Monday, July 10, 2006

Saving Social Security

Given my expertise in the field of social insurance programs, I guess it is time that I commented on what should be done about Social Security.

What Are The Facts That Can Not Be Disputed?
Social Security has no trust fund (lockbox).
There are going to be many more retirees per worker when baby boomers start retiring than there were when the program was created.
The current benefit formula generally gives a much higher monthly payment to the rich than it does to the poor.

Is There A Problem?
The Republicans say there is a problem because at current levels of SS taxation, benefits are expected to far outweigh taxes in the not too distant future. Whether or not you agree that this is a problem just depends on how you feel about raising taxes to pay for the promised benefits. If your rule is that SS taxes must stay where they are, then there is a dire problem because there will not be enough money to pay the promised benefits.

The Democrats say that there is no imminent threat, so we'd better wait to fix the problem until at least such time that we can get some Democrats running Congress.

I say that there is absolutely a problem, because if nothing is done too much of our annual federal budget in the future will have to go toward SS benefits and it will cripple our government and our economy. Basically, this small safety net has grown to a huge liability that will be a massive part of our annual budget if it is not adjusted.

The Trifurcation Fallacy
The trifurcation fallacy is very commonly heard in the media from people like Tim Russert on Meet The Press. Basically, they say that you must do one of three things to save SS - (1) raise taxes, (2) raise the retirement age, or (3) cut benefits. But that completely overlooks the option that we have been doing and will continue to do, which is to effectively pay for SS benefits by taking money away from other areas in the federal budget.

What Should We Do About The SS Problem?
The first and most important thing that we must do is create a segregated SS trust fund. Every year we should value that fund and compare it to the benefit obligations to measure the shortfall (or someday, surplus). We should project future annual contributions to the fund that are equal to the current SS payroll tax. Then we need to systematically cut the benefit formula and raise the retirement age (whichever is deemed to be more desirable to the country's values over time) until the projected liabilities match the projected funds. This fund can be used only to pay benefits to entitled individuals and the government should be banned from using funds in the SS trust for any other purpose. Doing these simple things will solve the entire problem by definition, without requiring an increase in SS taxes. Note, there are some relatively painless ways to cut the benefit formula. For example, don't cut benefit for current payees, but change the formula to use a smaller Cost-of-Living factor when determining future benefits for younger people. Another option would be to change the formula to pay more to those who need it the most. Either of these options would be generally acceptable and result in huge cost savings.

The G W Bush Approach
There are two issues with SS that most people want to talk about. There is the critical solvency issue, which I discuss above. There is also the less important issue of how the money is invested. This is a sexy issue for politicians to talk about because SS has historically had lower investment returns than most other ways of investing money, which is frustrating to the ordinary Joe Q. Nascar.

President Bush has unfortunately muddled the situation by trying to address both issues at the same time. Thus, any reasonably solvency ideas he has are combined with the concept of private accounts where people can invest their own money. This has created a lot of unnecessary opposition to the latter, and thus everyone has thrown their hands up and given up on solving the bigger issue.

What Will Happen?
Probably nothing for a while, since unfortunately the option of "do nothing" exists and has only subtle implications. The best we can hope for is that a future administration will reach a point where they have a strong majority in Congress and can get some of the above solutions enacted. But since senior citizens are the most likely cohort of Americans to vote, and they do so decisively, it may be that the majority of our resources go towards supporting the elderly (SS, medicare, etc.) for a long time - possibly until we have a major war or similar event to require a shift in budgetary priorities.


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