A lot of ink has been spilled over the last 10 years on the state of the United States’ social security program. For those outside the US, this is the base retirement investment program, which takes 6.2% of someone’s salary, and another 6.2% of the salary from the employer, and uses this tax to pay for current retirees. Most folks think they are paying into an “account” for themselves, but it is actually sort of a giant Ponzi scheme, where current tax money is used to pay off outstanding bills. For folks in the FI community, Social Security is a part of the program, but probably not a major part.
Like so many Ponzi schemes, it is predicated on getting more and more people/taxpayers to pay into it in order to keep it rolling. Unfortunately, the folks in the US have not been having 3+ kids to help defer this, and the bill for the “Baby Boomers” is coming due. The taxes taken in are now not enough to pay current beneficiaries, and so the system is spending up the excess it has built up over the past decades. Depending on which accounting system you use, the year it goes “belly up” is around 2032. Unless something is done, benefits will be cut to 75%, which could be very serious for the ones who most depend on social security.
This happened previously, and the two sides of the political aisle got together in the 1980s and came up with a series of items (extend retirement age, tax benefits, etc.) to fix it, at least for the next several decades. Well, we are fast approaching the time when we need to do something similar, but both sides of the US political aisle seem to not want to even discuss it. Probably because it has been called the “third rail” (i.e. the electrical rail for trains) for politics – to touch it means death.
Which is sad, because the closer we get to the magical date, the more severe the changes that will need to be made in order to keep it solvent. I recently read a report from the Society of Actuaries (an accounting field that specializes in longevity, insurance, etc.) on potential fixes, and what percentage they could go to in fixing the problem.
- Raise the retirement age to 70. Life expectancy is longer, but it could be hard on people with physically demanding jobs or who are disabled. +68% of fix
- Reduce the cost-of-living-allowance (COLA) by a certain percentage. A congressional commission felt the consumer price index (CPI) was overstated by 1.1%, meaning the COLA was too high. However, these would be cumulative, so as retirees get older, they fall further behind in purchasing power. +37% fix
- Reduce benefits by 5% for future retirees: Puts everyone in the same boat, but would hit low income the hardest. +26%
- Increase the number of years used to calculate average wage from 35 to 40 years. This would encourage people to work longer, but would hurt folks who work less than 40 years, especially mothers. +24%
- Affluence test: Reduce benefits for those whose total retirement income exceeds $50k/year. This preserves the benefits for most, but discourages savings and encourages people to hide assets. It also changes Social Security from a universal, “all in this together” program, to one of need. Would hurt support for program. +75%
- Raise payroll taxes from 12.4% to 13.4%. Would not hurt because real wages are going up, but we may also have to increase Medicare payroll tax (it is in even worse shape) so total taxation would be burdensome. +53%
- Increase wages to social security tax: Currently capped at , this would make Social Security a worse deal for higher incomes, further eroding universal support
- Invest 40% of Social Security Trust Fund in private investments. Could boost returns with less risk to individuals, but this would be 5% of private market. Stock voting and selection could be politicized. +48%
While there does not seem to be one single answer, the best way to do this is with a series of 3-5 of these, and this will get us over the 2032 “hump.” All we have to do is have the political will to do it.
That is the problem.
Sorry to be a bit of a bummer, but we all need to be planning on our financial future, and for those in the US, this is an important part of it.
Mr. 39 months