Random Musings

Social Security

Social Security is the best anti poverty program established within the United States. The policymakers who want to destroy social security most assuredly will not need to rely on social security for survival and are out of touch with the needs of the average retired person who will need social security.

There are a number of very real reasons to oppose any reductions of benefits and to stay away from privatization and private accounts.

First of all we are entering an age of reduced benefits from private pensions. All companies are looking for ways to reduce their long term pension commitments. Open the business section of the paper on any day and you’ll read about companies defaulting on their pension plan or reducing benefits. Major companies that once included health insurance for retirees are all eliminating that benefit as fast as they legally can.

Secondly, the majority of Americans are not covered by private pension plan. Only those who work for major corporations or have strong union have pension plans. The growth of the “Wal-Mart economy”, where a larger and larger percentage of Americans are working at minimum wage or not much above it leaves an enormous and growing population of people without employee pension plans. Most of this population can’t afford the company sponsored health plan let alone the means to set aside additional money for a 401k plan even when offered by the company or for an IRA plan.

Therefore, there is a large percentage of Americans who are relying and will rely on Social Security of survival. The elderly is the poorest segment of our society.

Thirdly, Social Security benefits are abysmal as is. People who do not have a substantial savings and have to live on social security are living in poverty. And a single person or surviving spouse living alone can barely afford to live on cat food after paying rent, mortgages, real estate taxes, transportation costs, health insurance and medications. Social Security supports a bare minimum subsistence living. We should be looking for ways to increase the benefits not decrease them.

As a base minimum safety net, social security benefits need to be guaranteed. The return from private accounts will depend on the vagaries of the financial markets, the ability and financial acuity of the investor aka future retiree and upon luck. Those are not attributes appropriate for a safety net.

Private accounts should exist as add-ons, in addition to the social security safety net. For those who can afford them we already have private accounts, they are called IRAs. Those who favor private accounts should spend their efforts in modifying the requirements and limits of IRA to make them more available to a larger population of workers.

And fourth, replacing part of traditional social security with private accounts is a hidden yet severe reduction of benefits, and here’s why. The money put aside as private accounts, will eventually run out. What happens then? Even if you use optimistic numbers the money you put aside will run out, especially if each year you withdraw the amount you really need to live on. What happens then? You are broke, you used up your benefits and now you have nothing.

Social Security will pay benefits as long as you live, no matter how much you paid in. That’s because it’s like an insurance policy and the costs are borne by all policy holders. Some people live shorter and don’t get the money they contributed into social security over the years and some live longer and get more than they contributed. We all want have the benefits to last to100 if we should live so long. Private accounts shift the whole burden to you, and when it runs out you are of out luck, old and out of money.

Say you put away $5,000 a year in private accounts for 30 years. That means you set aside $150,000 over the 30 years. By the time you retire you will have accumulated 332,194 if you assume a constant 5% return on your investment. Mind you, in the last few years the normal return has been a lot less than 5%. So if you use a higher percentage you’re just fooling yourself. The $332,194 will give you 16,610 a year forever at 5%. So if a gallon of milk costs the $30 it is expected to in 30 years and not the $3 it is now, then the $16,610 will not even pay for rent. So you will have to use some of the principal. If you withdraw $30,000 a year and get 5% on what is left, your $332,194 will last for about 16 years after that you’re broke and out of luck.

So to reiterate, social security as it stands now does not run out, is guaranteed and is a basic safety net only. Private accounts may or may not give you more in the short run, but will run out before you die, if you live into your 80s or longer. And if you invest poorly or the market falters you will get even less.

So what’s the answer? We have to keep the social security fundamentals as it is now. If truly there is a problem then we need to look at small changes to keep it funded. Here are some suggestions.

1) In the years that there is a surplus between the amount collected and the amount spent on benefits as there exists now, put aside the surplus to supplement the shortfall in future years and extend the day of reckoning. Now and until now social security surpluses are transferred to the general government kitty and not saved for the lean years.

2) Collect social security taxes owed by the underground cash economy. We would have no tax issue if the cash economy was taxed as it should be. Restaurants, store owners, contractors, plumbers, electricians, auto repair, body shops and all business that collect cash and pay their employees in cash do not report their share of income and do not pay their fair share of taxes. The W2 employee is subsidizing the rest of the free loaders and it’s a scandal that congress and IRS are letting them get away with not paying their share.

If you are a W2 employee you know that every dollar you receive as compensation is reported to the IRS and you pay federal income tax, social security tax and possibly state and regional income taxes. Your employer pays its half of the social security tax. When you pay someone in cash for a service chances are they are not reporting it to the IRS. If your contractor says it's $1000 for a service but only $950 if you pay cash, you know damn well that $950 is not being reported. Add that up for the billions of dollars not reported each year and calculate the federal income tax and social security tax not being paid and you'll understand why your taxes are always going up. Those people still want the benefits, only you're paying for it. If everyone paid their share there would be no crisis.

posted by David Tyme @ 8:49 PM