Saturday, June 11, 2011

Fixing Social Security

By fix it I mean make it self-sufficient, taking in more money than it spends.

There are three ways to fix Social Security.

  1. Raise the retirement age. 
  2. Invest in the stock market as opposed to US treasuries.
  3. Eliminate the cap on the tax, effectively taxing the rich.

Any of these solutions can work.  They all have issues that people object to.

1.  Raising the retirement age really doesn't solve the problem, so much as redefine it.  It moves people from "Old people costing us money" to "Unemployed Poor people costing us money".  If you are trying to simply stop paying them, it is easier to cut spending on poor people than old people.  Fairly evil.    Oh, you think they will get jobs?  That just takes jobs away from younger people.  We suddenly don't get more jobs available because we have more people available.   Even if unemployment was super low, older people are NOT lazy.  If they are employable and don't have enough savings, they already keep working.  Even if they DON'T have skills, they get work.     Part of the problem is that skills age and most businesses prefer to hire younger people than older people   Raising the retirement age just shifts the problem, it does not solve it.

2.  Investing in the stock market has lots of issues.  A good friend recently suggested this, and we discussed it recently, but we left out some facts.    First of all, we already let people do that - it's called a 401 K and an IRA and a hundred similar plans.   Second of all, while some people like to think they have an "account" at the Social Security Administration, they don't.  Yes the SSA currently has extra money coming in, which is invested in Treasury bonds.  But that is all in one big pool.   There is no pot of money defined as yours.  Instead you get a defined benefit, without any specific pot of money working for you.  This makes it harder to let some people invest in the market and not others.  Thirdly the entire reason for Social Security was to give a rock solid, 100% guarantee pay out.  Would it make some sense to invest some of it in the stock market?  Possibly.  But that effectively means the US government is taking some risk, not the citizens.   Fourthly, if we invest the SS money in something besides Treasury bonds, that means the SSA is either selling some of it's existing Treasuries to buy Index Funds (or possibly not buying more treasuries - so China would buy more of them, and instead using that money to buy Index Funds).  In either case, what it comes down to from an outside point of view is the government selling treasuries and using the money from those sales to invest in Index Funds. This both increases the interest rates for treasuries and puts the US government at large market risk.

3.  Eliminating the cap on taxes makes the most sense to me.   Effectively it means that rich people would pay the same percent 7.65% (15.3% if you include the employer half - which self employed people must do)  that all of us poor people do.    Right now, that tax is 'capped' at only 7.65% of the first 106,800.    The main problem people have with this, is that the benefits you get are capped.   Social Security was originally sold (and many still think of it) as a pay in now, get back later.  But honestly, that is not the case.  In reality it is pay in now, use that same money to pay out others now.   Effectively, if we get rid of the cap, it looks less like an 'investment' and more like welfare.  But in reality it was NEVER an investment.

Out of the box solutions.

1.  We could fiddle with the ages without actually lowering them.  I.E.  Keep the Early retirement (reduced) of 62, but extend the full retirement age from 67 to 70 and move "enhanced benefits from 70 to 75.  We could alter the Spousal/widower/children benefits also, those that get more complicated.

2.  We could use annuity tables to generate a virtual "investment pool" for people, then allow them to choose to invest a portion of their money in approved index funds, upto say 20% if you are younger than 45, and upto 10% if you are younger than 55.   The SSA would aggregate this and use these virtual pools to determine how much money to put into those same index funds instead of being used to buy treasuries. We could have the US government maintain the absolute guarantee of a minimum pay out, in exchange for half of any profits from the index funds (which would then be used to help keep the whole system a float.

The problem is that effectively, all we did was create a larger administration program to let all citizens vote on  how much to invest in the index funds. We would be paying them with some of the profit, which makes them happy, but is it a good idea?   I personally would rather just let some conservative financial experts make those decisions, rather than put it to a vote.

3.  We could raise the cap instead of eliminate it and/or raise the benefit a small amount for people that exceeded the cap.   This would be carefully done so that the benefit would be far less than the cap raise/elimination brings in.  To my mind this is a reasonably good offer.  A slight increase in benefits for the very rich could quite easily make the bitter pill of being forced to pay the same percentage of tax that the poor do go down easily.

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