Flashback: Social Security

In anticipation of the shutdown of Apple’s MobileMe service, I am re-posting some of my old blog entries before they become harder to retrieve.

This entry was originally posted on February 22, 2005.

When President George W. Bush rolled out his plan for social security, he challenged anyone to come up with an alternative to his idea.

I’d like to rise to the challenge.

Let’s first take a look at the problem that social security currently faces. it’s pretty straightforward, really. Right now, social security is bringing in more money than it’s paying out. The surplus is being invested in low-interest government bonds. As life expectancies increase, and as the baby boomers start to retire, it won’t take long before the scales will tip such that it is paying more out, than it is bringing in. Once any surpluses are gone, there will be a deficit. Unlike the general government budget, we absolutely don’t want the social security trust fund to run into a deficit.

Bush’s plan is to divert a small percentage of the social security taxes for younger taxpayers into private brokerage accounts, not unlike a retirement fund available from certain mutual fund or annuity companies.

My big problem with this is that it won’t do anything to actually remedy the problem. If we’re diverting some of the social security taxes to private accounts that can only be drawn from by that particular taxpayer and/or his or her beneficiaries, that won’t do much of anything to remedy the problem. Furthermore, it falls into the common misconception that social security is intended to be an investment. It is not. It is more like insurance, and, just as we don’t demand a refund on our car insurance when we don’t get into an accident, we should not demand all of our premiums back from social security, when it comes time to retire.

I would have less problem with Bush’s plan if he would take the extra step and allow people to opt out. He’s effectively doing that while simultaneously forcing people to contribute the same amount to the fund.

At its most basic level, the solution to social security is to either bring more money in to the fund, or to pay less out. And you don’t need to be a finance major or an actuary to recognize that. The current workers would likely balk at paying more in social security taxes than they already are, and the current retirees would likely balk at receiving less in their monthly check. So what are we to do?

On a high level, there are two ways of doing this in such a way that would not alter the way anyone who is currently paying into the system, or receiving money from the system, do what they’re doing.

First is to raise the cap on the requirements to opt into the system. Right now, if you earn more than a certain amount in a given year (I believe it’s $100,000.00 per year, but don’t hold me to that), then you’re not paying into the trust fund. Raise the cap, and allow the administrator of the fund to submit proposals to the secretary of treasury on an as-needed basis, to increase this cap. This cap should be somewhat commensurate with the direction median salaries are going around the country.

Next, to handle the amount coming out of the fund, is to take advantage of something we’re doing anyway. Beginning on January 1, 2012 and every ten years thereafter, change the retirement age to coordinate somewhat with the median life expectancy, as defined in the most recent census. Part of my rationale behind this is that social security was never intended to have one person pay into it for 40 years, only to be paying out to that person for the next 40 years, but it’s happening with increasing frequency.

There are a couple of choices with regard to how to handle this, and I’m open to either option.

First is to have it be a unisex table. Round the unisex life expectancy up to the next whole number, subtract, say, 10, and set that as the retirement age. So if in the year 2010 , the life expectancy will be 78.2, then the retirement age will become 69. Then ten years later, it will change again in response to the 2020 census.

The other option is to use the gender-specific tables. If women live to age 78, and men to age 74, then use a similar formula that is gender specific. I don’t necessarily know if this is the fairest way to handle this, however it could cause some degree of equity and both accommodate those women who took time out of the workforce in order to raise a family as well as do something to close the disparity between men’s and women’s wages.

The downside to this is the fact that many women generally marry older men, and may need to leave work at a time that roughly corresponds to when their husbands die to help them with their end-of-life issues.

The details can be worked out relatively easily, and the exact numbers are open to discussion. Still, these solutions do make more sense than Bush’s proposals.

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