Mainstream thought on Social Security
The NYT offers an editorial on what is becoming mainstream thinking on What’s Next for Social Security? Of course the writing is still short on pointing to the thoroughly researched possibilities for adjusting the program for changing circumstances.
The trustees of Social Security recently reported that the retirement system can pay full benefits until 2035, when it will be able to pay about three-fourths of promised benefits. That is not a crisis. It is a manageable problem.
The system needs to be restored to long-term health, but policy makers must realize that broad-based benefit cuts are not really a viable option.
…
The focus on benefit cuts also conveniently ignores the fact that benefits are already shrinking. Under current law, benefits are being reduced by the higher retirement age, which has been gradually rising from 65 to 67 for those born in 1960 or later. That translates into lower monthly benefits for those who retire at 65 or fewer years of benefits for those who work until 67. For example, a worker entitled to a $1,000 monthly benefit upon retirement at age 67 will get only $867 if he or she retires at 65.
Benefit checks are also being reduced by higher Medicare Part B premiums, which are deducted from Social Security benefits. The premiums are set to rise from 5 percent of benefits, on average, for those retiring in 2002 to 9.5 percent for those retiring in 2030. And if you factor in rising co-payments on health care services, most retirees already face living on less.Taxes further erode benefit payments because the levels at which benefits become taxable — generally, $25,000 for individuals and $32,000 for couples — have never been adjusted for wage growth or inflation. By 2030, more than half of recipients will owe tax on a portion of their benefits, compared with 10 percent when the taxes were first imposed, in 1984.
The upshot is that under current law, Social Security benefits will replace 31 percent of the typical retiree’s preretirement earnings in 2030, compared with 42 percent as recently as 2004, according to the Center for Retirement Research at Boston College.
please let me suggest that the way to deal with these things is to look pretty hard at, first, whether the benefit is a reasonable amount to cover the real cost of living for an elderly person…. not rich, not “the same” as before retirement, but “enough” to get by without real hardship.
then look at whether the benefit is a reasonable “return” on the “investment” represented by the taxes you paid it. again, not “a good return” or even not “as good as you might get on the market,” just “reasonable” in terms of getting what you are paying for: security.
third, look at what the cost (tax) would have to be to provide that benefit which is enough to cover ALL “necessary” expenses.. food, housing, medical-not-covered by Medicare. Is that cost a reasonable price to pay for the future benefit, considering what the benefit is worth. Is that cost an intolerable burden on the person paying the tax?
I am reasonably sure that the cost will always be a reasonable price, and not an unreasonable burden. But you need to find out what those are, and decide for yourself…. hopefully in a democracy we will be smart enough to decide by a majority not fooled by the hysterical lies of something like the Petersons or the forever stupid who just know they are going to get rich if only they don’t have to pay for Social Security.
But you need to know the facts, not the lies. EVERYTHING I have seen in the “media” has been lies, or obfuscation, or just total lack of understanding.
Even the present article (as it appears here) contains a bit of sleight of hand that should not go unexamined:..at least it is not clear that the “31% of retirement earnings” does not count Medicare Part B and the tax on earnings for those earning over the $25,000 level… as subtractions from the benefit. I don’t know. and we may want to consider both of those when we do the “math” I suggested above, but we do need to keep clear what we are talking about.
I personally don’t think we should tax benefits at all, and that Medicare should cover the costs of ALL “reasonable” medical care after retirement. But that also means the Medicare tax should be raised to cover those costs… and not by “taxing the rich.”
Unfortunately I do not expect to see any careful, honest thinking about any of this. We will have the Peterson liars on the one side, and the strange “social welfare” folks on the other whose answer to everything is “tax the rich.” Not to mention the many who can’t think any further than the last soundbite they heard that made them feel good.
The big stumbling block to all of this is that people have completely forgotten what Social Security IS, and why it has worked so welll for seventy years.
It is not welfare. It is insurance paid for by the people who will get the benefits.
It is not paid for by “the government,” or by “the rich.” It is “merely” the savings of workers, who for the first time in history can save enough of their own money to be able to afford to retire at a reasonable age. They can do this because, in the first place they are, mostly, making enough to have enough they can save. But, in the second place, because the government can guarantee (but not pay for) their savings by protecting them from inflation and market losses by the genius of pay as you go financing with wage indexing. And finally, the workers insure each other against a lifetime of low wages by agreeing in advance to pay the low earners a little extra so they will have “enough” by paying the high earners a little less out of their “more than enough.” And it does this without “means testing” which would destroy the whole thing (would in fact by the evil “welfare as we knew it.”
Instead we have the Peterson Lie Machine telling everyone its some kind of government welfare scheme that will bankrupt the country, and the idiot “social welfare” progressives trying to tell everyone we need to turn it into a government welfare scheme that will tax the rich to pay for it… that is the progressives want to make Peterson an honest man.
But we don’t find anyone who just wants to look at the Roosevelt plan and do some basic arithmetic and find out what it really costs them, and what they get for their money.
The answer is that it costs very little, and what they get… security… is precious.
and i’ll add
that raising the retirement age… “it’s obvious” said Bill Clinton to Newt Gingrich when they were conspiring to “fix” Social Security
is cruel and stupid.
even 67 means essentially “no retirement” at all for working people.
65– or 62 with reduced benefits — was a reasonable place to set the retirement age given the money-facts of the time. now we are richer and could afford to retire even younger… if we were willing to pay for it.
those who love their work, or love the money they are making, would be under no pressure to retire early…. except of course the pressure they might feel from “leaving that retirement money on the table” but i have no particular sympathy for those faced with that choice. SS is insurance. if you don’t need the insurance at age 60 or 62 or even 70 or 80… don’t collect it.
But there are those who do. And I think the “test” would be whether or not they are in fact still working. The benefits are low enough that i don’t think too many people are just going to decide to “live on the government teat.” This may require further thought, or some experimentation… but what it does not require is mindless — it’s obvious — raising of the retirement age “because we are all living longer.”
we are not all living longer. and we do not all want to spend our last few years working for the boss. and we can afford to pay for our own retirement… if the government protects our savings with Social Security.
So that ‘s a decision the workers should make in full possession of the facts, and not have made for them by cheap politicians on the take from Peterson. Or simple minded folk who are making enough money they don’t have to “count on” their Social Security to be able to retire when they want to.
I can tell you from direct experience that even with high incomes, the best planning and a ton of hope over the years, there is no way most folks could save enough money to retire. I am in my late 50s and both my wife and I are counting on SS and Medicare to retire. The sad truth is that my 401k returns never fully materialized over the long haul due to lots of issues including financial meltdowns and the mysterious phenomenon of reality never meeting the hype of the prospectus. The other truth is that the older you get, the less employable you are and your options start to diminish the day you turn 50. I may want to work past 62 but I doubt if my income at that point will come close to what I was making in my 40’s. Life costs way more money than any of us can imagine and if you live in high cost areas, it is hard to survive even on six figure incomes. If you are single, no kids, live in a low cost area and make six figures or more for your career, piece of cake. But in California, forget about it.
I appreciate the comments and AB as I read most articles daily and unlike many other web sites I read these very good comments.
Woolley
I wouldn’t want to mislead you into thinking that SS will enable you to live in a “high cost” state with as much comfort as you might wish.
I don’t know what taxes and rents and food costs are in California, but if they are significantly higher than other places, and your SS is based on fairly “low” earnings, you may have a problem. On the other hand if SS is a supplement to other resources you have, it might make the difference between serious poverty and reasonable comfort.
the cure for the problem that i can see is move to a low cost state when you retire, or look hard for lower cost parts of california.
theoretically the SS benefit, because it is based on your wages, should be higher in a high cost / high wage state. But I don’t think anyone has an answer for high cost / low wage states.
I will earn the maximum benefit when I retire and will likely stay in California unless the kids move out of state. I would rather be broke in a nice place than better off in a hell hole. My point was that SS is critical to the foundation of a retirement income for most of us regardless of the best laid plans over the years. The bottom line is that most 401ks over the course of the last 30-40 years have NOT returned the year on year returns and protections that all of us so eagerly expected when we bought our first issue of Money Magazine in 1979 and followed the logic of how to have a million bucks by the time we were 60. I find the stock market to be a form of scam myself, it has become a place where you go to have a slice of skin taken off every year, it never kills you until you realize you have no skin left at all.
well, nice is what you like. i live in a fairly expensive town in a cheap state, but i am able to control my expenses so i do pretty well on a pension that is a good deal less than the SS maximum benefit.
moral of story is that you can make SS work for you.
other moral is you can’t count on the stock market. though it can certainly help… if you are lucky and if that’s what you like to do. i believe that most of the people who won’t “need” their SS certainly have enough income to pay their SS tax and still have plenty left over to “invest.” indeed SS would be a sensible “hedge” for any investor.
the problem they have is that it is mandatory. it it was offered privately they’d buy it and count themselves wise.
I have many friends who are older than me and have various sorts of incomes. The ones that are doing the best are public employees on pensions ranging from 40 grand to 150 grand a year for life. These same folks usually stayed in the same location and house due to the nature of their jobs being in a certain location. Chances are they have a very low mortgage, low property taxes and are living pretty decently on savings and their pensions. They are not worried about future economic events taking half their 401ks down in a single day like the rest of us. The others are folks who are very rich and live accordingly. That leaves the group that is surviving on meager SS income, a part time job, asset depletion schemes like second mortgages or reverse mortgages, kids and eventually, public assistance if they outlive their net worth. The variable at my age is life expectancy which no one can predict. If you have kids, there is a good chance you will end up with them at some point but if complications arise like Alzheimers, the kids will not be able to handle it without assistance. At that point, you either spend most of your remaining assets on assisted living or get on Medicaid in some publicly funded nursing home. The key is to limit expenses while you can and they hope you die quickly. This is morose but unfortunately reality.
Woolley
I think your description of reality is about correct. Let me add that the nature of Social Security is NOT that it will provide you with a retirement at your pre-retirement standard of living. But it is insurance that will provide a very basic retirement if all else fails (and supplement other retirement income if not all else fails).
This can turn out to be very important… and for about 50% of the people it turns out to be critical. The difference between having only 20k to live on and having 150 k is not nearly as important as the difference between have 20 k to live on and trying to live on 10k, or having only 10k to live on and having nothing.
As for those 150k state pensions… they are rare. They may indicate that “we” are paying SOME public employees too much. But if the work that public employee was doing was worth that much to the public (and arguably it may have been) there is nothing “wrong” with providing that pension as a simple choice… mutually agreed between worker and employer… to take the compensation in the form of “some now” and “some later… in the form of retirement benefits.”
My own state pension is about 10k, and I get very upset reading the newspapers telling the people about those 150k pensions as if ALL retired public employees were getting that much… in order to justify cutting all public pensions even though those pensions were paid for by the employee by deferring the income he earned exactly in order to provide something for retirement.
And apparently those public pensions are not “for life.” My state has decided that it can cut our pensions so that it does not have to raise taxes to pay for other state “needs”… which are always described as “programs for the children.”
In California, six figure pensions are more common than folks realize but most are indeed in the 40k to 80k range. That is still a tremendous income for life. I live in a neighborhood of 800k plus valued homes and most of the residents are retired public employees. A good friend is 54 and can retire from being a Sheriff right now at 80k+ a year. Another sheriff who was in leadership gets over 200k a year for life, not bad for being a cop. IMHO, there should be a cap on pensions like this that is a fixed amount not tied to wages. I support pensions but with the lack of any real pension or decent publicly financed pension scheme like SS, there is a huge disparity between the public and private sectors. This will lead to problems sooner or later as we end up racing to the bottom instead of meeting in the middle.