Thursday, January 03, 2013

A sensible reform to Social Security

By Carl

In the wake of the fiscal bump in the road, much was left undone in fixing the economy while paying down some of the outstanding debt.

A lot of trial balloons are being floated, and I want to focus on one for now: Social SecurityFirst, let's review the whole program. Social Security is a life insurance policy -- I'l l get back to that-- the government purchases for you with your money. 

While this is referred to as a "payroll tax," it is more useful to think of it as a deposit into a long-term savings account. Monkeying with the withholdings may have immediate consequences as a stimulus (similarly, raising the rates can help quell inflationary spikes) but in the long run, what you put in, plus the minimal amount of interest the government can earn on it by law, is what you should get back.

How you receive this amount is determined by actuarial tables -- like an insurance policy's -- based on life-expectancy calculations that even I have a hard time wrapping my mind around. Of course, none of this accounts for exogenous factors like, say, a change in your life expectancy.

And there's the rub. When SocSec was implemented, the average life expectancy of a man at birth was 58, for a woman, 62. Retirement was deemed to be 65.

Yes, they worked them to death back then, literally.

It's not as bad as that sounds, frankly. Once you reached age 5 -- infant mortality was, and still is, a major health crisis in America --you stood a better than even chance of attaining age 65. And once you reached 65, you lived another decade or so (15 years for women.)

SocSec was designed to help ease poverty amongst the elderly, at one time the single poorest demographic in the country (it's now among the richest.) Specifically, it was designed to ease poverty among elderly women who generally outlived their husbands and generally had not worked a day in their lives, except for the enormous job of running a household. This is why it's generally described more as a life insurance policy than as a retirement plan.

Flash forward to 1990 for a moment: once you reached age 5 after 1990, you stood a 3 out of 4 chance of reaching age 65, and once you reached age 65, you stood an average chance of living to 80, not 75.

Clearly, there's room to make some adjustments to Social Security. Clearly, those adjustments can come in the form of a slightly lower payroll "tax" in exchange for a slightly longer working life.

Because, let's be honest, the percentage of people who can retire at age 65 dropped dramatically in the wake of the burst housing bubble. Many people were counting on now-non-existent equity in their homes to finance their retirement. Many more people were counting on 401ks and IRAs that lost enormous amounts of wealth in the past four years, and certainly lost enormous amounts of earnings on whatever wealth they did lose in the interregnum of rising balances over the decades.

Bear with me, I'm not calling for current cuts in the program.

But here's the thing: retirement at age 65 was an arbitrary construct. It basically said, "After 40 years of working, you deserve the rest of your life, that last decade, to yourself."

Now that people can't afford to retire at 65, and have to work into their 70s....*shudder*...this later retirement will now become an arbitrary figure that we can peg for the payroll tax rates we charge people entering the workforce.

Here's where we can make the cuts that will allow us to help pay down our deficit, if only as a facade. By making cuts 40 years down the road, and essentially borrowing those balances now, we can firm up the assets of Social Security and allow it to stand on its own merits. Down the road, as young people pay (less each paycheck but for a longer time frame) into these accounts, those shortfalls will reverse and the fund will fully fund once again.

Raise the retirement age, lower the payroll tax. That sounds like a winning formula and can help us now

(Cross-posted to Simply Left Behind)

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