In a previous post, we addressed this commission's proposals for changes to the federal income tax. We generally agreed with them, and suggested they should even a bit bolder. In this post, we will revisit a topic I have blogged on at least twice before...the "social security" system.
Facing the prospect of a bubble of "baby-boomer" retirees, longer life expectancies (with higher medical costs), and fewer young workers paying taxes to support them...addressing this looming crisis is long overdue. The Obama Commission, in it's preliminary stages, has suggested the following:
1) Cost-of-living increases would be reduced for seniors (these increases are currently tied to the Consumer Price Index, which measures inflation. This year seniors received a big fat zero.)
2) Social Security benefits would be adjusted based on recipients’ incomes. Most retirees would receive less, but those with lower overall incomes would receive more.
3) Gradually raising the retirement age for full benefits from 67 to 69 — though not until 2075 (It would appear that this element is drawing the most fire so far)
4) More of workers’ incomes would be subject to Social Security taxes. Currently, workers are only taxed (at 7.65%) on their first $106,000 of income. In order to close the funding ga, the Commission is likely to propose raising this to $190,000. While this might seem prudent at first glance, many forget that businesses must match their employees social security contributions...and in the current economy (hell, ANY economy), this is a price too high for many businesses to absorb.
On this set of recommendations, we must disagree with the Commission's suggestions. To be fair, they deserve applause for tackling perhaps the most sacred of all sacred cows in the US. However, their approach still amounts to treating a compound fracture by wrapping it up in gauze.And so once again, we are lead to ask:
"If the Social Security System is such a good deal, why are thousands of federal and state government employees exempt from being involved in it? Why have they chosen federal and state pension systems, and private retirement options instead?"
And why haven’t the rest of America’s workers had that right? If we can cut through the political rhetoric, we might just be able to give our kids and grandkids better choices than we have had.
Social Security is a financial time bomb as a natural result of changing demographics. And the single biggest problem is how it is funded: current workers pay for current retirees. When today’s worker pays social security tax, it does not go into a ‘safe place’ to be held for his future retirement; rather, it is used to fund the checks of current retirees. As the Social Security system currently operates, that means that today’s workers will have to rely on their grandchildren’s taxes for retirement income.
When this system was devised more than eighty years ago, there were forty working people for each retiree. Today, as family size shrinks, that ratio is approaching only two young workers for every retiree. In the 1930s, the average life expectancy was only sixty-five; today, we have two generations of retirees living into the eighties and nineties. That means that as originally conceived, forty young people supported one senior for a relatively short period of time. It was seen as a caring social responsibility. But in today’s world, that means two young workers will need to support themselves, their family, and a retiree for almost twenty years. That’s neither ‘caring’ nor ‘socially responsible.’
In fact, it is the opposite: it is socially irresponsible because we are turning our grandchildren into indentured servants with a tax burden that can not be sustained, while asking our seniors to work longer and live on less.
In addition, one of the most distressing trends in America is the growing wealth disparity between the wealthy and poor. The Federal Reserve has found that the difference in median net wealth between the richest and poorest jumped 20% between 1998 and 2001 alone...and that was before the current unemployment mess.
Worse is the dirty little social security 'secret': The gap between whites and blacks has grown 21% , and the social security system has played a significant role in that widening gap. 52% of Americans invest privately, but the poorest, after paying for clothing, housing, food, transportation and medical care, have little or nothing left to invest. Yet, they are forced to pay 7.65% of their income as a social security tax. This worker may pay this tax for 40 years, but if he dies without minor children or a spouse over 65, none of that money passes to his heirs.
In essence, the current system robs the poor of their ability to get ahead. One in three African-American men will die without ever collecting a cent of social security, and with no investment inheritance to pass along, in spite of paying a compulsory retirement tax his entire life.
Personal Lifelong Investment Accounts are the answer to these inequities.
Workers should have the right to invest their own money, long-term, in their own accounts, so they may collect interest and bequeath their funds should they predecease their spouse. Retirement should be something that people work for and save for throughout their lifetime...not a tax on the next generation.
We are not suggesting that people place all their retirement funds in a single gamble (the “Enron” scare tactic.) Rather, investments should be placed in a highly-diverse, long-term, broad basket of stocks, bonds, and mutual funds that easily survive even should one company have trouble – precisely the plan that I, as a State employee, have the right to do.
Yes, the market has ups and downs. But no one planning to retire in 2010 begins by starting to invest in 2005. Long-term investments in the market have always yielded significant results, and retirement is a long-term process. Just as workers currently must pay a tax today to fund a check tomorrow, so may they be required to save today in an IRA that will garner growth, interest, and dividends over the course of the next 30 years. And yes, the federal government could and should continue to provide a safety net to guarantee a minimum income for ALL seniors.
Those who would seek to ‘save’ the current social security system always choose to accomplish that task through using coercion: they would tell you when you may retire, what your benefits would be, how much you would pay in taxes, and how much you would receive and on what schedule when you retire. It presupposes that government can somehow decide what is best for you. In a nation like Chile, workers decide how much they will put aside, when they will retire, where and how their money is invested, and what payment schedule they would prefer upon retirement. If they should pre-decease their retirement, their account still belongs to their estate, and their family is not left at the mercy of government payments. Returns on Chilean workers’ money has averaged 13%, far more than Americans can ever hope to make back on their social security contributions.
No wonder US government workers have permitted themselves to opt out of Social Security. It's time that right was given to the rest of America as well.
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