Voices of the People

I was in a group of senior citizen's today discussing the work of Milton Friedman. Today's topic was the Federal budget deficit / debt. Almost 50% of the $9 trillion debt is attributable to "intragovernmental" transfers of which the largest portion is related to Social Security.

At a point, the question was raised as to how to solve the Social Security pending shortfall. The first suggestion was to raise the tax on wages by 2%. A second suggestion was to raise the retirement age. The burden of both of these ideas would fall on young people. Note: few in the room currently pay taxes on wages because most are retired and receiving Social Security payments. It's always easier to let the other guy pay for something.

In fairness, a few suggested cutting benefits.

The shortfall will have to be paid by either an increase in taxes or a cut in benefits or both. However, creation of truly funded personal retirement accounts would mean that on an on going basis the system would become funded and there would be on additional shortfall.

Let's Save Social Security now.

Treasury Issues Second Issue Brief

The Department of Treasury has issued the second of three briefs on the issue of Social Security. You can access it at treas.gov/press/releases/reports/treasssissuebriefno2.pdf.

Save Social Security

Social Security Announces 2008 COLAs

The Social Security Administration has released information about increases in the benefits payable to recipients in 2008. Benefits will be adjusted for the cost of living by 2.3% beginning January 1, 2008.

"Retirees are going to feel a disconnect this year between the COLA increase and the reality of the inflation they face," said Mark Zandi, chief economist at Moody's Economy.com. "If this calculation were done in another three months, it would be measurably higher."
Advocates for the elderly said the small increase highlighted the need to revamp the cost-of-living adjustment to better reflect prices paid by retired people, including the money they spend on health care.

Does it really make a lot of sense to increase benefits even more than they are presently being increased considering the precarious state of the system's finances? Congress might decide change the COLI calculation for seniors in order to buy some more votes next year but that would be imprudent.

Save Social Security

Young People Take Action

Are you a young worker, perhaps one just entering the workforce? If so, the Social Security issue is of great importance in your life. You have many years to prepare for retirement. You may think now that (1) it's so far away, you will think about it some other time, or (2) that you cannot afford to save now. Well, retirement will come sooner than you think. Even if you cannot save much, save something. Get into the habit. You'll be surprised at how quickly it adds up. Then, think about the wisdom of having private accounts in Social Security; either add on accounts as Congressman Rahm Emmanuel proposes, or a private account funded with your social security taxes, as proposed by some others. Right now you and your employer put a total of 12.4% of your wages into the social security system, plus the funds that go toward medicare. That's a lot of money in anybody's savings regime. Think what that could grow to if it were invested in a conservative mix of stocks and bonds. Even if only your own direct taxes (6.2%) were invested and earned as little as an average of 4% a year (far below the historical average), you would be able to purchase an annuity far in excess of what you can expect to receive from social security.

Save Social Security

US Treasury Issues First of a Series of Briefs on Social Security

Secretary Paulson has issued the first of a series of briefs about Social Security. The first is intended to describe the nature of the problem. It tells how we got here and discusses options for remedying the system's shortfall. You can link to it at www.treas.gov/press/release/hp572.htm.

The key points in the brief are as follows:

• Social Security faces a shortfall over the indefinite future of $13.6 trillion in present-value terms, an amount equal to 3.5 percent of future taxable payrolls. Looking at the gap over a shorter horizon provides only limited information on the financial status of the program.
• Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax revenues. Other changes to the program might be desirable, but only these can restore solvency permanently.
• Delaying changes to Social Security reduces the number of cohorts over which the burden of reform can be spread. Not taking action is thus unfair to future generations. This is a significant cost of delay.
• By itself, faster economic growth will not solve Social Security's financial imbalance - realistically, there is no way to 'grow out of the problem.'

See page 1 of the linked brief.

The $13.6 trillion dollar shortfall comes from the fact that those who retired in the earliest years of the program received far more than they contributed. As a consequence, in my opinion, the shortfall should be met from general tax revenues and not put on the backs of current and future workers.

Save Social Security