Thursday, October 18, 2007

Social Security Funding


Social security is going broke by 2041 unless we do something. What can we do? We're doomed to die alone in the woods devoured by coyotes [that's a long story].

Well, irrational fears aside, the funding issue for social security can be resolved in short order without raising taxes. First let's have a brief history lesson.

From Wikipedia:

The original 1935 statute paid retirement benefits only to the primary worker. Many types of people were excluded, mainly farm workers, the self-employed, and anyone employed by an employer of fewer than ten people. These limitations, intended to exclude those from whom it would be difficult to monitor compliance, covered approximately half of the civilian labor force in the United States.

The 1935 Act also contained the first national unemployment-compensation program, aid to the states for various health and welfare programs, and the Aid to Dependent Children program. The initial tax rate was 2.0% of the first $3,000 of the employee's earnings, shared equally between the employee and the employer. The tax rate has been raised several times over the years, beginning in 1950, when it was raised to 3.0%. [9]

A poster for the expansion of the Social Security Act
A poster for the expansion of the Social Security Act

In 1939, the 1937 Federal Insurance Contributions Act (FICA) tax was amended in three important ways:

  • The widowed, nonworking spouse of a someone entitled to an old-age benefit also became entitled to an old-age benefit.
  • Survivors (widows and orphans) became eligible for a benefit.
  • Retirees who had never paid any FICA taxes became eligible for old-age benefits. This feature was very popular among the millions of elderly Americans hard hit by the Great Depression, and fatefully decoupled benefits eligibility from work history.

In 1956, the tax rate was raised to 4.0% (2.0% for the employer, 2.0% for the employee) and disability benefits were added. Also in 1956, women were allowed to retire at age 62 with reduced benefits (70%). In 1961, retirement at age 62 was extended to men, and the tax rate was increased to 6.0%.

Medicare was added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. (See List of Social Security legislation (United States).) Social Security was changed to withdraw funds from the independent "Trust" and put it into the General fund for additional congressional revenue.

Automatic annual cost-of-living adjustments (COLAs), not requiring legislation, began in 1975.[10]

During the Carter administration, immigrants who had never paid into the system became eligible for SSI (Supplemental Security Income) benefits when they reached age 65. SSI is not a Social Security benefit, but a welfare program, because the elderly and disabled poor are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement, because there is no right to SSI payments.

The 1983 amendments to the SSA, resulting from the 1982 report of the Greenspan Commission[citation needed] empaneled to investigate the long-run solvency of Social Security, taxed Social Security benefits for the first time: benefits in excess of a household income threshold, generally $25,000 for singles and $32,000 for couples (the precise formula computes and compares three different measures) became taxable. The amendments also gradually increased the age of eligibility for full old-age benefits, from 65 to 67 for those born after 1959.

In 1940, benefits paid totaled $35 million. These rose to $961 million in 1950, $11.2 billion in 1960, $31.9 billion in 1970, $120.5 billion in 1980, and $247.8 billion in 1990 (all figures in nominal dollars, not adjusted for inflation). In 2004, $492 billion of benefits were paid to 47.5 million beneficiaries.

One other piece of information is needed before the solution is revealed.
A preliminary report from the US Centers for Disease Control and Prevention (CDC) based on national statistics for 2005 puts life expectancy in the US at 78 years, a figure that has been increasing steadily over the last 50 years. In 1995 life expectancy in the US was 76 years and in 1955 it was 70 years. Racial and gender differences in life expectancy are also reducing.
The simple solution:
  • Increase the early eligibility age from 62 to 66 and the full retirement benefits age from the current 67 to 70.
  • Make mandatory retirement illegal before age 72 to ensure no one is forced to leave a job before retirement benefits are available
  • Require legal residence/citizenship for eligibility
The reasons this would work:
  • The funding problem is an actuarial issue, not a cash input one
  • Eligibility has been expanded beyond manageable limits or reasonable limits
This would place any hardship on the aging population as opposed to those who receive benefits from ancillary programs attached to Social Security. Those could and should be reviewed separately.
Just one other thought: delaying the time that social security benefits are available would serve as an incentive to 1) delay starting a working career to 2) become skilled/educated in something that they really want to do for a long time or 3) move to a country that offers nationalized everything like Britain (where you are granted all kinds of benefits, but you have to pull your own teeth to get them).

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
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- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)