Social Security

Social Security is the federal government’s largest program (20% of budget) and was a cornerstone of Roosevelt’s New Deal in 1935 to address poverty among senior citizens. It essentially provides retirement security through two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). Over time it has proved to be a very effective and valued social program – earning it the nickname of the “third rail” of politics meaning you’ll get electrocuted if you touch it.

The problem with Social Security is two fold. First, too many people rely on it as the solution for retirement security. Around a third of current retirees rely on their monthly checks for more than 90% of their retirement income. The personal savings rate has plummeted in the United States from more than 10% in the 1970s to less than 3% this decade. Second, the program is in financial trouble from growth in retirees. Without any action there will be a massive benefits cut of 22-24% by 2037. By 2016, it will start adding to the federal deficit as more people will be collecting benefits and fewer people contributing via payroll taxes. Looking at history, there were 16 workers paying taxes to support each retiree in 1950. Now there are 3.3, and by 2040 there will be only 2.

We need both reasonable solutions to the fiscal problems of Social Security and better solutions for providing retirement security to our citizens.

Social Security Solutions

  • Gradually Raise the Retirement Age – The first social insurance pension system was in 1870 by Chancellor Otto von Bismarck who promised benefits to Germans who lived to age 70, when the life expectancy was 55. Likewise, in 1935 the US life expectancy was 65, not 78 as it is today. By raising the age gradually (to say 70) for those well away from retirement we can better link the retirement age to increases in longevity. Generally speaking this could encourage people to work longer and boost potential output. There could also be an allowance made for manual laborers who can’t continue heavy work.
  • Increase Payroll Tax Revenues – By keeping the 6.2% rate but increasing the cap on taxable wages from 86% of earning to 90% you can increase the inflows and stem the approaching deficits. This regressive tax can be increased gradually to ensure historical consistency of captured earnings and adequate revenue generation.
  • Reduce Growth in Benefits for the Better-Off – Reducing the relative benefit for those in middle-income and high-income positions through progressive wage indexing could better target benefits to those in greatest need. This would strengthen the social safety net without allowing Social Security to become a welfare program.
  • Reduce Cost of Living Adjustments (COLA) –  While this would reduce benefits to current beneficiaries, the shift from CPI-W to the chained CPI-U would more closely reflect changes in the cost of living. Slowing this growth of benefits pays significant dividends over time. To protect vulnerable populations, lawmakers might choose to reduce the COLA only for beneficiaries whose income or benefits were greater than specified amounts.
  • Reduce the Spousal Benefit – Trimming this benefit from 50% to 33% would strengthen the connection between taxes paid and benefits received. The Census Bureau’s reported that the cost of living for a two-person elderly household is only 26 percent higher than that for a one-person elderly household. If correct, this change would more accurately reflect the cost of supporting a two-person household.

These changes, and others proposed, will help address the more than $7.7 trillion in future benefits promises that could go unfunded without action. The problem with changing Social Security is that its “third rail” nature makes it rather unpopular to tamper with unless you are adding unfunded benefits. The American people can’t have their cake and eat it too forever, so reform is only a matter of time.

Learn more about Social Security:

Retirement Solutions

Many young people are currently operating under the assumption that Social Security will not be there for them in 40 years. This assumptions is helpful in the sense that it is driving behavior toward individual responsibility and planning for your own retirement. As it turns out, saving for retirement is not only good for the individual in the long run, but good for the economy. Savings leads to investing, which leads to research and development, which leads to innovation, which leads to increased employment and standards of living.

“Without savings there is no future.” – Alan Greenspan

The personal savings rate in the United States is one of the lowest of any industrialized nation. It has plummeted since the emergence of the credit revolution as consumer debt has risen to more than $2.5 billion. Here is a chart of the savings rate from 1959 to 2009:

Source: US Department of Commerce

The nation needs a coordinated move to improve personal savings. The introduction of tax-preferred savings vehicles like the 401(k) employer savings plan or Individual Retirement Accounts (IRA) have done little to influence the overall rate while costing $120 billion in lost revenue for the U.S. Treasury. Ezra Klein reported for Newsweek magazine that “retirement experts say average workers approaching retirement need about $250,000 in their 401(k)s to maintain their standard of living. They don’t have it. The number is closer to $98,000.”

Greater education is needed along with a public national goal of a 10% savings rate, but we may also need to supplement with required savings accounts. Many people have grown up with the idea of instant gratification so automatic withholding may be the best solution to funnel savings. Of course, the country responds best philosophically to incentives and personal choice rather than coercion so perhaps we could construct ways to reward those that save certain amounts. Remember that if you invested $10 a day ($300/month) and earned 10% annual return, you’d wind up with $678,146 after 30 years. That should be incentive enough!

Whatever path we take the focus should be on results and achieving sufficient personal savings for citizens to enjoy a secure retirement. Further, acknowledging that higher savings and a lower debt burden are the basis for a more stable economic future we must feel comfortable using government to influence the personal choices that have gotten into this mess.

Retirement resources:

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