Social Security Needs Reform, The Question Is How

Bernie Sanders is back in the news and this time on Social Security. I know this will come as a shock to everyone but Bernie is calling for higher taxes on people earning high incomes to pay for any shortfall in benefits. Where Bernie is correct is where he says that by 1933 Social Security will be running a deficit. That is true and Congress will eventually have to address this problem and quit kicking the can down the road. But simply raising taxes is a band-aid to the problem and a comprehensive agreement that is shaped in the form of a compromise would be a better way to approach the problem.

The Social Security Act of 1935 was passed to address a major problem in our country. To many elderly were living in poverty and many were found in what were known as “county poorhouses.” As a nation we were in the midst of a great depression and something had to be done to give these people something to ensure a basic living. There are a lot of myths out there about Social Security and you hear them repeated at parties and over the Internet. Most of them are false but people still believe them.

First, there is no “Trust Fund”. Any illusion to this should have been dispelled in 1968 when President Lyndon B. Johnson moved the funds to the “unified budget”. This change was merely an accounting change since the United States still remains obligated to pay the benefits. But time and again I hear conservatives clamor for a “lock box” on social security funds and believe that somehow the government has raided those funds. I am a conservative and I know this is simply not true.

The next big change in Social Security came in 1983 when Congress passed in an over whelming bipartisan manner and President Reagan signed that a portion of Social Security benefits would be taxed if you exceeded certain thresholds in income.   The amount at that time was 50% of your benefits. In 1993 Congress changed the law and raised that level to 85% of your benefits being subject to taxation provided your income exceeded a certain amount.

Those two changes are then doing partly what Bernie Sanders says he wants to do with people that are currently working and earning higher incomes. So people who have saved for retirement and find themselves living comfortably are paying a higher rate of taxes than those that have not provided for retirement at the same level. That in itself is a progressive tax system. As someone that is past the age of 65 and knowing a lot of retired people (I am not one of them) I can tell you one of the most common complaints I hear is people questioning why they had to pay taxes on the money while they earned it (FICA taxes are not deductible) and now they have to pay more taxes on the benefits. They believe they are being taxed coming and going.

The fact that should stand out to everyone is the ratio of workers to Social Security beneficiaries.  What this means is how many workers are there contributing to how many retirees are collecting benefits.  In 1940 that ratio was 160:1.  That was pretty good but it started to deteriorate rapidly.  Ten years later in 1950 that ratio was 17:1 and by 1990 that ratio had dropped to 3.3:1.  In 2013 it was down to 2.8 workers for every retiree.

But we cannot keep fooling ourselves and pretend that we can ignore the problem that we are presented with in the long term funding of Social Security. As I stated earlier, I agree with Bernie Sanders that we can to take some form of action. Where I disagree is with his solution by only taxing people to make up the short fall. The following is my suggestion for a compromise solution.

Right now you can draw benefits at age 62 and if you wait until age 70 you will receive the maximum benefit you have earned. It is about 8% per year. This year you will pay FICA on the first $127K you earn, up from $118 last year so that is a tax increase already. The ages we use were based on an outdated actuarial model. When established the medium death age was 65 and now it is north of 75. We live and work longer.

I would rise those ages to 65 and 72 and phase them in over a ten year period. Nobody would feel a major impact, as the ages would increase a couple of months per year. Of course Democrats like Sanders would scream and yell that we are forcing people to work longer. He ignores that they are already doing that and forgets they are actually living longer as well. It is the latter that is going to threaten the system with the average person that lives to age 70 has a pretty good chance of living to age 90. That is a lot of benefits that will have to be paid out.

As soon as raising the age limits part is agreed to I would raise the FICA threshold to $150K and keep it indexed. Of course there will be Republicans that will scream and yell that this is a tax increase. It is a tax increase and it will be borne by those earning higher incomes. It is also a tax increase on employers and we have to factor in the impact it will have on those businesses. Since most small companies have a limited number of employees earning over the new thresholds I think the impact will be minimal.

So now you would have both sides upset with the compromise so something must be right. These simple changes will solidify Social Security for the long term and take us through the baby boomers (my generation) with solvency.  The one thing that you should always know is that when a politician starts mentioning Social Security in a campaign they are trying to scare you and nothing else.  Social Security is not going anywhere.  Eventually Congress will have to address the problems with the program.

If I could make any criticism of the government on this program I would go back to the Johnson Administration. His social agenda became known as the Great Society and they fostered a belief that Social Security would be the retirement program for many workers. That was never the real intent of the program. Social Security was intended to be a backstop to people in retirement. That means everyone should continue to plan and save for his or her own retirement. If you are planning on living completely on Social Security you can survive but it will not be a comfortable existence. As of 2014 Social Security paid and average of $25K to a retired couple and the Census bureau put the poverty threshold for couples over 65 years of age at $14K. But living on just over $2000 per month is a struggle.

Congress has recognized this and put multiple sections into the tax code to encourage people to save for retirement. Most workers today try to contribute something to a 401(k) or similar program. Hopefully they are getting some form of a match from the employer. There are also individual IRAs and the move to Roth IRAs give middle income families a way to receive retirement income that is tax free when they start drawing on their accounts.

I offer my simple solution of raising ages and increasing the amount paid as a start to ensure the financial viability of the program and to lessen the progressive nature that already exists in the program.

 

 

 

 

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