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Why Facebook's Falling Share Price Really Doesn't MatterUSA 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 2 of 2)
10-23-2007 @ 11:34AM
jan said...
i was a bookkeeper for 50 years, and the only raise in ss taxes was the 1.45 percent added about 20 years ago for medicare making the total go from the 6.20 percent to the current 7.65 percent of every $100 or $7.65 of every $100 of payroll. I don't think the masses of average working would mind paying a small amount of increase in taxes, but employers would since they have to match it, but give huge increases to ceo's and others which is way more than a raise in ss would cost, and both are tax deductible. why is all this so overwhelming complicated? just take the cap of so no matter what is earned..the tax is taken...raise the tax reasonably..and stop the fund from being used for other purposes..police the fraud in medicare .. do medicare investigators ever question the bills they pay?
10-23-2007 @ 11:57AM
Lita Epstein said...
Jan,
Several studies have shown that if the cap were removed completely from earnings and there was no change to the maximum monthly payout of benefits, the financial problems for Social Security would be solved. In 2007, Social Security taxes were paid on income up to earnings of $97,500 that will increase to $102,000 in 2008.
But there is a catch, if the Congress tries to take off the cap on earnings, then there would be a major push to also take off the cap on benefit payouts - and that would only be fair to the folks paying so much more into the system. If we raise the benefit cap we won't solve the problem this way.
Most likely if a Social Security tax increase does come to the table the cap on earnings will be raised to help make up for some of the anticipated shortfall. That would help to reduce any across the board increase to Social Security taxes.
I agree Congress needs to reinstate the Lockbox that former President Bill Clinton started. We were actually paying down the debt when the Lockbox was in place and starting to solve the shortfall problem. Allan Greenspan testified to Congress when President Bush wanted to cut taxes, that we didn't have to pay down debt so quickly and we could afford the tax cut. Well obviously we couldn't and we're paying dearly - especially those counting on Social Security to be around when they retire.
Lita
10-23-2007 @ 12:49PM
Dog Lover Ca. said...
Its not fair for those of us who have paid into SSI all these years to have our benifits cut. There are a lot of people who hardly make it as it is. The government should stop using the funds as they please. Stop the war and use that money, stop foreign aid use that money, stop paying out medical to illegals use that money!
10-26-2007 @ 3:04PM
Ed said...
So let the older generation keep working and contributing through the payroll tax, WHILE they collect social security. The net effect is to change the balance of payment INTO the Social Secuity trust fund for the positive. The current policy promotes early retirement and is a disincentive to working seniors to earn more than $12K per year before a Social Secuity forfeiture is triggered.
Many states like Iowa, forecase a labor shortage in the coming years. I submit the labor shortage is artificially driven by Social Security earnings limitations. Give everyone a break! Fix the system by increasing the contributions from the 60 somethings and UP!
10-30-2007 @ 12:17AM
bearmj said...
Removing the cap and putting in a tiered tax rate increase would seem to be equitable. You would need to run the numbers to be sure, but why not remove the cap and increase the tax rate for high wage earners. Much like income tax works today.
Don't reduce benefits for those entitled, however, limit payouts to those who have paid in. Stop payments of any kind (except one way bus tickets) to illeagals.
12-04-2007 @ 8:45PM
BOB MORROW said...
THE U.S.GOV. TAXED MY SOC.SEC. WHILE I WAS WORKING, THANKS TO CLINTON IT IS TAXED AGAIN AT THE RATE OF 85%. . MY PENSION ,SOC.SEC.,C.Ds MY RETIREMENT SAVINGS, WHEN THE HELL YOU GOING TO GIVE US A BREAK . NOW DON''T FORGET STATE,TOWN ,COUNTY ,SCHOOL TAXES ,I CAN BARELY MAKE ENDS MEET,BUT WHO CARES, I'M SURE U.S.G DOESENT GIVE A DAMN.-------