With negotiations continuing over the expiring tax cuts and cuts to Federal spending dubbed the Fiscal Cliff, discussions about paying for Social Security and Medicare will no doubt ensue. One proposal being championed by Republicans and Democrats alike to “preserve Social Security for future generations,” is to make the retirement age later and raise Social Security taxes, either outright or by increasing the cut-off above which taxes are no longer collected.
Those who are regular readers will know that I am no fan of Social Security, partly because the system is unsustainable with excess revenues robbed during flush times. My main objection though is that, for the amount being put away, retirees should be getting $15,000 per month, not $1,500. If directed to private accounts senior discounts would become a thing of the past because even the $15 per hour laborer would retire a millionaire.
The fact is that Social Security is going bankrupt and very soon. It The trouble is, there are a lot more Baby Boomers than Generation X’ers and the excess revenue collected during the 1980’s and 1990’s was all spent. This excess of collections has ended, and the amount being withdrawn by current retirees is already greater than the amount being collected from current workers and many more retirees are retiring every day. There is also an explosion in the number of people going onto Social Security disability – which means they aren’t contributing and are collecting very early. The cut in the worker’s portion of the payroll tax also isn’t helping.
It is true that if you add up the IOU’s, the system could last another 20 years or so. But the IOUs are being paid by current tax collections and government borrowing. If the government can’t continue to borrow and if revenues do not increase significantly, which is not likely given that taxes are getting ready to increase which will slow the economy, it will not be able to pay back the IOUs. I predict this will happen within four years, which means there will be significant cuts in Social Security payments within about four years (unless other functions of the government, like roads, parks, education, and defense, are cut to almost nothing).
The current proposals for saving Social Security, however, don’t make logical sense. Questions that constituents should ask their Congressmen are as follows:
1. If the issue is that the system will not be able to pay for the current glut of retirees within four years, how will raising the retirement age for those who will retire in 20 or 40 years help?
2. Why do we want to preserve a system that provides less of a return that a savings account and that politicians have been unable to resist raiding for years?
3. The standard argument is that private accounts invested in the stock market are too risky but the current system that is funded by taxes collected from current workers and businesses is safe. Given that the health of the stock market is a direct reflection of the health of the economy, if the stock market collapsed as in 1929 what makes you think the economy would be healthy enough to collect enough taxes to fund Social Security payments?
4. Why is it considered fair for those starting to work now to wait until they are 70 (and have paid into the system for 50 years) to collect benefits while those who are 64 now can retire next year and collect full benefits after working for only 45 years? Given that the issue of paying benefits is now, why not raise the retirement age for everyone now?
And finally, a fair way to start unwinding the Social Security system and transitioning to private accounts:
Pass a law that allows anyone 67 or younger to exempt one person of their choosing from needing to pay into the public system, directing their payments into a private account instead, in exchange for the elder person giving up all benefits. This will strengthen the public system since there is about two people paying in for each person getting benefits. If 1/2 of the people getting benefits used this option, there would then be 3 people paying in for each receiving benefits and the public system would be stronger. It would be fair because the people would receive something of value in exchange for giving up their benefits.
Please contact me via firstname.lastname@example.org or leave a comment.
Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.