Monday, June 20, 2011

Nice Interactive so you can solve the Social Security problem...Try it out and compare to what I did.

Using the parameters in this interactive provided by the Wall Street Journal, this is how I would go about solving the Social Security problem that looms on the horizon.  The selections I made create a bit of a surplus (the triangle shape to the right of the "0.0"-- +.33%).  After each   ection, I offer explanations and rationales. This is not a prefect simulation, but it is a start.

Seems to me that the problem can only be solved by a mix of tax increases and benefit decreases, that will be progressive in some situations and regressive in others. I tried to do this as sensibly as possible and with some thought...

Source: WSJ

 First, Social Security has to move to a "means tested" entitlement program (the first box checked above).  This means that a retiree's OTHER income (savings, investments, 401K's, physical assets, etc) would be taken into consideration in determining how much in Social Security they would receive. The more you have in other independent assets, the less you get in Social Security you would be entitled to receive.  The problem comes in as you move down the income scales where the government determines the cut-off points for the level of benefit received. Formulas will have to be created and there are lots of pitfalls there.  EVERYONE should receive something (yes, even the rich guys/gals) because if someone contributes all their lives and gets nothing in return, then the program is not an entitlement but a welfare-type program.  This IS an important distinction.

Second, the retirement age has to increase from 67 to 68 (the next box checked above). This is not a huge jump, given the increased life expectancy of the average American.  This is a regressive policy, however.  Statistically, lower income/poor people have shorter life expectancies relative to high income/rich people---wait longer and receive less benefits is regressive in nature.  I soften the impact of this in my last point a little bit down the page.

Third, a payroll tax increase over an extended period of time, from a total of 12.4% to 14.4%. This is a 16% increase in payroll taxes over 20 years.  Currently, workers pay 6.2% of their gross earnings in Social Security and the employer pays 6.2% on your behalf as well, for a total of 14.2%.  This is regressive in that lower income people pay a higher percentage of their total income in payroll taxes than do higher income people.  Currently, the maximum income that is subject to the 6.2% Social Security tax is $106,000.  Any income OVER that amount is not subject to SS Tax.  The interactive does  not give an option for a moderate increase over the $106,000, but I would be in favor of increasing it, but not to the $200,000 level suggested in the interactive. 

Lastly, as mentioned above I would make provision for the "very poor" elderly population amongst us (box checked above).  This is a progressive policy.  Do I really need to explain/justify that one?  Pretty self-explanatory, in my opinion.

I believe my choices reflect a political "Moderates" approach to solving the Social Security problem.  Liberals will not like that I don't put more of the burden on the "rich" and Conservatives won't like that I means tested the program AND raised taxes.  However, I do not know of a better way out of our predicament.  Do you? 

Please try the interactive yourself but really think about what (1) you would do and (2) what could actually be implemented. Two very different things...
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