[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.]
I say … let me keep my contribution and I’ll save and invest it how I choose. I am far more fiscally responsible than the members of that useless talk-fest called congress. Who knows, I might even be able grow it and compound it so it’s actually worth something by the time I reach the age of retirement!?
Thanks for another guest posting opportunity, Lazy.
Let’s take a close look at your closing comment.
“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.”
It’s GOOD news that you’ll get less money out of Social Security than you put in? How bad have expectations of Social Security become that we are satisfied with a negative return? I’ll happily give you a 0 percent return on any money you care to invest with me :)
I made that comment as an explanation for the title. I wanted to preempt the comments that Social Security was dying.
Lazy Man is right. As long as a ponzi has incoming cash flow, it can pay out even if it is much lower than promised.
Medicare is a lost cause. They would have to increase taxes fivefold to even come close to covering the shortfall. I don’t see that happening.
The world benefited from the baby boom generation in that the world had enough people paying into the world’s pension systems so the governments could make fat promises. Now that the pig has moved through the python, the world is finding out it isn’t going to work. Europe, the US, Canada are going to find defunct systems.
The countries without the safety nets of the western world are sitting in a better position. The savings rate is over 20%. These folks know that they must save since they have to provide their own safety net. This results in lower indebtedness, healthier balance sheets, and more capital for new businesses, technologies, and industries.
It is clear to me we are better providing for ourselves than idiots in DC.
@ Kirk – I’m actually surprised that more attention isn’t paid to Medicare. Everyone knows that SS is in trouble … but somehow a lot of people don’t realize the impact to Medicare. If Social Security is in trouble, and if medical costs are rising faster than the overall cost of living, it’s a pretty easy logical jump to say that Medicare will need a significant overhaul to be viable.
I say get rid of the penny and start a round up tax on all general purchases. If the end result happens to be .00 or .05 then it would be an automatic .05 so there is no way to avoid it. All of the money generated, would get dumped into SS in addition to what employees pay in eliminate the employer tax match. Employers could hire more and so there would be more employee contrbutions anyway.
I am one of those “Baby boomers” who have had their pockets picked by the government since I started working at the age of 14 in 1965; I’m still working in 2011 and I’m still being robbed.
SS was running a massive surplus as a separate trust fund until Congress raided it. Since it was made part of the general fund Congress has stolen the money meant for me and others like me who had no choice in participating in the plan in the first place.
You, the Federal government, have a contract with me and others like me. If you lower my payments or raise the retirement age for us it WILL be political suicide. Either keep payments at the same levels for us or buy me out-pay me all the I paid into it. I’ll be happy with that.
Hey guys here is an idea, So we are looking for ways to stimulate the economy but no one seems to be able to come up with a reasonable solution, so this is what I say. We have all payed in on our social security over our whole work lives, We can borrow against our 401k with a small fee so why don’t we make it possible for USA citizens to use there social security accounts the same way? Do you know how much money that would put back into the economy. Or am I thinking like a poor person. Any feedback would be nice just to see if something like this is possible.
@ Trevor – that’s an interesting idea, but I don’t think it would come close to matching the employer portion.
Let’s say I buy something for $999.99. You’d round that up to $1000.00 and drop a penny into Social Security.
Alternately, if the employer portion of FICA was paid on that $1000 as it flowed to the worked, the employer would have contributed $62 to OASDI and $14.50 to Medicare.
@ Bill – yeah, you guys definitely served as the backbone of SS for decades, and obviosuly deserve your benefits. No argument from me.
I find Trevor’s idea intriguing. I don’t expect too many people make all their purchases of $999.99. There’s plenty of smaller ones that would contribute. However, this really amounts to just another small tax (guessing the 3 and 8 gets rounded up and 2 and 7 get rounded down). At 1000 purchases a year, this would really only net about $10.00 for SS (by my quick, perhaps flawed math).
As for getting rid of the penny, it feels like it doesn’t do much. People are paying with things electronically (credit, debit, over the Internet, etc.) so the penny doesn’t come that much into play.
The Social Security projections assume 0 change in immigration (numbers! not percent/year). I think most projections are extremely pessimistic for this reason alone.