Chicken Little is everywhere these days, warning us that the Social Security sky is falling. Republicans like to call SS an “entitlement program” that’s contributing to the federal deficit. It isn’t. It’s a self-funded annuity program. You put money in over your working lifetime and you’re guaranteed a monthly payment as long as you live.
We’re now being told that those payments are unsustainable. How can that be? For decades, the Social Security Trust Fund ran huge surpluses. In 1940 there were 42 workers for every retiree. In 1950, there were 16. There was way more money going in than being paid out.
Remember how Al Gore was ridiculed when he talked about the Social Security “Lockbox?” He was ridiculed because there was no lockbox. There was a cookie jar.
Think of the surpluses as cookies. The greedy children in Congress couldn’t stand all those cookies just sitting there in the cookie jar, so they ate the cookies and left IOUs in their place. Now, the cookies are all gone and Congress has to pay back the IOUs. That is the only way that Social Security contributes to the deficit.
Today, there are 3.3 workers per retiree, and within 40 years, it’s projected that there will be just two workers per retiree. In other words, the pyramid scheme will collapse. Obviously, something will have to change. The question is what and when? Here are some of the solutions being discussed:
Means Testing: Warren Buffet is not waiting for his social security check to arrive so that he can afford to buy his Lipitor, but he gets the maximum benefit, currently around $2,000 per month. The more you earn during your lifetime, the bigger your benefit, and vice versa. So, the people who need the most – low-wage workers – get the least. Means testing is supposed to save money by lowering benefits for more affluent retirees. What worries me about means testing is who defines the parameters of need? If it’s a Republican, expect to be eating more dog food.
Raise the retirement age: If you were born after 1938, this has already been done. Full retirement benefits aren’t available until you’re 66 or 67. Given the increase in life expectancy since 1935, I don’t think this is an unreasonable suggestion except for people who do strenuous physical work or are disabled by deteriorating mental capacity. But here’s why it may not be a good idea: jobs. If globalization and automation continue to decrease job availability, older people will need to retire in order for younger workers to find jobs.
Eliminating or raising the earnings cap: Currently, working people and their employers each pay 6.2% Social Security taxes on the first $106,800 you earn in wages. The maximum SS tax anyone pays is $6,622. If you make less than the cap, you pay the maximum 6.2%. The more you earn above the cap, the smaller the percentage of your wages it represents. (Which makes it a regressive tax.) If you’re an average Wall Streeter earning $340,000, your SS taxes amount to less than 2% of your income.
By far the easiest way to erase the SS gap would be to raise the wage cap but hardly anybody ever talks about that. Can you guess why? Companies with lots of high-paid workers – Goldman Sachs for example – would have to pay higher payroll taxes. If ever there was an entitlement program crying out for reform, it’s corporate welfare.
Privatizing: This was a non-starter under the Bush Administration and for good reason. Those of us who are lucky enough to have retirement accounts understand that we save today for tomorrow’s needs and with any luck, our savings will grow enough to fulfill those needs. Unfortunately, luck hasn’t been with us lately. If you’re retired or near retirement, the stock market meltdown took a big bite out of your savings that you may never recover.
Say you had $100,000 in your retirement account and it lost 40% ($40,000) in 2008, but gained 40% in 2009. You did not regain your lost $40,000, you regained $24,000, which is 40% of the $60,000 that was left in your account. If you were already retired and taking money out instead of putting it in, you’re royally screwed. If you were close to retirement, you lost at least three years of earnings when your savings should have been multiplying the fastest.
The Wall Street geniuses are being rewarded with big bonuses again because the market is back above 12,000, (2,000 points less than its peak) but you’re not even back to even. Do we really want to give Wall Street our Social Security money to play with?
Question #2: When should we fix it?
The office of management and budget predicts that Social Security, with no changes at all, will be solvent for another 25 years. Not that I advocate procrastinating, but here’s my fear: If we put more cookies in the jar, what will prevent Congress from stealing them?