LISTEN: SOCIAL SECURITY: You Might Still Get It –If You Live Long Enough (mp3audio) (5:48 min)
With all the political rhetoric about the economy, notice there isn’t much noise about Social Security. In the midst of the toughest economic stretch since the Great Depression, you’d think a national insurance and pension plan that is tottering toward a financial breakdown would generate some strong political discussion. Why so little dialog? Here are some thoughts.
First, the summary review: Social Security provides pension and insurance benefits for qualified recipients by collecting a payroll tax on all wage-earners. In the past, the number of wage-earners far exceeded those receiving benefits. However, increased longevity and the arrival of the Baby Boom generation on the threshold of retirement has skewed the math: At current tax rates, the Social Security Administration will not collect enough from those who are working to provide benefits to those eligible for benefits. In a word, the plan is broken.
Sifting through all the political posturing, there are only four possible real-world solutions to fix Social Security.
- Increase taxes.
- Decrease benefits.
- Change the eligibility requirements.
- Scrap the plan.
From a rational perspective, getting rid of something that isn’t working is an obvious choice. But the question that follows is “what do we do for a replacement?” Change is fraught with unknowns, both for citizens and leaders, and even good ideas can be scared away by “what might happen.” For three decades, the standard political response has been to defer making a decision, leaving the responsibility in someone else’s hands. And as long as the checks keep coming, there’s little call for change from the populace as well. The hope is “I get mine before the well runs out.”
With a sluggish economy and growing sentiment that the national government has already spent irresponsibly, the idea of raising payroll taxes for all citizens doesn’t have much popular appeal. While government leaders certainly look to squeeze every bit of revenue from the populace, politicians only rule if they get elected. Raising taxes is not a popular plank on the reelection platform this year.
20th century British scholar C. N. Parkinson observed that a “luxury once enjoyed soon becomes a necessity.” Adapting this thought to Social Security, it’s fair to say that what was once supposed to be supplementary income in old age has become a critical retirement component for many Americans. As such, it’s hard to imagine a politician seeing much to be gained by threatening to decrease benefits.
That leaves changing the eligibility requirements. In mid-July, 2010, members of Congress from both parties mentioned two possible changes. The first is to raise the Social Security retirement age to 70 for people who are 50 or younger today. The second proposal up for serious consideration is to include a means-test for benefits; those with more assets would receive smaller benefits.
Raising the retirement age is a logical response to the increased longevity of Americans since Social Security was established in the 1930s. As Patrice Hill of the Washington Post noted in a July 13, 2010 article “with people living longer and enjoying better health in their senior years, the nation simply can’t afford any longer to be paying out benefits for as long as 30 years after retirement.”
The rationale for implementing a means-test to qualify for benefits is simple economics. In the words of Ohio Congressman John Boehner: “If you have substantial non-Social Security income while you’re retired, why are we paying you at a time when we’re broke?” he said. “We just need to be honest with people.”
A means-test would represent a fundamental change to Social Security. With benefits indexed to income or assets, it is possible that some affluent workers will never receive benefits even though they will make a lifetime of payments into the plan. While this approach won’t result in an across-the-board decrease in benefits, making Social Security a clearly defined wealth transfer program has some political risk.
Twenty years ago, retirement planning was often pictured as a three-legged stool, with the legs being Social Security, the company pension, and personal savings. Today, the pension leg is rapidly vanishing from the financial landscape, personal savings have been pounded by the economy, and Social Security (if it survives) looks like it will come into play later in life. This turn of events leaves many Americans wondering if they will have a leg to stand on in retirement.
