The Social Security debate has its own private lexicon wherein words take on new meanings, which at times even contradict the meaning those words have in the English language. The consequence of the Social Security pseudo-code is a stalemate, because it is virtually impossible to build any consensus in a world where up means down and right means left.
For example, the standard rebuttal to any call for reform is, "Social Security has funds in a worst-case scenario to pay full benefits for more than 20 years, and minor changes could easily fix the long-term funding problem." While you hear this often, you need a decoder ring to understand what is really being said.
The most abused word in the debate about Social Security is "fixed." Writers use the word "fixed" and "solvent" interchangeably, even though the concepts are 14 trillion dollars apart according to the Social Security Administration. "Fixed" means that we have no problem. "Solvent" means that we have made our problem a problem for our kids. These are not the same thing.
For millennials, "solvent" means that the nation will divert roughly $10 trillion away from deficit control so that in 35 years millennials can be in the exact same situation Boomers are today. As millennials approach retirement, the system would have massive solvency shortfalls. The working generation would be complaining about the cost of the system, doubting that they will collect anything. The nation will be right back where it was in 2013 and 1983 with millennials trying to convince their children that Social Security will provide them a safe retirement provided that they pay more and get less.
This problem comes in part because the word "funds," in a Social Security context, does not mean funds in the traditional sense of the word. Social Security is financed, not funded. Social Security collects payroll revenue in exchange for the promise of future benefits. This is no different from going to a bank to borrow money in exchange for the promise of future interest and principal payments. Social Security pays every dollar of benefits with borrowed money, where the next generation serves as a new bank.
Yes, the system holds $2.7 trillion in borrowed money in the trust funds. In building that reserve, the system issued more than $25 trillion of promises for which there are no funds in any true sense of the word.
Words of certainty in the Social Security debate also have no meaning. "Will" means "might," or at best "should." The Trustees of Social Security say that in a good economy Social Security might be able to pay full benefits until 2033. 2033 is not a prediction. It is a likely outcome. The projection is provided as a warning, not as a guarantee.
Even so, what would the word "guarantee" mean? On Dec. 20, 1977, President Carter said, "This legislation will guarantee that from 1980 to the year 2030, the social security funds will be sound." "Guarantee" meant that six years later the system was completely insolvent, requiring massive tax increases, benefit cuts, and the inclusion of millions of more workers.
Not only is 2033 not a guarantee, it is not even a "worst-case" scenario. The Trustees provide projections based on three different scenarios, ranging from low-cost to high-cost. On page 58 of the Trustees Report, the Trustees provide outcomes based on less favorable economic assumptions where the system pays degraded benefits in 2027. And while these assumptions are called "high-cost," they are far from a worst-case scenario.
Words of magnitude in the Social Security debate have no meaning. The opponents in the debate change the wording of $10 trillion so that it has no meaning. Ten trillion is expressed as a percentage of GPD. It is expressed as a percentage of wages. For example, Gail Buckner on Fox Business referred to the $10 trillion as "small" increase in the payroll tax rate of 1.3%. Another way to express her ideas is, "Raising Payroll Taxes to Save Social Security will Cost the Average Worker $73,000." Expressing the problem in fewer digits does not make the problem smaller —$10 trillion is still $10 trillion.
In a debate where words have no meaning, it is possible to say that Social Security's financing gap is easy to fix — whatever "easy" means.
Friday, June 6, 2014
Think Social Security is Unaffordable Now? Just You Wait
Millennials who have an interest in the debt and the burden the government can place on the economy should pay attention to a trend among older Americans. Today, an estimated 10,000 people leave the workforce for a pension from Social Security — every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
People tend to see this trend as a problem for Social Security, and it is. The trend presents, however, a larger problem for the people who are expected to pay for the general debt of the government. The problem is that retirees in general are leaving income-tax-producing jobs for a pension that is exempt from taxation.
Many people mistakenly believe that Social Security benefits are subject to income taxes. While the income is reported to the IRS and revenue is collected, the monies paid to the IRS on Social Security benefits are returned to Social Security. Not one penny of the revenue collected on Social Security benefits goes to the general fund to help control the deficit. The penalty collected by the IRS is really a means-tested clawback of benefits.
Not only are people leaving the work force, but as Andrew Biggs reports, the trend is for Americans to retire early over time. In the 1950s, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83. Today only about 30% of first-time checks go to retirees who have reached full retirement age.
It is difficult not to reach the conclusion that Social Security induces people to retire earlier than they normally would. In fact, Social Security penalizes those who work part-time during early retirement. It is impossible the reach the conclusion that Social Security will not foster lower income tax revenues in the long run.
Let's look at a simple example of consequences. If I were to retire next year, my wife would continue to work, making around $15,000. My accountant tells me that we can manage our income to avoid Social Security's penalties on outside income. Our income tax will drop from $6,700 to zero. Our payroll taxes will drop from roughly $10,500 to $2,250. Our total tax bill will drop from more than $17,000 to about $2,000.
The situation is worse because of the way that the penalty on Social Security benefits is imposed. My wife's wages might make getting below the penalty threshold more difficult. If we miss the threshold, even by a penny, 50% of my Social Security benefit will be subject to penalty at our marginal rate. As it works out, my wife may quit her job late in the year because the tax and penalty liability would exceed her paycheck.
This picture becomes more troubling once my wife actually retires because we will not fully replace her wages with outside income. We will compensate for lower disposable income by spending less. That lower spending will feed into the economy as a whole. I am not a problem by myself, but 10,000 people retiring every day does present a problem in terms of tax revenue and domestic spending.
There is no doubt that we will spend less. Even with less spending, we will transition from a net buyer of investments to a net seller in order to provide the lower standard of living. As the focus of Americans shifts from equity investments to fixed income, it will affect the capital gains created for all Americans. There are no winners in my spending less money.
Americans need to pay attention to a tax system that is grounded on income when many people are transitioning from an income-based lifestyle to one based on wealth. In my case, we'll get less income and lower spending. More broadly, my decisions are apt to hurt capital-gains taxes paid by others. If it were just me, the change wouldn't be a problem, but there are 10,000 people who are joining me every day.
The $3 Trillion Dollar Question No One Is Asking....
The media is not covering the problem looming in Social Security, one which will fall on millennials much sooner than 2033. The $3 trillion question is: Where will the government get the money to repay the Trust Fund?
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
This is a huge question for millennials. Social Security will add $3 trillion of funding questions to a government which is already plagued by debt. Social Security will create this problem at the exact time that it is reducing its role as the nation's private banker.
When the Social Security Trust Fund redeems a bond for cash, the Treasury Department needs a source of funds with which to pay the bond. The Treasury Department has two options: It can buy the debt or it can refinance the debt through a new lender. Buying the debt means increasing tax revenue. Refinancing the debt means finding a new lender. Between 2021 and 2032, the Social Security Trust Fund is projected to redeem $3 trillion in bonds.
The media and experts tend to view this process as a seamless transaction that will go unnoticed by the markets. The problem is that today Social Security is the best customer of the US Department of Treasury, holding 2.7 trillion dollars of assets in a private pool of capital on which the government can draw at friendly rates. This reserve insulates the government from the cost of borrowing in the public markets. Basically Social Security is the government's best friend.
This friendship has been in modest decline since 2007 when Social Security generated roughly $200 billion in excess cash flow. By 2010, Social Security's operating cash flow turned negative. As Social Security excess cash flow has dropped, the government has increased its dependence on the Federal Reserve for its funding needs.
In 2021, the terms of the friendship change entirely. Social Security will start liquidating bonds in order to pay full benefits. At that time, the projected gap between the income of Social Security and its expenses will require the system to redeem bonds. In short, the best customer of the Treasury is about to become a direct competitor.
If you owned a shoe store, and your best client was leaving you, it would be a worrisome event. The problem in this case is exponentially larger because the best client is leaving so that he can open his own shoe store next door. In terms of Social Security, it isn't even clear that anyone is even paying attention.
The government should be asking who will fill the void created by the decreasing excess cash flow from Social Security if only for its own borrowing needs. The fact that Social Security will add 3 trillion dollars of incremental financing is a question that everyone should be asking.
The Social Security Trust Funds hold $2.7 dollars of assets. It is the largest customer of government debt in the world. The terms of 1 3/8% are fairly generous. Social Security is projected to need to start redeeming bonds in 2021. Between 2021 and 2033, Social Security will redeem a projected $3 trillion of debt.
Social Security Crisis Explained In Four Simple Steps
When Social Security was created in 1935, the system was designed to be funded by workers not financed by their children. It wasn't a generational-transfer or a Ponzi scheme. Since that time, the system's finances have deteriorated virtually every year to the point where the financing gap is nearly the size of our entire GDP. So what the hell happened?
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
How to destroy the future in four easy steps:
1. Give To Voters
During the 1950s, Social Security became a way to buy votes. Congress raised benefits — every election year in the 1950s. Social Security Act Amendments of 1950, 1952, 1954, 1956, 1958 all increased benefits. These increased the value of existing benefits, created new benefits, or expanded coverage to more Americans. The 1950 Amendment raised benefits by 77%, 1952 (12.5%), 1954 (13%), 1956(added disability), 1958 (7%).
A couple retiring in 1960 expected to collect $8 of benefits for every $1 of contribution. Basically, Congress in the 1950s was selling dollars of benefits to voters for little more than a dime. The difference between the cost and the benefit was largely passed on to future generations who had no vote in 1950.
2. Take From Non-Voters
The original law included automatic tax increases which would have increased the cost of Social Security to 6% of wages from its 2% base. Over the 1940s, Congress waived every increase, one of which required a Congressional override of FDR's veto. Funding for Social Security did not reach the originally envisioned 6% until the 1960s. Self-employed workers would not pay 6% until the 1970s.
These tax cuts transformed Social Security from a system paid by workers to a system financed by children who had no vote at the time.
3. Allow The Federal Reserve to Lower Interest Rates At A Cost Of $1.2 trillion of Projected Interest Income (in 2012 alone)
In 2011, projected interest income over the life of the Trust Fund was 3.6 trillion. In 2012, projected interest income over the life of the Trust Fund was 2.4 trillion.
Thanks, Ben Bernanke.
4. Ignore The Problem
Social Security almost reached insolvency in 1983. At that time, Social Security had more than 40 years of promises embedded in a system that did not have a penny to pay them. The solution to these problems in 1983? Repeat step 1. Repeat step 2. Prepare for step 3. The solution to these problems in 2013? Repeat step 1. Repeat step 2.
Today, Social Security is not much different than spending quarters to buy dimes. Congress' solution is for us to get our kids to spend quarters to buy nickels.
A Frightening Phrase: "I'm Your Mother-in-Law. I Need a Place to Stay.
If Social Security is important to you at all, you should be paying attention to the cost of doing nothing.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
During 2012, we did nothing, the cost of which was roughly $1 trillion. According to the trustees, the cost to maintain Social Security rose from $8.6 trillion in 2012 to $9.6 trillion in 2013. Basically, the system lost more money than it collected, in its entirety.
Another way to look at this dynamic is we lost more money not fixing Social Security than we spent on the entire military. If we diverted every penny that we spent on the military and education in 2012 to Social Security, the system would be slightly worse off financially at the end of 2012 than it was at the start.
The problem for millennials isn't whether they will get Social Security benefits. The more immediate problem is whether their parents will get benefits. The Congressional Budget Office ("CBO") projects Social Security will pay depleted benefits in 2031. If so, every future retiree from now until eternity expects to outlive scheduled benefits.
CBO's projected imbalances are based on many economic uncertainties which may or may not come to pass. The one ingredient in this mess that we can measure with certainty is time. The Trustees Report says, "The unfunded obligation would have increased from $8.6 trillion to $9.1 trillion solely due to the change in the valuation period."
This is not economic uncertainty. It is the mathematical cost of time.
Doing nothing means that we didn't change the revenue intake, benefit formula, age requirements, or the number of quarters to qualify. We let the system run while politicians talked. In the 14 seconds that it took candidate Obama to say, "Social Security is structurally sound," the system lost over $220,000 (even more if you count the time it took candidate Romney to agree).
Because the equation "discounts fewer years" and replaces the cost of 2012 with the cost of 2088, I know with mathematical certainty that time has added more than $500 billion to the cost of Social Security in 2013 because of nothing being done.
Politicians will tell you that we have time to fix Social Security. But time is the one thing that we know for certain will make Social Security worse.
Thursday, May 15, 2014
Senator Rubio's Social Security Proposal
On Tuesday, Sen. Marco Rubio (R-Fla.)
outlined a number of reforms for Social Security at the National
Press Club in Washington.
His speech dealt with public
policy on retirement in the 21st century, including a 4-point change to Social
Security:
1. Eliminate the payroll tax for
anyone over age 65 who continues to work.
2. Remove the retirement earnings
test for seniors 62 and over
3. Raise the Social Security retirement
age for those under the age of 55.
4. Increase benefits for low-income
seniors and reduce scheduled
initial benefit levels for wealthy retirees.
His words were strong. Rubio warned
the audience, "(By 2038), Social Security will have been bankrupt for
years. This is not a scare tactic. It is a mathematical certainty. The longer
we wait to address this the harder it will be to fix, and the more disruptive
those fixes will be.” These words contrasts sharply with the 2012 election in
which we heard "Social Security is - you know - structurally sound."
It is refreshing to see a politician speak
candidly about Social Security for all Americans. At the same time, his
comments paint a clear picture that the even the most courageous politicians
remain distrait from a system on which they do not depend.
Oddly enough, a considerable portion of his
proposal will make
Social Security less solvent. Reducing payroll taxes will not help Social
Security, particularly for seniors who, as Rubio notes, may get very little in
return for their contribution. Removing the retirement earnings test will only encourage
more people to start drawing benefits at 62, which creates near term pressure
on the system. Likewise, increasing Social Security benefits for anyone makes
Social Security less solvent.
There are two parts of
his policy that will improve Social Security's finances. One will increasing the age of
retirement for those who are 54 and younger.
The other targets wealthy retirees for lower benefit levels. So would these
adjustments rescue Social Security for those under the age of 54?
The Social Security
Administration has scored similar concepts, and the results generate little
confidence that Rubio's changes will add "years" as he claims. The research from the Social Security
Administration suggests that it is closer to months. It isn't even possible to
say that these adjustments will offset the negative impacts of his other
proposals.
These are scores of comparable
ideas. None of these ideas increase the exhaustion point of the Trust Fund past
2033. The Social Security Administration :
·
scored
a proposal to increase the retirement age for people 54 and younger. This
change addresses about 12% of the financing gap.
·
projected
that slowing the initial benefits of senior retiring in 2026 addresses 2% of
the shortfall financing.
·
scored
the changed to Chain-CPI would address 14% of the projected shortfall. That
assumes of course that we change the system in 2016 rather than 2026, and apply
the cost controls on all seniors rather than just those who reach normal
retirement age after 2026.
There are some problems
with Senator Rubio's proposals. Specifically, Social Security does not have
insight into a retiree's wealth. His proposals use past income which may be
connected to wealth, but it isn't possible to say that his changes will even
target wealthy retirees.
It is
difficult to criticize someone who has the courage to step forward when no one
else will. It is however a tiny step, one that does almost nothing. In the
words of Senator Rubio, "anyone
who is in favor of doing nothing about Social Security is in favor of
bankrupting Social Security." He is effectively doing nothing.
Thursday, May 8, 2014
What Is Social Security?
Much
of the contention in the debate about Social Security derives from one basic
source: few agree on what Social Security is. Many see it as a safety-net
program and most of the rest want to the system to be a retirement plan. Oddly enough it is neither.
Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay. The likelihood of living to 100 is about 1%. The cost of living for more than 30 years without a job is staggering. Like fire or health insurance, Social Security protects you against the cost of an unknown event.
Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay. The likelihood of living to 100 is about 1%. The cost of living for more than 30 years without a job is staggering. Like fire or health insurance, Social Security protects you against the cost of an unknown event.
The
terms of insurance vary by type. For
instance, auto insurance insures a momentary event. Health insurance insures costs occur within a
whole year. Social Security measures
longer old-age in two week intervals with a small check, one that may payout
over a very long period of time. The
length of the event does not change the nature of insurance.
No
insurance pays the full cost of the event, likely or not. Social Security does not pay the full cost of
living without working. Social Security
does not prevent poverty. It provides
supplemental income to provide the retiree some measure of certainty against
falling into poverty ridden old-age. FDR's words not mine.
Insurance
is an expense, not an investment. Without
Social Security, how could anyone retire?
Without insurance, the worker would need to create sufficient savings to live
30 years or more. That is a lot of
savings to require of someone who expects to live about 17 years, and may live less than
1 in actual retirement. Insurance allows the worker to buy protection against the possibility that he might have an extended life, enabling him to retire
at a reasonable age.
Insurance
fits into a retirement plan with other tools.
When it was designed, Social Security was suppose to be only one part of
a three legged stool. The rest of the
stool was private savings and private pensions. An investment is something that
accumulates the wealth on which you retire.
Insurance protects that wealth so that you do not have to draw it down
too early in retirement.
Some people argue that the force of law exerted by the government makes Social Security a welfare program. Yes, Social Security is legally required for most workers. This requirement is no different than the one by which most states have for auto insurance. Yet your auto insurer is not an arm of the government to provide welfare. The legal requirement to participate does not change the nature of the program.
The reason that many struggle with the nature of Social Security comes from the way we pay for it. The pay-as-you-go system doesn't work. Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference. This is the unavoidable outcome of using the money of one to buy the insurance of another.
Until we agree upon what Social Security is, there will be no way to fix it.
The reason that many struggle with the nature of Social Security comes from the way we pay for it. The pay-as-you-go system doesn't work. Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference. This is the unavoidable outcome of using the money of one to buy the insurance of another.
Until we agree upon what Social Security is, there will be no way to fix it.
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