With Social Security on Brink of Collapse, Dramatic Changes Coming
Dear Reader
Dale Coberly: Bill has asked me to comment on an article appearing on the internet at wealthynickel.com under the title
With Social Security on Brink of Collapse, Dramatic Changes Coming – Some With ‘Bipartisan Support’ written by Andrew Herrig, who calls himself a finance expert and says his expert financial advice has been featured on CNBC, Entrepeneur,Fox News, GOBanking rates, MSN, and more.
Herrig says
Lawmakers have a mere 12 years to fix the Social Security program before it can no longer pay full benefits, according to the most recent Social Security trustees ’report.
I say
…a mere 12 years? in 12 years I got a public school education. It seemed to take forever. The Trustees do recommend we start now to make gradual changes so the people will have a chance to get used to it.
I have been trying to tell the people for fifteen years that if they start whenever the Trustees report “short term financial inadequacy” to raise the payroll tax one tenth of one percent per year they can make Social Security solvent forever. The Deputy Chief Actuary agrees with me.
One tenth of one percent of a 50k salary is one dollar per week. This should not be a burden to anyone. Moreover the raise would not be needed every year and should reach an ultimate level of 2% of wages when no further increaseswill be needed. By that time real wages will have increased at least 20%, so the worker will have more in his take home than he has now, plus saved enough via Social Security to pay for his longer life expectancy in retirement. Note the tax raise does not go into some government black hole; it comes back to the worker with interest when he will need it most.
Herrig says
After 2034, the report notes, the $2.9 trillion trust fund will be depleted, and with no legislative action, Social Security would have to rely solely on current tax income to pay benefits. This income would result in an ability to pay out only about three-quarters of the scheduled benefits.
I say
Relying on current tax income is not “Brink of Collapse.” If the payroll tax has been raised about one tenth of a percent per year by then, the Trust Fund will still be full and the expected “depleted” day will have been pushed back to about 2050. This is because the tiny increases in the tax each year will mean the Trust Fund does not have to pay out that much for each of those years and all subsequent years. The math shows a break even point..where rate of income growth reaches rate of benefit growth and no further shortfalls are expected [projected or predicted].
Even if the Congress is stupid enough to not raise the tax until 2035, the sudden need for a 2% tax increase would not be a burden that would even be noticed if the usual Social Security liars did not promote hysteria. Two months after the increase people will have forgotten all about it.
And, if the worst happens and Congress refuses to raise the tax even then, Professor Rosser has pointed out that a 25% benefit cut then will still leave benefits at a real value higher than they are today. I think this is bad policy, but still not the Brink of Collapse,
Herig says
However, there is good news. There are several proposed policy changes to address the Social Security funding gap that voters on both sides of the aisle overwhelmingly support.
I say
this is not good news. What people who don’t know anything about Social Security overwhelmingly support is not a good place to start planning In fact none of the policy changes would restore “solvency” and they all would have destructive effects on both the program and the people who rely on it.
Herig says
The University of Maryland’s Program for Public Consultation (PPC) surveyed over 2,500 registered voters through an online ‘policymaking simulation ’process. Respondents were briefed on the state of the Social Security program and then asked their opinion on arguments for and against various proposals to address the budget shortfall.
Surprisingly, a large majority of Republicans and Democrats favored various proposals to increase revenue, trim benefits, and even increase benefits for low-income earners. According to PPC researchers, these measures would eliminate 78-95% of the shortfall over the next 75 years, depending on the implemented policies.
I say
The enemies of Social Security love these “policy making iinteractive simulations. They give you not enough imfromation to make an informed choice, and the offered choices are rigged so they all lead to benefit cuts Note the use of the words “budget shortfall”. Social Security has nothing to do with the Federal Budget, and the “actuarial deficit” in the Trustees Report is not even a “debt.” It’s just a projection that at the current tax rate and benefit schedule, the system will run out of reserves, but at that point there is no “debt.” nothing the tax man or the bill collector will be demanding you pay. What there is is a need for you to save more of your money for retirement beause you are going to be living longer than your grandparents. and yes so will the generation that follows you. Because of the pay as you go financing each generation, by paying for his own future retirement is at the same time providing the cash to pay the benefits to the current retired generation. This is ordinary finance, just like a savings account or even an “investment.” It is not “the young paying for the old” although that is what the highly paid non-partisan expert liars want you to think of it as.
And here dear reader I need to rest. I will come back tomorrow with some very short responses to the proposals that Herig offers as good news.
Substantially redeem the Trust Fund, then increase the tax to what is required. The idea of “pushing back” the depletion of the TF even a month is silly, let alone doing so until 2050. The idea of gradually raising the tax while there are enough redeemable assets in the TF is quite odd. “Twelve years from now we need to be at +2%, but to make that easier for you guys we will require you to throw money at it for the first 11 years, too. It’s just a coincidence that that big ole TF over there won’t need to get redeemed by general revenues.” I mean, what does the frog think about the hot water scheme….”Mr. Frog, 12 years from now your water needs to hot enough to kill you. Your choices are live 11 years in your nice cool water and then get boiled, or starting right now make it increasingly uncomfortable until you die. Which do you prefer?”
Eric
you really don’t know what you are talking about. can you read my posts more carefully?
the gradual increase in the tax would push back the “depletion” date of the Trust Fund forever if continued until it reaches the target of a 2% increase sometime around 2050. but meanwhile every one tenth of one percent increase pushes back the depletion date not months but years…because the tiny tax increases are replacing the money otherwise drawn from the Trust Fund.
“substantially redeem the Trust Fund” is meaningless nonsense. The Trust Fund is money that Social Security saved from then-present income they did not need to pay then-present benefits. The payroll tax was increased in 1983 exactly to create this larger than normal Trust Fund so the boomers could pay in advance for their own retirement more than the usual pay as you go formula would proved due to the greater size of the boomer generatio compared to the one following (and the one preceding). It is being “redeemed” right now as money is withdrawn from that enlarged Trust Fund to pay for the boomer retirement in progress. The need for the tax raise is NOT the bomer retiement but the fact that the post boomers will be living longer than preivous generations but not necessarily able to keep working for health reasons related to old age. contributing to the expected shortfall is the smaller than “normal” birthrates and the lower than normal increase in wages that are expected at the same time. It is not a huge difference in the needed “tax” but it will make a real differenece in the amount of money people will have in their retirement or the age at which they can retire..and they will want to retire if they don’t have jobs like Bill Clinton and Newt Gingrich. but since we have an unemployment problem right now, it is not clear that anyone will hire them even if they wanted to or could (health) keep working.
one more time: if we start raising the tax right now we willl NOT need to raise it 2% twelve years from now. we will already have raised it more than 1% and this extra money will have pushed back the date be which we will need to raise it another 1%. and by continuing to raise it one tenth of one percent at a time (won’t be needed every year) the Trust Fund will never need to be redeemed, but will remain a paper asset ready to even out any temporary short fall in social security revenues (payroll tax) as during a recession. that paper asset will be earning interest..just like all the other government bonds our economy can’t do without. holding the final tax about one percent lower than it would otherwise need to be.
the fairy tale you have been constructing for yourself has no relation to reality, and you don’t even seem to understand then when you gradually pay off a “debt”(in this case an “acutuarial deficit”..yes there is a difference) the debt gets smaller with each payment, It does not sit there waiting to demand “payment in full” of the original amount owed (or needed to fill the deficit.)
But don’t feel too bad, there are people who think they understand money who make the same mistakes you make.
Eric:
The TF should not have so much money in reserve. Indeed, if it were up to Repubs, they would cut SS now and use the Reserve to cover deficit spending for tax cuts, etc. As Dean Baker made it known, a one tenth of one percent is hardly noticeable except for the higher income brackets which may see a $5 to $10 increase in withholding. Again, hardly noticeable to them. Dale was commenting on this plan before Dean had said such.
The $trillions in reserve were to cover Babyboomers. Things have changed since then and another tweak is needed which is far less than before. It does not have to replenish the TF, it just needs to be an incremental increase in withholding.
“much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148).” There is also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon.”
If the shift of wage income to high-end earners to profits to high end earners had not occurred, the closing of the projected shortfall in Social Security would be a more manageable task. Dean says “far more manageable,” I will stick with manageable.
I do agree with Dale on incremental increases to SS withholding of 1 tenth of one percent. However, the dynamics of income are and have changed. More of the population has earnings from annuities, and the interest or dividends from your savings and investments are not taxed for SS purposes. What we are seeing is a shift from wages to return types of income. And yes the return argument will be, it has always been that way. And yes that is correct, However, more people who can do so have shifted their income to this type of return. Capital gains may be taxable by SS.
It is a game of how to avoid taxes. Fixing it may lessen the need to hike taxable income. If you do not fix it, more income will shift to nontaxable SS income.
a big part of the shift is from taxable wages to non taxible benefits likehealth insurance.
I can’t see starting a war to tax higher income people in order to “fix” social security when all it takes to fix it is to raise the tax a dollar per week per year while wages are increasing over ten dollars per week per year.
if you want to tax higher income people more, use the income tax. if you reallt want to fix everything that is wrong with America get a higher minimum wage or better unions.
but don’t drag Social Security into fights you can’t win, or can’t win soon enough to keep the bad guys (and the stupid guys) from destroying Social Security. it’s like two greed besotted persons (yes, one rich and one poorest) fighting over a dollar and destroying the house while the quiet man in the corner slips the dollar in his pocket, and filches your wallets while you are lying on the floor wondering who won the fight.
Dale:
You are making stories and stuff up.
I explained what the issue was, that being investments purposely avoiding taxes. They avoid higher income taxes and other taxes as well which happens to include Social Security INDIRECTLY. You ignore the factual data Baker puts up and what I gave as a sound explanation. Then you wonder why people get angry with you.
Nobody took away your 1 tenth of 1 percent increases. The fight for increased inefficiency of taxes is not solely over Social Security which is a small part of it.
“You can’t see” is the correct comment to make. You are already in a war which you can not avoid. And those who can make the investments avoiding taxes would like nothing better than to see Social Security disappear.
This statement is where I disagree with Dale. Yes, liars promote hysteria, but people will remember right into the next election. Congress is stupid enough to not raise the tax and the liars will use the increase to break Social Security.
The liars will say things like Eric did above and even though they will be so silly they should be able to be ignored, people will listen to them anyway.
Arne:
Dale’s, Bruce’s, and your thought are accurate and very doable. Just need to close some loopholes on what is taxed by SS.
Arne
you are not disagreeing with me as much as you think. I said “except for the liars promoting hysteria, no one would remember the 2% all at once tax increase. ” except for the liars.
my point was that except for the liars the needed 2% increase would be forgotten very quickly as people realized it did not change their lifestyle in any way they noticed, especially if the non-liars pointed out that this was not “losing” two percent of their income, it was “saving” two percent of their income for their retirement when they would need it a lot: avoiding a 20% cut in benefits or a two year increase in the “basic” retirement age.
this is different from saying that if congress does not raise the tax, no one will notice. in fact, they probably would not notice, and by the time they retired they would have no idea why their benefits were too small to live on,, or why they could not retire when they wanted to or needed to.
I am sure that with all that happening, the liars would have much more success cutting social security or doing away with it altogether in favor of a stock-market based retirement scheme. people have said and shown that they value the security of Social Security more than the potential greater return on the stock market. but amid the confusion created by the liars they will not remember that, and not be able to do anything about it.
Arne
the horror of it is that Eric will be back talking the same nonsense (as will the Congress) having learned absolutely nothing from me. And even people who thought they agreed with me will be generating new nonsense as they hear new new nonsense from the paid liars and it gets incorporated into their thinking.
which is why i will not be posting [for a while] the rest of the essay that Bill asked me to write…although I feel much better about it having seen your response to Eric.