USA Today writes about the first baby boomers retiring next year at a rate of 365 an hour. The articles goes on to use terms for the fix that feed into the fears the current Administration is raising about the event. But is the crisis truly that bad? Yes it's true a fix is needed for Social Security, but if you look closely at the numbers used even in the USA Today you'll see that the fix is not that drastic. As long as we take it seriously and do something.
In the story USA Today states the fix would need to be a 16% increase in the existing payroll tax or a 13% cut in benefits. First let's look at that 16% in actual tax rates. The current tax rate for Social Security is 15.3%, which is 7.65% paid by the employee and 7.65% paid by the employer. Were the Congress to decide to fix the system solely by using tax increases then the increase would be 2.448% or 1.224% for the employer and the employee. That added would move the total tax collected to 17.748% (or 8.874% from one's paycheck). When a cut in benefits is discussed options always look at future promised benefits. The cut would not impact those currently collecting Social Security, but may include a number of different things such as increasing the age for retirement, reducing the COLA increase, or some other combination of benefit changes.
The fairest way to fix the problem would be a combination of tax increases and cuts in promised benefits. Let's say we cut responsibility for the fix in half - an 8% increase in tax rates or 1.224% shared equally between employer and employee: each paying 0.612% more in taxes. Would you be willing to pay that to secure Social Security for at least 75 years? A cut of 6.5% in promised future benefits would be necessary if the fix is to be shared by all.
I'm not even sure that this much of a fix is necessary. There are two key questions I've yet to see studied. One involves the dwindling size of the workforce. While the need for this fix is based on the dwindling size of the U.S. workforce, will that really happen? Those leading the charge to scare the public regularly quote the statistic that future Social Security benefits will be paid at the ratio of 2 to 1. Right now they are being paid at the ratio of 3 to 1. Can business survive in this country with that great a reduction in the workforce or will there be a greater need for immigrants to fill the holes in the workforce as baby boomers retire? Social Security taxes are taken out of the pay for immigrants.
The other big question is whether or not baby boomers will retire early in large numbers. With the rising cost of health care today, most can't even think about retiring until they can get Medicare. It's nearly impossible for a person over the age of 55 to get individual health insurance and even current retirees are finding they need to go back to work to get health insurance.
Both these factors could reduce the level of fix needed, but I've not seen any study that takes these two factors into account. Even if all the current assumptions are correct the Social Security Trust Fund will not run out of money until 2041 - that's 34 years from now. How many baby boomers will still be alive at that time?
Remember the Social Security Trust Fund was out of money in the early 1980s when a Social Security Commission was formed by former President Ronald Reagan and headed by Alan Greenspan. At that time Greenspan orchestrated changes in benefits and taxes to create the Trust Fund we have today. The fix did not go as far as it needed to do because an even a higher tax rate would not have been acceptable at that time, so we have a shortfall now that does need fixing. But I wish we'd stop using scare tactics and start having a serious discussion about the options to fix it.
Lita Epstein is the author of more than 20 books including the "Complete Idiot's Guide to Social Security."
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Reader Comments (Page 1 of 2)
10-15-2007 @ 10:47PM
Robert said...
Articles I've read in the past say the true problem is Medicare, and this article says the same if you quote it at more length:
"Fixing Social Security solely with higher taxes or cuts in spending would mean a 16% increase in the payroll tax or a 13% cut in benefits. Medicare's needs would be far greater: a 122% payroll tax hike or a 51% reduction in spending, just for hospital care."
You say here 16% is not a big deal, but 122% + 16% = 138% I would say might be a big deal!
10-16-2007 @ 6:23AM
steve said...
The author of this blog leaves out an important fact: Namely, that the social security trust fund is not sitting in a bank somewhere waiting to be paid out. The money has already been spent and is owed back to the social security fund by the federal government. Where will that money come from? By raising taxes or cutting benefits.
You need to include that fact in your calculations.
10-16-2007 @ 6:23AM
Brad Kirkland said...
Steve is correct.it's a fund in name only.even if they keep benefits the same,the falling dollar continues to erode BUYING POWER.They will sacrifice the dollar to stave off inflation(wont work).What is needed is 2 things.1) catastrophic health insurance.This one thing has cause many a bankruptcy.2) shop at COSTCO-you DONT have to be a member to use the pharmacy.By doing this you will see the overinflated prices of say CVS,Walgreen's etc.FOrce them to charge what Costco does.Its a start anyway
10-16-2007 @ 6:25AM
John said...
It's no less a fund than a mutual funds is a fund. When you put money into a fund, the fund managers do not put your little coins into a piggy bank. They invest them in things like Enron and ExxonMobil.
The SS surplus is invested in debt obligations of the United States of America, which has a slightly better shot at paying off than the Enron investment mentioned above.
Having a surplus in a "pay as you go"system was stupid, but its done. Some politicians got to look you right in eye and lie about lowering taxes when they knew the surplus was subsidizing those lower marginal rates.
10-16-2007 @ 7:11AM
Lita Epstein said...
Robert,
Yes it's true Medicare is the bigger problem and it's solution is no where near as simple as Social Security's. Instead of fixing Medicare in the last Congress all they did was increase it's problems with a big payoff to the insurance companies. Recent articles show that the insurance companies are not able to negotiate the type of savings the Veterans Administration does for drugs and drugs for Medicare recipients still cost much more than they should. Medicare Advantage plans are reimbursed at a much higher rate than traditional Medicare - another one of the fixes of the last Congress. So until Congress is ready to truly deal with the health crisis in this country, I don't think Medicare will have a chance of getting fixed.
Lita
10-16-2007 @ 7:12AM
Lita Epstein said...
Steve,
The assets of the Social Security Trust Fund are invested in U.S. Treasury Bonds, so unless this country is unable to pay its debt the trust fund does exist.
Social Security is a pay as you go system. The taxes on those currently working are used to pay the benefits for those currently collecting. Right now about 86% of the taxes collected go toward paying current beneficiaries and 14% goes into the Trust Fund. As the number of people collecting increases when Baby Boomers start taking the benefits they paid into throughout their working lives, the taxes being collected will no longer cover Social Security payouts in about 2017. At that time we'll need to start using the Social Security Trust Fund to pay part of the benefits due retirees. How early that point will come will depend upon whether Baby Boomers choose to retire early or decide to wait until full retirement age for them - 66. The story in USA Today assumes the worst case scenario that most will retire at 62. I have my doubts that is true because of the problems getting health insurance, many seniors are staying in the worforce until they can get Medicare unless they have retiree health insurance as part of a company retirement benefit.
If this country can afford to pay $200 billion a year for wars in Iraq and Afghanistan, as long as we're out of there by 2017, we should be able to cover the yearly shortfall for Social Security benefits.
Lita
10-16-2007 @ 7:12AM
Bob Brinker said...
Just another Reason of what happens when you let the Gov't take care of your $ and to PRIVATIZE SS! SS and Medicare are providing alot more than they were designed to do. The Gov't allows this so they don't have to rasie payrolltaxes topay the states more $ to pay for their Medicade plans.
SS..Good intention, gone Bad... PRIVATIZE IT!
10-16-2007 @ 7:13AM
tenergyllc said...
One minor detail. An IOU goes into the Trust Fund to cover the 14%. The Federal Gov't. borrows from the Trust Fund as a matter of course. We run an overall account deficit.
10-16-2007 @ 7:14AM
Chuck said...
Whether the SS money comes from someone mowing lawns or from one commuting by Learjet, it appears that once over the "boomer" hump, there will be many more paying in than receiving benefits when there will be a "surplus" - ta-da!
Whatever factors the COLA increases are based on seem to be inflation-proof while most consumer items seem to be vigorously increasing in price, putting the squeeze on retirees, but "saving" the system. Ever think you'd pay $15 for a no-cocktail lunch? Or $2 for a dozen eggs? Even 5 years ago did you have that expectation? Not me.
10-16-2007 @ 8:33AM
Buck said...
SS is nothing but a ponzi scheme and the liberals would love to raise taxes and see it expanded. I want my money back but I may never see it because they have rigged the payout against me. Americans save plenty (over 15% combined with their employer). The problem is that we are forced to invest it in a lousy system instead of on our own. I could be a multi-millionaire on what I have aid in over the last 40 years.
10-16-2007 @ 9:34AM
Connie said...
More reason why SS should be privatized! I certainly don't trust the government to handle any money much less anyones future retirement money. Why not take peoples payroll taxes and put them into individual accounts. That way someone might actually be able to retire!
10-16-2007 @ 9:35AM
Bob said...
On the news a few days ago the SSS had a 78 million dollar profit that the government took. They left them an IOU for it. The IRS said they would pay back it with interest, over a 100 million. They also gave an IOU. Now you want to raise taxes so the government can steal more?
10-16-2007 @ 9:57AM
John said...
The United States of America has never ever failed to pay one of its debt obligations.
So now it's running a ponzi scheme? Sharpen your pencil. Taxpayers pay in more money than SS currently is paying out to grandma and grandpa. SS loans that extra money, the surplus, to the United States government in exchange for an interest bearing debt obligation of the United States of America - an investment in an entity that has never ever failed to pay back a single one of those obligations. The whole world buys them for that very reason.
I agree that the above was an incredibly stupid thing to do, but it is not even remotely close to being a Ponzi scheme. Do you think maybe the Enron shareholders wouldn't love to trade their little scraps of paper for some of those paper IOUs?
You're mad because they didn't buy Enron. You really should refrain from voting.
10-16-2007 @ 10:42AM
Gil Franco said...
Lita, you are still ignoring the fact that the federal govt will need to huge funds to pay back the social security funds that it "borrowed" when the pay-as-you-go system was in surplus. That will require mammoth tax rises and/or spending cuts for the rest of the budget at the very same time that the entitlement progams require huge additional subsidies and/or benefit cuts. All self-destructive addicts seem to have their enablers.
10-16-2007 @ 10:48AM
Lita Epstein said...
Gil,
The issue of additional funds for Social Security won't need to even be dealt with until at least 2017. Until that time Social Security taxes will cover Social Security benefits. After that time the U.S. likely will need to tap into the Trust Funds. When the U.S. taps into the Trust Funds it does mean the U.S. needs to start paying its IOUs. That's what Bill Clinton's "lockbox" was all about. Unfortunately the "lockbox" was thrown out when Alan Greenspan said we didn't need to worry about paying down the debt and supported the various rounds of tax cuts since 2001. Yes we have a problem that needs to be fixed, but it should not be fixed by denying benefits to U.S. citizens who have contributed into the system their entire working lives. Possibly those tax cuts will need to be reconsidered to get the U.S. spending back in balance.
Lita
10-16-2007 @ 11:13AM
John said...
No more so than any other borrowing the federal government has ever done. You're thinking the people of America are going to fail on this one when they have never failed on any other.
What's the source of this irrational fear?
10-16-2007 @ 2:03PM
Sue said...
The SS Trust Fund lends money to the US General Fund.
My bank lends money to borrowers from MY Savings Account. OMG, my savings account balance isn't really in the bank? OMG.
- end sarcasm -
People who cannot understand these simple concepts, that money borrowed from the SS Trust Fund will be repaid and that the US Gov't can borrow from other sources should not try to comment on blogs like this.
There IS an issue about the US Gov't spending too much money, and not planning adequately for that coming day of reckoning, but that's NOT an issue with Social Security. THAT'S an issue with deficit spending. Go tell George Bush that he should stop with the tax cuts and should stop crowing about how the deficit is smaller than what he thought it would be - it's still a deficit. He inherited a balanced budget with budget surpluses, surpluses that were helping to bring down the National Debt, and he changed that direction.
10-16-2007 @ 8:44PM
Jeanette said...
What ever happens to the Social Serurity payments that are no longer paid because of death. We never hear about that. I am on my own. The time Medicare is taken out. I get $906. Take out Supplement of $107. prec. card.$25. a month. Then pay my medican which is not covered. Taxes, House insurance, Car, Utilities. Thank God I own my Small home. I don't know what I would do if I had to make a house payment. I have no retirement. Some inheartence no to much. But had to pay Taxes on that. NE
10-18-2007 @ 9:04AM
Dudley Gray said...
I,ve paid the maximum tax since 1979 and would
not support a cut in benefits. Let,s instead make Congress pay into the system and cut their benefits. If they had done their job since 1979
we wouldn't be in this fix. But it's just one small piece of our collective 9 trillion debt issue. We used to be a rich country but our entitlement thinking
has us in a real fix and no leadership to help us fix it.
10-21-2007 @ 7:16PM
William Hallowell said...
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