[Today's guest post is by Kosmo, a man with more irons in the fire than your local iron incinerator. He recently launched a consulting business (Sparks by Kosmo) and announced plans to publish a book on the lives of sports card collectors. Today, as he pursues a run at the White House in 2012, Kosmo discusses the eventual demise of social security at the hands of lawmakers.]
For more than seventy years, American retirees have received benefits from the massive Ponzi scheme that goes by the name of Social Security. Some may bristle at that characterization of the program. For those people, I ask a simple question: what would you call an investment that takes money from a later set of investors and distributes it to an earlier group of investors. Exactly.
For a while, the program worked out pretty well for the retirees. Ida May Fuller paid less than $25 into the system, beginning in the first year of the program (1937). She began collecting benefits at age 65 in 1940. When she died thirty five years later, she had received nearly $23,000 in benefits - an incredible return on her investment!
When the baby boomers reached the workplace, they kept the Social Security machine running - providing a large base of employed Americans from which to withhold money. As these very same baby boomers reach retirement age, they will stress the system - as there is no comparably sized group standing behind them to fund the boomers' retirement.
Advances in medical science mean that people are living longer than ever. From a human perspective, this is a great thing. For Social Security, this creates more pressure on the system - a longer life span means more years of payments to the retirees.
There are a few ways to ensure the long term financial viability of Social Security:
- Reduce benefits
- Raise the retirement age
- Raise the withholding rate for the OASDI portion of FICA
(which has historically been 6.2% for the employer and the employee, for
a total of 12.4% of wages)
- Go rogue and implement Logan's Run on a grand scale
I'm sure that the geniuses in congress have discussed all of these options. Talk of reducing benefits is political suicide. The rate of return is already pretty lousy for a lot of people. According to information on the SSA's own web site, my rate of return will be less than 2%. I'm a pretty liberal person, but I was in favor of some version of George W. Bush's plan to privatize Social Security. Contrary to the scare tactics you have seen (thank you, AARP), giving people the option - but not the requirement - to pursue alternate investments would not result in everyone losing their nest egg. We don't need to take this money and dump it into penny stocks. I could more than double my rate of return simply by investing in 30 year treasuries - even after the rate recently dropped by a full point on Wednesday. Seeing as Social Security and treasury bonds are both backed by the US government, isn't the risk exactly the same?
Raising the retirement age isn't quite as much of an incendiary topics, as it affects the younger portion of the population - people who often aren't that concerned about retirement. Still, these people likely wouldn't cotton to the idea of waiting until age 80 (or 85, or 90) to receive benefits.
I'm sure a few Senators would love the Logan's Run option, but law enforcement would probably take a dim view of that option (particular the ones who are near retirement age).
That leaves the withholding rate. Will the 6.2% rate eventually become 7% or 8%? Will the Medicaid portion of FICA (1.45% for employee and employer) face steep increases to keep pace with rising medical costs? As much as we hate to admit it, this is probably the option that would keep Social Security and Medicare on reasonably sound financial ground while ensuring that benefits are available at a reasonable age. It may be an unpopular choice, but is probably the most prudent.
Imagine my surprise, then, when a temporary reduction of OASDI made its way into the controversial bill that renewed the Bush-era tax cuts. In 2011, the employee (but not employer) portion will be reduced from 6.2% to 4.2% of eligible earnings (there is a cap). So we take a program that is already on shaky ground ... and cut funding? Sure, it will be great to have a few extra dollars in our pocket on pay day (I like extra money as much as the next person), but this seems to be missing the forest for the trees. Then there's the prospect of this cut ending at the conclusion of 2011. Will it really end? Or will there be fear that a reversion to the regular rate will be characterized as a "tax increase"? If that's the case, we could see a few more years of underfunding for social security until someone finally has the cojones to say "If we want to keep Social Security, we need to pay for it."
[Editor's Note: I picked the title, not Kosmo. I realize that Social Security is not scheduled to "die." As the plan currently stands, people will still be paying into the system when I retire and I will get some percentage of those benefits. It will just be a small portion and likely less than what I put into the system.]
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