September 20, 2009

Not Broke... Just Without Money

Justin Katz

Wow. It's been awhile since we've had an opportunity to use the "Social Security" tag for a post, so for that much we should thank Bryant Math Professor Robert Muksian. However, once he moves beyond the calculation of benefits, into the reality of the program, his declaration that "Social Security is far from 'broke'" should begin to spark "wait a minute" reactions:

It is the trust fund expanded by the Social Security Amendments of 1983 that is being depleted to the broke level. To quote the trustees of the Social Security Administration in their 2009 report, "Projected OASDI tax income will begin to fall short of outlays in 2016, and will be sufficient to finance 76 percent of scheduled annual benefits in 2037, after the combined OASDI Trust Fund is projected to be exhausted."

You may recall several relevant factors, from that long-ago period when Social Security was actually a topic of conversation (in contrast to our current contentment to let it fester like an infected wound). For one thing, there is no actual money in the trust fund, only government IOUs. Come 2016, the feds will have to cut benefits, trim some other government spending, or raise taxes. That will no doubt spur a cordial debate at about the same time that cap'n'trade, auto efficiency standards, healthcare "reform," and who knows what other policies begin to show their teeth. For another, the trajectory of Social Security is entirely in the wrong direction. When the government finishes paying off its IOUs to the trust fund in 2037, a perpetually shrinking workforce will be funding a larger retiree pool (especially if longevity continues to ratchet up).

Writes Muksian:

As an investment, it far exceeds anything the average American, or perhaps even professional investors, could achieve over the lifetime of a retired worker.

Rather than impressing us, that fact should raise questions about the method. How could it be possible? Muksian touts the Social Security Administration as "the most efficient entity in the federal government," but all it's doing, at this point, is transferring money from younger workers to older workers and retirees. It doesn't take much back-office acumen to accomplish that. Whether the supposed efficiency will continue when the SSA must begin demanding payment from the rest of the government and then when it runs out of money altogether is an open question.

Muksian tries to convince his fellow Americans to ramp up their investments in the scheme, with a mere 1% increase in the Social Security tax, to 7.2% of taxable wages. For those keeping score, that 1% of wages would represent a 16% increase in the tax. It is Muksian's determination — on our behalf — that another four to five hundred dollars per year is "tolerable" given the benefits. In context, though, we should recall that we'll be tolerating that confiscation of our earnings on top of the taxes that the government raises to pay for the money that it's filched from the "trust fund" — not to mention the countless other drains on our income that the current administration and Congress are piling on our backs as a sort of investment derivative of labor yet to be performed.

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I read somewhere that fewer than 5% of workers who do not have pension-type 'guaranteed' benefits are putting enough money into their 401k/403b investments. What's going to happen to the people who -did- put enough pre-tax money away?

Right now I'm paying 7% of my income for social security, and I have to put away 14% on top of that to cover my own butt. When these chickens come home to roost (conveniently, only a few years after I plan on retiring), I fully expect the government to classify me as 'rich' and tax the bejeezus out of my retirement withdrawals.

There has to be a way to make individuals -more- accountable, but not let people starve in the streets because they haven't put enough away.

Someone really ought to be spreading the word about this, too. Almost none of my friends (mid twenties to early thirties) know how a 401k or a Roth IRA work, and it's not like anyone is any rush to explain it to them.

I don't disagree with Social Security as a concept, but I certainly disagree with it running sans-assets, without the 'trust fund'. I think it's important for a modern society to have some sort of barebones safety net for its elderly and disabled, but maybe it should scale back payments if proceeds don't meet demands.

Posted by: mangeek at September 21, 2009 12:52 AM

It is unfortunate that Social Security was a rapidly "thought through" program, sort of like "cash for clunkers". We have been playing catch up ever since. For instance, and I believe this is accurate, the age 65 was adopted because it was the age Bismarck adopted for the German system in the 1880's. I believe that at the time in the 1930's, life expectancy for men at age 65 was about 4 years.

Why not something like the pension systems use by most governments? The payouts are certainly better than SS.

Posted by: Warrington Faust at September 21, 2009 4:52 AM

"Muksian tries to convince his fellow Americans to ramp up their investments in the scheme, with a mere 1% increase in the Social Security tax, to 7.2% of taxable wages."

Between stimulus packages, bailouts and an irresponsible budget, we've run up almost incomprehensible debt over the last year. That's, of course, on top of debt run up by prior Congresses.

The House passed a completely pointless cap-and-trade bill that would cost all households upwards of $3,100 and have zero effect on global warming.

The President and certain members of Congress are now pressing for health care reform which they admit will cost $100b a year; the reality, then, is that it will cost far more than that.

And now some dingdong is proposing to raise the social security tax?

At the risk of sounding a little grumpy, where exactly are we, as taxpayers, supposed to come up with the money to pay for all of this?

Posted by: Monique at September 21, 2009 8:43 AM

I have been putting $2000 a year away in a Roth IRA since age 23.Over the past 10 years, I have watched this money increase and then decrease sharply. Some months it has been quite difficult to come up with that $200 and I have occasionally had to call my financial advisor to have him hold off on a month. Yet I have only done this as a last resort, and as soon as I am able I plan to steadily increase towards the $5000 a year limit. My husband plans to open an IRA as well within the next two years. Quite simply, Gen Xers (and those who come after us) will have no Social Security to rely upon and pensions are not enough and, in many fields, non-existent. The losses I have seen my account suffer, particularly in the past 3 years, will eventually be recouped and when I am in my 60s and ready to retire, I'll be glad I made the choice to save my own money wisely, even through the times when money was tight.

Posted by: Tabetha at September 21, 2009 5:27 PM

Right Tabetha. Remember that none of that value actually means anything until you actually have to retire. When the Dow was at 6,000, you were able to 'buy low', you're investing -well-.

It certainly hurts to look at a portfolio that's been hurt, but the worst thing you can do is switch to 'safer' investments or stop buying when the market is low.

As for $200/month, that seems reasonable, but it might only leave you with a small portion of what you need to retire. Based on my 'cocktail napkin' math, you would put away $200 per month if you intend to retire while maintaining a standard of living equivalent to a $16k annual income. Hopefully, we're all aiming higher than that!

What's scaring me is that I don't think -any- of my friends, who are all in their mid-to-late twenties, are enrolled in 401K programs or put in more than 1% of their income. Those chickens are going to come home to roost in the worst way possible.

Posted by: mangeek at September 22, 2009 10:38 AM

You are right on target. For the next 2 years I am only putting away $200 a month because I went back to school in 2007 to earn my PhD. (I got a teaching fellowship which doesn't pay much but does pay for my degree, so it balances out.) When I finish in 2011, I should be making at least twice what I make now and will increase my monthly payments accordingly. At that point I will be 35, so still young enough that maxing out yearly on the Roth IRA will be very beneficially. I don't anticipate that my husband and I will surpass the combined income limit of $166,000 anytime soon (though that would be nice!), so I should be able to put money away for a long time to come.

Posted by: Tabetha at September 24, 2009 4:46 PM
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