Friday, November 25, 2011

Saving Social Security

Note: To become your neighborhood's expert on Social Security, you really only need to read one article: Roger Lowenstein's excellent A Question of Numbers, written for the New York Times in 2005. It includes a good history of the program (and the vitriolic criticism is has incurred over the last seventy years) and an excellent discussion of the state of its finances.

Social Security has come under a lot of criticism lately, be it Gov. Perry’s  claim that it is a Ponzi scheme, or Herman Cain’s claim that it will go bankrupt in 2037. Even less addled folk have chimed in, calling for raising the age of eligibility, reducing benefits or … even having to raise payroll taxes.

This is all … bullshit. Social Security is doing very well, thank you, but it could use a little assistance in dealing with bump in expenditures that will be caused by the retirement of the baby-boomers. After that, it’s clear sailing as far as the eye can see.

If you'll open up your copy of the 2010 Social Security Board of Trustees Report to page 15, you’ll find the graph above. From about 2015 to 2030, Social Security expenditures are expected to rise – but after that, they stay flat all the way out to 2080. Hardly a crisis.

But it would still be a good idea to help out this essential social program, so let’s see how big a problem it is and what we can do about it.

According to the Congressional Budget Office Director’s blog:
Under current law, the resources dedicated to financing the program over the next 75 years fall short of the benefits that will be owed to beneficiaries by about 0.6 percent of gross domestic product (GDP). In other words, to bring the program into actuarial balance over the 75 years, payroll taxes would have to be increased immediately by 0.6 percent of GDP and kept at that higher rate, or scheduled benefits would have to be reduced by an equivalent amount, or some combination of those changes and others would have to be implemented.
So Social Security isn't going to go bankrupt, though it will start running a deficit, one which have to be picked up by the federal government -- or addressed by things like raising the eligibility age or cutting benefits.

But the problem, while sizable, hardly constitutes a crisis. This is all due to the Social Security reforms under Reagan, which saw -- among a bunch of other reforms -- an increase in payroll taxes to address the strain to be caused by retiring baby-boomers. That means the problem which we face --a gap of 0.6% of  GDP -- is as small as it is.

Nicely, the folk over at the Social Security Administration analyzed thirty options and published a graph with their findings. 

Now take a look at fourth line down, the one that says “Eliminate the Taxable Maximum.” In English, this refers to getting rid of a tax break which allows the wealthy (and the fairly well off) from having to pay Social Security taxes on all of their earned income. Right now, if you make $1 million, you only have to pay Social Security taxes on the first $106,800. For the remaining $893,200 -- hey, no worries!

By junking this one egregious tax break, we’d be able to add 0.6% GDP back into Social Security. Now, according to the CBO Director’s blog, the shortfall we’re facing is…. 0.6% GDP!

Holy shit. We’re done!

The retirement age stays the same; no screwing around with benefits. All we need to do is close one tax loophole.

But what is we weren’t satisfied with saving Social Security. What if we … wanted to make it better.
Consider that CNN has recently reported that:
A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.  
It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans. 
While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.

For whole lot of folk, the economic stagnation, combined with the downturn in the housing market, means that retirement is looking harder and harder to achieve. Here’s the chart for the S&P 500 for the last twenty years.

Ah, the Clinton years; they were so good to us. Unfortunately, we’ve not been able to get back to those heights – even though eleven years have passed. So if you had a retirement fund keyed solely to the S&P 500 (and which included neither dividends nor additional capital contribution), your performance would be as shown below.

Since January 1, 2000, you would have experienced a negative return of $179, or about -13% over almost eleven years. That is not how to build a retirement plan.

But, perhaps you’ve got money stuck in your house, and were hoping that would play a key part in your retirement.

According to the Case-Shiler Home Price Indices, your house is now worth what it was eight years ago, in 2003.

Now the loss of a decade’s worth of growth it not something which remedied easily, or even with a lot of work. But we can do something for those people who planning to work for years after they die.

The magic words are “unearned income.” The 1% have pulled off a brilliant con over last 30 years, where they’ve been able to convince the government that unearned income – the kind that comes from capital gains, dividends and interest – should not be subject to the kind of taxation that the rest of us face. In terms of income tax, long term capital gains are taxed at 15%, far below the current maximum marginal rate of 35%.

But it gets worse in terms of Social Security, because these things have ... never been taxed at all.

In 2009, the IRS reported that there was nearly $7.7 trillion in income, $5.7 of which was salaries and wages. Now, just because something isn't salaries and wages does not necessarily mean it would qualify as "unearned income," but it does give us a sense of scale. If only half of it was -- $1 trillion -- then applying the 2009 employee Social Security rate of 6.2% would yield an additional $60.2 billion in revenue.

And all of this increase would be on income -- literally -- that no one worked for.

Fixing Social Security is easy -- just get rid of one tax break for wealthy (and well-off). Making Social Security better will take more work, but it's the kind of thing a decent country -- one which doesn't make dead people work -- should consider. And one good place to start would be re-examining the special treatment we give to "unearned income," a.k.a. money no one worked for.

No comments:

Post a Comment