Treasury Publishes 4th Issue Brief - True Pre Funding

The US Treasury has published its fourth issue brief on Social Security. You may find it at www.treas.gov/press/releases/reports/ss_issuebrief_no.4.pdf. This brief discusses mechanisms for achieving true pre-funding. Treasury considers the current "trust fund" which is held off the books of the government not to be true pre funding. Treasury takes the position that if a portion of Social Security tax was placed into individual accounts in the name of each taxpayer, the debt obligation would move onto the books. While it would still be the government which owes the Social Security benefits, such a move would make it apparent that the debt exists. The funds could not be diverted for general governmental purposes as is done now. The issue brief does not contemplate individual direction of the investment of the accounts; rather the funds would be invested in regular US Treasury obligations and would be administered in the aggregate. This would keep the economic distortion to a minimum and would not result in large administrative costs. Benefits would be paid as annuities, similar to the current system. The issue brief cites the "Nonpartisan Reform Plan" as an illustrative mechanism for true pre funding. The Nonpartisan Reform Plan may be found at www.nonpartisanssplan.com.

This proposal is a long way from true ownership of the assets one accumulates in the Social Security program and certainly does not resolve some of the equity issues but, in my opinion, it provides a reasonable and thoughtful way to commence the discussion. Importantly, it contemplates solvency in the long run. I urge interested readers of this blog to review the two reports.

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Generation X Pessimistic About Ability to Retire

According to a news story published by Reuters on April 14, 2008, two-thirds of the members of Generation X don't think they will be able to retire. The information is the result of a survey by Scottrade and BetterInvesting. These young people, age 27 to 42, believe it will be impossible to accumulate enough money to retire at any age.

According to the article, champions of the Social Security system say that financial problems for the system will not arise until at least 35 years from now. Even if that were true, a debatable proposition, thirty five years is right in the eye of the retirement storm for Generation X.

Historical market returns show that money invested conservatively in the market over the 35 to 40 years of a person's working life would permit accumulation of significant retirement income. Raising the tax on wages or raising the amount of wages subject to the tax will not solve the problem but will only defer it.

This is really important.

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Social Security Trustees Report

For those of you who may be interested, the Trustees of Social Security have published their annual report. It can be found at http://www.ssa.gov/OACT/TR/TR08/tr08.pdf You can copy and paste the address to navigate to the report. As in past years, the Trustees once again raise concerns about the funding issues and the ability of the programs to pay promised benefits in the future.

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"Stop the Raid"

Senator Jim DeMint (R. SC) has offered an amendment to the budget bill currently under consideration. The amendment provides that surplus funds derived from social security taxes not currently required to pay benefits must be used only for future social security benefits; i.e., the money may not be loaned to the federal government and used for general budgetary purposes. The bill is co-sponsored by Senator Claire McCaskill (D. Mo). While it is true that the social security actuary expects that there will be no surplus funds after 2017, at least these 9+ years will provide some cushion while we wait for a solution to the problem.

This blog is being posted on March 12, 2008. If you read it within a few days of posting, contact your senator and urge him or her to support it.

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US Treasury Issue Brief 3

For those who have been following the US Treasury's series of issue brief regarding the Social Security situation, the third brief has been issued. It can be found at www.ustreas.gov/press/releases/reports/ss_issuebriefno.3.pdf (The blank space in the address is an underscore.) The brief illustrates various proposals for adjusting benefits and tax rates in the future to attempt to provide some equity between groups affected by the shortfall in projected funding of $13.9 trillion dollars.

Contrary to some suggestions, simply removing the cap on wages subject to Social Security taxes falls very short of solving the problem. Without significant changes in the program young workers will see both an increase in taxes and a decrease in benefits. There are many alternatives for addressing this issue but one thing is clear, delay does not make the problem easier to solve. We need to get to work sooner rather than later. Young workers should not be content to say that they do not expect to receive Social Security benefits. They pay a great deal for this program, regardless of their income level. They should demand change.

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Medicare Part B Means-Tested Premium Adjustment

You may recall that the Medicare Part B premiums are means-tested. The adjustments based on 2006 income tax returns have just been published to recipients. The regular premium has been increased to $96.40. For any recipient with income over $82,000, the premium is increased. The amount of the increase depends on the amount of income. The additional monthly premium for 2008 will range from $25.80 to $142, for a maximum cost of $238.40. I does not matter how much social security you receive, the up-charge in premium is based solely on your 2006 income. It does not matter that you paid into the system for your working life (or at least the life of Medicare), the implied promise of equal treatment has been broken. Furthermore, it is my understanding that the income limits are not adjusted for increases in the cost of living, although the premiums are. This will affect more and more people as time goes by.

This is a portent of possible changes to the old age portion of the social security program. That program is already subject to means testing via the tax on a portion of social security payments. Some politicians are talking about a more explicit means-test, reduction of benefits depending on other income.

We need to let our Congressional representatives know that these changes are unacceptable. The best way to save the program for future generations and avoid putting more money into the hands of the politicians is private accounts.

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What's a Voter to Do?

As the political season heats up, it's time for those of us interested in the issue of Social Security reform to take a look at the current crop of presidential candidates. Of course, at the same time, we cannot take our eyes off the Congressmen and women. Even when we had a president willing to look at private accounts, e.g., Presidents Clinton and Bush, the Congress remained adamantly opposed. Think it has anything to do with the power to buy our votes that the ability to manipulate the present system provides? Or perhaps, it is the pot of money which is spent "off the books." that makes them so reluctant to take any meaningful action.

So what is being proposed? Let's start with two of the front runners. Barack Obama and John Edwards have expressed a willingness to raise or eliminate the cap on wages. That would be an enormous increase in the amount of taxes collected without a commensurate assurance that the money would actually be available to pay benefits.

"Eliminating the cap on payroll taxes would be, by far, the biggest tax hike in U.S. history: more than $1.3 trillion in new taxes over the first 10 years alone. As bad as that would be in the aggregate, it would be even worse for individual workers. A worker earning $103,000 per year would pay $1,240 more in taxes each year." http://www.socialsecurity.org/

Unfortunately, none of the other candidates has been willing to make any specific proposal. So much for profiles in courage.

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