Social Security: Here's How to Extend the Fund's Life

A recent post on August cash flow losses at the Social Security Trust Fund got me an email from the Fund that pointed to their thinking on the potential approaches that will be considered when and if the problems at Social Security come on the table.

It is clear that there is no one solution or magic bullet to address the continued solvency of the Fund. The solutions proposed either raise income or they reduce expenses.

The full list of the Fund’s proposals can be found here. Each proposal has a discussion of the results over time. In my review there are two areas that appear to produce favorable results. Reducing COLA and raising payroll taxes have the most significant impact.

To have a meaningful effect on the outcome it is necessary that payroll taxes are increased by a combined 2.2%. This graph (click to enlarge) shows the impact of this change.

Raising taxes clearly fixes the problem. However to do so requires an increase in payroll taxes of $110 B in 2010 and each year thereafter (indexed higher). This is not an option that should be seriously considered. Any proposal that results in increased taxation on workers is just not going to fly. It would have a significant drag on the real economy. To stimulate growth and sustain the weak recovery requires tax decreases not increases.

To demonstrate the magnitude of the problem consider the following graphs (click on each to enlarge). The first looks at the impact of raising the retirement age to 70 over a period of time. The second looks at raising the ceiling on taxable income from the current level. As you can see there is very little change. These approaches address the political issues behind the problem. Increase tax on high earners while old people would get benefits later in life. A grand compromise that will result in more divisions in our society and achieve next to nothing by way of fixing the underlying problem.

Adjusting the COLA formula has a significant impact. Reducing the COLA by 1% annually significantly extends the life and health of the Fund. This is just a cheap way to reduce benefits for future beneficiaries. While this approach shows promise it will result in future retirees that depend on SS income to starve. This just creates a future problem, the numbers look better but the social consequences will be a disaster.

However, this fix is the most likely one to be seriously considered as it addresses the present and pushes the problems of an aging population to the next generation. I hate this approach. It encourages inflation as a government tool to reduce costs. Reducing or eliminating COLA is a fix not a solution.

The Fund provides a significant range of alternatives for the public to look at. The summary of these alternatives can be found at this site. For each alternative go to the summary and then the graph on the right that looks like those above. If the graph shows meaningful extension of the viable life of the Fund it is a tool that can/will be seriously considered. While there are a number of proposals that achieve the desired results those same approaches run counter to the current macro economic/social picture we face and should not be considered.

In my view the Fund has done both an excellent and a terrible job in defining and analyzing the range of options we face. I think they have omitted the only choice that makes sense on a long-term basis. We have to have a means test for Social Security.

The American people and their lawmakers should be able to look at a proposal that means tests availability of retirement benefits. There are a lot of Lloyd Blankfeins, Larry Finks, Steve Jobses, Bill Gateses and yes, maybe me too who could do without the extra $15k a year that we are currently entitled to get.

I would propose a means test on availability of $100,000 (indexed over time) in taxable income starting in 2010. If you make that much in a given year you simply do not get the retirement benefits. This is taxing the rich. While that is undesirable, it is a far better alternative than raising payroll taxes on current workers or cutting benefits across the board to all retirees. The impact on those with incomes greater than $100k would be negligible.

To the Fund: Please provide this information. We need to consider this approach. Trust me; Blankfein, Fink, Jobs, Gates and even I will back that option. In the long run it is the best alternative for our children, our society and us.

The proposals that you have put forward that are effective are at the same time flawed. That flaw is that they will be broadly unpopular. Washington is about to hit its citizens over the head with health care. And then you are going to come up for discussion. By that time people will be very angry. Those folks who came to visit your city this weekend are part of something much bigger and troubling. The means test narrows the scope of the hit that must come.

Comments

[Carneades:]

Although reducing COLA isn't a knockout punch, it should be included in the combination of adjustments that we need to make in order to keep the Fund solvent. With a 0% COLA for 2010 though, SS advocacy groups are pushing for a "beneficiary bailout" that would consist of a one time payment to make up the difference between health care inflation and CPI. This is a horrible idea that will set a precedent for demanding additional benefits whenever a given year's COLA isn't substantial enough for SS beneficiaries.

Great article though, we need to be talking about his problem and it's possible solutions more often.

Sep 14 09:31 AM

[Howard_T:]

I'm not sure what you mean by the "availability of $100,000 in taxable income". Does this mean having savings that will produce income, but only at the depletion of savings? That hardly sounds like an incentive to hard work and thrift. Placing a means test on Social Security is equivalent to theft, since the government forced us to hand over the payroll tax. Even in these bad times, voluntary privatization is possibly the best way to save the program. Those who are able to earn good salaries can opt out of the system and invest what would have been their payroll taxes. Those who are not in a position to accept that risk can continue on with SS as presently constructed. Of course, since Social Security (and Medicare, for that matter) were both devised when the average life expectancy was much shorter than it is now, perhaps we ought to place some sort of limit on the years an individual may collect. At the end of the limit, I'm sure the government will be glad to provide us with a nice pamphlet detailing how we can manage our end-of-life situation.

Sep 14 10:28 AM

[Richard 996:]

I think that the COLA reduction is a wonderful idea. Reducing COLA will also create an incentive for a large segment of our population to be concerned about inflation,ie; (reduce fed spending) this could be a win-win for everyone. I would also suggest eliminating the Federal Retirement System and combining both systems into Social Security, that would also create an incentive to develop a resolution for the
problem
Cheers

Sep 14 10:52 AM

[Dan in mpls:]

Perfect. I pay into my retirement and get nothing out of it. They might just as well extend that to 401K plans as well and conficate that as well. There is zero difference. Now I'd like to hear the quick fix for medicare and medicaid to see how much that will cost the hardest workin bunch of Americans. We, the "wealthy" ,are not all movie stars, CEO's of major corporations and the like. We work huge hours and harder than any of our employees and, by God, we've done well in this once Capitalistic country where hard work was rewarded. The moral hazard of socialism will kill this goose soon enough so I should lay off my rants. But I won't.

Sep 14 10:54 AM

[Dan in mpls:]

I might add that there should be no law to forbid a Social Security recipient from receiving welfare. That's pretty much what the check is anyway for may of them. You do the right thing which is pay everyone the retirement they paid for over their lifetimes. Bill Gates will most likely send his check back or deposit it into his multi billion dollar charity. Mine will mostly likely end up in my minority scholarship fund but I sure don't need to have it taken from me by the socialists in the government

Sep 14 11:06 AM

[huskerbob:]

Where is your article detailing how we could have kept Madoff's fund going? Didn't those investors, including charities, put in their hard-earned money expecting a comfortable retirement or at least some rewards? At least Madoff made some little effort at producing value (enough to fool the SEC anyway). "Investors" in social security are no more deserving of payouts than Madoff's suckers. Theirs was not a pure ponzi scheme like social security, simply taking money from late investors to pay the early ones. In spite of whatever painful and unfair schemes you can think up, all ponzi schemes end the same way. That's why our appointed rulers do not participate. Social Security is for suckers, and it will end in disaster (see the Supreme Court decision Flemming v. Nestor)

Sep 14 11:21 AM

[Bruce Krasting:]

HowardT:
My means test would be on taxable income. This could be wages, it could be interest income or capital gains. If your taxable income according to schedule A is 100k you get nothing for the next year.

If the following year year you fall below that level you get your scheduled benefits for the nest year. And so on.

Sep 14 12:00 PM

[drewriders:]

You telling me Rick Wagoner of GM worked longer and harder than any of his lower level manager? I don't believe it.


On Sep 14 10:54 AM Dan in mpls wrote:

> Perfect. I pay into my retirement and get nothing out of it. They
> might just as well extend that to 401K plans as well and conficate
> that as well. There is zero difference. Now I'd like to hear the
> quick fix for medicare and medicaid to see how much that will cost
> the hardest workin bunch of Americans. We, the "wealthy" ,are not
> all movie stars, CEO's of major corporations and the like. We work
> huge hours and harder than any of our employees and, by God, we've
> done well in this once Capitalistic country where hard work was rewarded.
> The moral hazard of socialism will kill this goose soon enough so
> I should lay off my rants. But I won't.

Sep 14 12:13 PM

[baldskits:]

Dear Bruce: All that has to be done according to SS actuaries, is remove the payroll cap. According to the graph, this makes the plan solvent past 2080. This will tax the rich. Too bad. It is about time they start paying their fair share. Looking at your bio, you must be one of the rich. Too bad, your ox must be gored.

Sep 14 02:06 PM

[jimmy46:]

A major problem with SS is that women pay so little in to it and take so much out.
Women only pay 37% of SS taxes.
They take out 63% of benefits.

My mother is a good example,
she's been taking SS for 34 years now, and will probably live another 5 years.
she only paid into the system for 3 years during WW2.

Sep 14 02:24 PM

[Chancer:]

I am delighted that you suggest means testing. Those with retirement incomes over $100K excluding social security from pensions, investments, etc. do not need social security. However, you see the arguments clearly here of why even liberals have opposed this. They fear that pressure will come from the rich to "opt out", if they will not collect. The idea should be that those who have received the most in society should sacrifice to save the system.

I believe the cap should be removed so that all earnings are taxed without increasing benefits for those contributions.

The problem with reducing COLAs is that retirees depend on the COLAs to pay Medicare increases. Medicare's current $96.40 per month is planned to increase to $128 in 2012. That's a 33% increase for those who paid in social security taxes all their life. Looks like the "hope and change" guy's plan to reduce healthcare costs is not working out. It would certainly be reasonable to reduce COLA's to a more correct increase in cost of living- if true as some have argued that COLAs are too generous.

I would be for raising full retirement age to 70 if it helps. But workers have to be protected from employers forcibly retiring them at 65. What do they do for 5 years? More people would file social security early for reduced benefits. Age discrimination laws should be strengthened to protect older workers. Right now you almost need an employer to confess it in order for a claim to prevail.

Payroll tax increases should be raised only as a last resort. The country is already "sticking it" to young people with the deficit, reduced opportunities (even with a college degree), higher education costs, and a certain future of higher taxes with a higher cost of living.

Sep 14 03:17 PM

[rosey99:]

This is an interesting idea, but it goes against the "soul" of social security's design. Which is to say, it was never intended to be a "welfare" program. Raising the cap on taxable wages, while amounting to the same thing, is likely to get a little more traction.

Interestingly, SS was implemented back in the day as an expedient way to get older workers out of the workforce, thereby making room for younger workers to gain employment. Recall that initial benefits were paid from the general fund, and SS ran at an immediate deficit for years. Given current demographics of current (un)employment trends in the US, we could easily end up facing a similar problem soon, if things don't turn around pretty dramatically. Also interesting to note that should the CPI decline, COLA does not go down. COLA can only go up under current law.

I don't have any idea what the best mix of solutions are. Thanks for the interesting post.

Sep 14 04:00 PM

[mplaut:]

I think it would be a good idea to show different options for the means test: 100k, 200k, 300k

Obviously the higher we can make the cutoff point, the better it is.

Sep 14 04:28 PM

[bobbybutte:]

I just think benefits for rich people should be cut and payroll taxes should be raised slightly but it is wrong that family which earns 66 thousand and has 3 kids pays NO tax

Sep 14 04:46 PM

[Wood1024:]

Obviously reducing the COLA will greatly help extend the life of the program. However, it also means the recipients that made the most contibutions to SS will actually receive a negative "real" return (return minus inflation), and that is not exactly a solid retirement plan. This also means SS is really just a welfare system and that our government has let us down (once again). Is it any wonder that many like me worry about the implications of big governement in other aspects of our lives, say healthcare? When politicians like FDR propose programs like SS, they sound really great, too good to be true, and they are!

Sep 14 05:01 PM

[baldskits:]

Corporations do not like defined benefit retirement plans, except for CEO's and their ilk. So they took away defined benefit plans and replaced them with defined contributions and now the average in a 401K is $28,000. How are seniors supposed to survive w/o SS? Right wingers want to take this away since Roosevelt had it implemented. This is the only thing people have left.

Sep 14 05:31 PM

[levin70:]

Cut the benefits. They failed to earn what the benefits are paying out. Its that simple. Move to a defined contribution system and the problem solves itself. You get to take out what you put in.

Sep 14 05:46 PM

[Living4Divi...:]

Superb article. I have written about OASDI/SSTF and am thoroughly impressed by your article. I am especially impressed by how well your graphics tell the story.

Here is the solution that will be chosen: "raising the ceiling on taxable income" - that is taxing the rich.

As you said, this does not fix the problem. But, it "sounds good" and its very feasible, politically.

Most voters don't have the time to read graphs or study in-depth analysis, such as yours, in order to make informed opinions. They go with what sounds good.

There will be more than one element to the fix. "raising the ceiling on taxable income" is certain to be part of the solution along with one other of your proposed fixes.

Sep 14 06:20 PM

[woollyB:]

We need to raise the minimum age requirements. When the SSA was enacted, the average lifespan was less than 65 years, so when you qualified for full retirement benefits, you had already lived a longer than average life, i.e., you were OLD.

Average lifespan is now pushing 80 and SS hasn't changed.

Sep 14 06:20 PM

[John Bowman:]

Don't worry...within a few years, anything above minimum wage will be considered wealthy.

And who is to say that people who make $100,000 a year don't deserve a return for what they paid in for many years? If I recall, the SS contribution is approx. 6% paid by the employee and another 6% paid by the employer. Assuming a worker earned an average of $100,000 per year during the last decade, the SS system received approx.$100,000 to $120,000 in just that period alone. That is a lot of money!!

That doesn't even account for the prior years when they both contributed into the system or the additional amount which could have been gained from alternative investments.

Why not means test at $70,000 or $50,000? After all, if I'm a single person and have my house paid off and few other expenses, I can still exist.

I just love when socialists tell other people who make more money than themselves that they don't deserve it and that other members of society are automatically entitled to their additional earnings.

Sep 14 06:54 PM

[davn57:]

the federal retirement system was switched to social security way back in 1984, where have you been?

On Sep 14 10:52 AM Richard 996 wrote:

> I think that the COLA reduction is a wonderful idea. Reducing COLA
> will also create an incentive for a large segment of our population
> to be concerned about inflation,ie; (reduce fed spending) this could
> be a win-win for everyone. I would also suggest eliminating the Federal
> Retirement System and combining both systems into Social Security,
> that would also create an incentive to develop a resolution for the
>
problem
> Cheers

Sep 14 07:12 PM

[starkoski:]

The SS Trust Fund is already gone because it is a suitcase of IOU's - just like in the movie Dum and Drummer. The money was heisted since the early 80's to fund all other spending in which the banking cartel members & others profited. The only way recipients of SS are getting their cherished $ is by taxing others now and by borrowing. I cannot believe you did not bring this out in your article. Now you want to save the system by confiscating the contractual future payments of SS money to anyone making more than 100K? What? Hello - 100K is a modicum of money now days to survive on with the rampant price inflation that is here and the tidal wave to come from all the monetary inflation produced by the Fed Res money printing. This idea will create a revolution if implemented. A better idea would be to confiscate the money from all the beneficiaries that created the SS bankruptcy and monetary inflation. This would be all the banking cartel members and the corporate elite that have houses all over the world and keep the inflation con machine going.

Sep 14 07:31 PM

[Nathaniel C:]

Lets follow the Constitution which does not allow the federal government to force citizens to contribute to ponzi schemes such as Social security and Medicare. It is illegal to steal money from people who work hard for it and hand it over to the government where they distribute it to Wall street bankers, corrupt government agencies, pork barrel projects,etc. The founding fathers would never have supported an income tax, payroll tax, etc. The US survived and prospered until 1913 without income taxes and people retired without social security and medicare up until 1935. Everyone is responsible for their own affairs. We should not have to pay 60% of all of our money to taxes.

The author's suggestion that anyone who makes more than 100k in taxable income should not receive any benefits is ludicrous and illegal. If you think someone making 100k in California is well off think again buddy. 100k thanks to inflation (courtesy of the FED) is not worth very much anymore when the average house in California is 450k, gas is 3.50, high state income taxes, etc.

The best way to fix social security is to get rid of it. Let people who do not want social security to opt out. Currently you will be arrested and imprisoned if you do not pay the payroll taxes even if you do not want social security. What happened to freedom? Oh thats right we lost our freedoms. Government knows best according to the Fabian socialists who want to create a police state where the government will control every aspect of our lives.

What's wrong with people saving their own money any putting it into bonds, stocks, or whatever they want to invest in? If they are risk averse, they can put all of their money in government bonds. Why does the government not allow this option? Because the truth is there is no social security trust fund. All of the money is distributed into the general revenue fund where congress spends all of the surplus every year and sends social security an IOU bond that pays a small amount of interest. If you did want to keep the ponzi scheme going the government would not spend the social security surplus every year which amounts to trillions since 1935. One of the greatest scams in US history. If they had invested the surpluses their would be no social security crisis and the ponzi scheme would continue.

One last point, the US is not a democracy--we are a constitutional republic which does not allow 51% of the population to enslave the other 49%. Ben Franklin said that democracy is simply two wolves and a sheep deciding on whats for dinner. Just because 51% of the population wants social security does not mean they can illegally steal money from me and force me under threat of imprisonment to pay these illegal payroll taxes when I do not want social security or Medicare. I want our republic back!!!!!!!!!!

Sep 14 09:48 PM

[MBL:]

i've got an idea, kick out al those people who are collecting based on work histories of only 10 to 15 years. A lot of these were part timers, spouses who work once in awhile, people who wiho work part time for a few years near retirement- enough so they just barely qualify. Due to the regressive nature of the payout formula these are the individuals who receive far more than they put in
If we required 20 years of contributions (which isn't much for someone by 62 ) we'd eliminate a lot of the people who did not put that much into it or did work much because they did need or want to

Sep 14 10:37 PM

[MBL:]

Socialism can get carried away, however, can anyone name even one country that doesn't have socialism where someone might actually want to live?
Everywhere thats decent to live seems to have socialism and these are usually those countries with the most freedoms.
I can think of two which have virtually no socialism; Somalia and Liberia but wouldn't want to live there.

Sep 14 11:10 PM

[JeffDB:]

On Sep 14 07:31 PM starkoski wrote:

> The SS Trust Fund is already gone because it is a suitcase of IOU's >

I'm surprised no one else brought this up. The "Trust Fund" is a joke. They haven't allowed the Trust Fund to invest in anything other than Treasuries. I believe it was the Clinton administration that took those Tresuries "off the books", so that they counted the Social Security taxes as revenues, but didn't count the Treasuries as liabilities, thereby magically lowering the deficits and debt.

Now the tide is about to turn as the baby boomers are getting ready to retire and all those IOUs are going to start coming due. Someone on here posted numbers showing that a couple of months this year showed a net outflow of capital to the fund for the first time. He noted that was probably due to the recession, but that it was certainly a harbinger of things to come and those outflows are going to be chronic and growing rapidly as the first boomers (born in1946) begin to retire. Rather than contributing, they will be withdrawing funds.

And it couldn't come at a worse time for the economy. Our deficit this year is now projected at $1.58 TRILLION! www.dollarsandsense.or...

Moody's has intimated that they are "testing" the UK & US credit ratings and has split their AAA ratings, rating the US a notch below countries, such as Germany, France, Canada and the Scandinavian nations. Standard & Poor's changed it's outlook for the UK to negative and some are claiming the US seems headed into the same dangerous territory.

Add to those problems the fact that China, the country who has been purchasing more of our Treasuries than any other country has been loudly complaining about the stability in the value of the dollar. They also have apparently started quietly(?) following up on their pledge to slowly begin divesting themselves of such a hefty stockpile of US $ denominated assets.

Add to those problems the fact that China, India, Russia and others, including the UN have called for transitioning away from the dollar as the international currency.

Perhaps the fact that we don't have nearly enough IOUs in the SS Trust Fund isn't as big of a problem as the *quality* of those IOUs. If we're already more than $1.5 trillion in the hole this year with those baby boomers paying taxes and not counting the liabilities that are accruing into the Social Security Trust Fund for them, how will things look when they are withdrawing benefits? I don't know if one would legitimately call that counter party risk, but the Social Security Trust Fund certainly has all of its nest eggs in one basket.

Sep 14 11:32 PM

[SAAverageJoe:]

Here is what they will do:

They will nationalize all private retirement accounts - creating what is essentially SS2.

www.carolinajournal.co...

www.usnews.com/money/b...

The next leg down in the stock market will provide just the crisis they need. It will be spun as saving those in private retirement accounts from disaster. The truth is it will be yet another money and power grab: kicking the can further down the road.

That is really what "Health Care Reform" is all about. It is about money, power and an insolvent medicare system shell game.

Back to SS: Most likely you can kiss your hard earned private retirement funds good bye!

Even if your 401K or IRA is not outright confiscated for the collective good, you can count on withdrawals to be taxed at a much higher rate.

My bet is that they will at least attempt confiscation for the collective good. It really is not fair that some people sacrificed and saved for their own retirement while others did not. You can see that can't you?

online.wsj.com/article...

I'm figuring that paying the taxes + 10% penalty now is a better alternative than possible confiscation or 60% or 70% or 80%++ taxes when I retire.

Nathaniel C: We were intended to be a Constitutional Republic but we are no more. The president, members of congress and the supreme court openly deride the Constitution and openly admit to operating outside the bounds of the Constitution. Our lawful government has been overthrown - an inside job.

Sep 15 07:05 AM

[John Bowman:]

How's this for a means test? SS was never intended to be for primary income. It was to be supplemental income. So why not have some kind of means test for the recpient's sons and daughters?

I don't know how it would work, but instead of burdening society, they could possibly live with their offspring with their existing SS benefits. This is nothing new. It appears to work in other nations. And it was probably the norm a hundred years ago.

Sure, independence is sacrificed, but compromises have to be made somewhere.

Sep 15 01:54 PM