This was my summary at MPP regarding the annuity comment.
"Now I agree that Social Security should be a self funded pension plan. However we know that it's balance + ongoing contributions are not adequate to pay its forecasted disbursements. Therefore we either need to raise it's contributions (higher payroll tax), make transfers from the general fund (wealth transfer) or cut it's disbursements. (lower payments or raise age)"
This seems pretty simple and straight forward to me. And then after looking at links 2 - 4 below it becomes pretty self evident that what we payed for and what we are expecting to receive are out of whack and Father's correct. The eligible age has to be increased greatly or we need to raise the payroll tax significantly. Thoughts?
MPP Reagan's Advice on Social Security
Intellectual Takeout Life Expectency Change and SS Benefits
Carpe Diem Retirement Age vs Life Expectancy
Life Expectancy History chart
33 comments:
It should be noted here that with respect to life expectancy, the relevant starting point isn't life expectancy from birth, it's life expectancy from at or near retirement age.
Social Security is slightly out of whack because incomes haven't risen as expected, not because of changes in life expectancy which weren't forecasted.
--Hiram
Source?
If incomes have not increased, then the initial SS payment should be lower. These should be self correcting
If incomes have not increased, then the initial SS payment should be lower.
There isn't much of a constituency for cutting social security payments, initial or otherwise.
--Hiram
No... I mean that I think it is indexed to CPI or some other factor...
Social Security payments are indexed to the CPI AFTER benefits begin, and there hasn't been an increase for current beneficiaries over the last two years. While there are complaints, that is probably as it should be. The INITIAL payments, however, are based on the promises made by Congress and, well based on the amount "contributed," bear no resemblance to the amount of money actually come in to fund those benefits. That is why the Social Security fund started operating in the red two years ago and why the situation has been made so much worse because of the FICA tax holiday Obama wanted. Apparently when Democrats are in charge tax cuts do not have to be "paid for" and funding for Social Security appears magically out of thin air. No problem, right?
J. Ewing
The money coming into the government does bear a resemblance to the money going out. The reason Social Security is in the red in the sense that it is, is that it was set up that way as a part of the Reagan era reforms back in 1983. While the exact timing wasn't predictable back then, what was known at that time was that the day would become, around now, when SS outflows would exceed inflows. What has changed is Ronald Reagan's assumption, that we would keep the promises he made on behalf of the American people.
Tax cuts do have to be paid for, something I said a lot during the campaign and which I am saying now. The magical thinking that tax cuts don't have to be paid for, except by Adam Smith's invisible hand operating an invisible printing press, is mostly concentrated among Republicans.
--Hiram
SS Benefit Calculation Factors
The starting point is also based on avg wages...
We criticize Social Security for running at a loss in the last two years. What we mean by that is that the outflow to recipients in the last two years exceeds what we think of as the dedicated revenue stream of FICA. The horror, the horror. But what happens when we apply that same line of thinking to other government expenditures, expenditures that have no dedicated stream of funding associated with them at all? How long as the Pentagon been losing money, that is how long has it been since expenditures on defense have exceeded any dedicated source of revenue for the defense budget? Even more than thirty years I should think, yet why is it that no one argues that the Pentagon is insolvent?
--Hiram
MJ Payroll Tax Cut Does Not Hurt Trust Fund
Don't worry J, they made up for the "missed payments" with ~$240 Billion from the general fund... (ie a welfare payment if you will...)
Ok... The GOP has to learn that the "tax cuts do have to be paid for..." and the DFL needs to learn that "Gov't gifts that exceed the economy's growth rate are not sustainable".
More info:
Bernstein Payroll Tax Cut
Bloomberg 2035
"Gov't gifts that exceed the economy's growth rate are not sustainable".
Why is that? Why is sustainability related to growth? Is this how we manage our private lives? Do we, for example, look at potential income growth when evaluating whether we should have a needed medical procedure? The country is getting older, and that involves expenses that must be either paid for or ignored. Is ignoring them a sustainable policy? And what would be the impact of that on growth?
--Hiram
Okay. Let's stop govt payments on "optional medical procedures", raise the retirement ages ASAP and cut the social security payment amounts by 20%. That should free up money for "needed medical procedures".
And yes people reduce spending and evaluate their spend more closely when money gets tight.
According to the graph, government spending is ~40% of the country's GDP, or ~$6,400,000,000,000dollars. What would percentage would you be willing to let it grow to?
Another good question is how much does government spending contribute to the Gross Domestic Product. In our current mode with the fiscal cliff all the rage in the media and in Washington, we are told by just about everyone that drastic measures designed to reduce the debt would wreck the economy, with presumably a negative impact on the GDP.
It seems we are all Keynesians now.
--Hiram
That's kind of funny, I have heard almost nothing about avoiding the spending cuts. "Everyone" seems to be focusing on the tax cuts. The President, Congress, etc.
Maybe the Keynsians are losing popularity.
Even the Heritage Foundation says we should be raising the retirement age. To me, that's cutting promised benefits and I want no part of that. Already, Congress is facing the same three choices they have always faced when the Ponzi scheme of Social Security starts running into the red: they can cut benefits, raise taxes, or take money from the general fund. Since Democrats believe they can print as much money as they like, taking money from the thin air that is the general fund budget is the obvious choice. They don't care that it makes the deficit worse.
Everybody seems to overlook the obvious solution, which is to phase in private accounts while phasing out FICA-paid benefits. The math on this works great. All that's needed is to get the political obstacles out of the way.
J. Ewing
Hey look... J and Hiram are agreeing on something...
I'll have to do some research, but I think the baby boomer retirees are scheduled to get a lot more out of social security and medicare than can be justified by the amount they contributed. If so it is welfare that should be cut ASAP...
Any sources to the contrary? (Ie we earned all those benefits, even with our longer period in retirement and higher medical costs))
Hey look... J and Hiram are agreeing on something...
I'll have to do some research, but I think the baby boomer retirees are scheduled to get a lot more out of social security and medicare than can be justified by the amount they contributed. If so it is welfare that should be cut ASAP...
Any sources to the contrary? (Ie we earned all those benefits, even with our longer period in retirement and higher medical costs))
I am told that the current generation of retirees has earned something like 1% on their investment. That of course assumes normal life expectancy, so "break-even," the point at which retirees start taking out more than they contributed, is something like age 75, which happens to be average life expectancy (for men). In other words, if you contribute all of your life and die at the expected time, you get your money back-- no interest earned, and the dollars are going to buy far less because of inflation, so in short it is an absolutely horrible investment OR "old-age insurance" policy.
There are other problems. Those who don't live to 65 get just $250 for their surviving family. And those who DO live to 65 have a life expectancy of at least 80. Neither is fair and any reasonable investment, including US treasury bonds, would be far better.
J. Ewing
It is an insurance policy, not a retirement account. (Federal Insurance Contributions Act (FICA) tax) Wiki FICA So of course there will be winners and losers.
However, here is a link that shows some better returns than the 1% you showed.
Pol Calcs SS Rate
And I have known people who have been on Disability, and children who have received survivor benefits for years and years. I am pretty certain they were paid far more than $250. Where did you get that terribly inaccurate data?
SS Disability page
SS Survivor benefits
This is from the SS Survivor site...
How much will I receive?
The benefit amount is based on the earnings of the person who died. The more the worker paid into Social Security, the greater your benefits will be.
Social Security uses the deceased worker’s basic benefit amount and calculates what percentage survivors are entitled to. The percentage depends on the survivors’ ages and relationship to the worker. If the person who died was receiving reduced benefits, your survivor’s benefit is based on that amount. Here are the most typical situations:
•A widow or widower, at full retirement age or older, generally receives 100 percent of the worker’s basic benefit amount;
•A widow or widower, age 60 or older, but under full retirement age, receives about 71-99 percent of the worker’s basic benefit amount; or
•A widow or widower, any age, with a child younger than age 16, receives 75 percent of the worker’s benefit amount.
•Children receive 75 percent of the worker’s benefit amount.
Maximum family benefits
There is a limit to the benefits that can be paid to you and other family members each month. The limit varies, but is generally between 150 and 180 percent of the deceased’s benefit amount.
I was just thinking about my 20 yr term life insurance policies. (me & wife) There is a $9,600 investment that I hope to never to recover.
I wonder how the return calculator accounts for the disability and survivor benefit premium portion of the payroll tax?
Of course there is a benefit for survivors of a SS beneficiary, but if that person dies BEFORE the start of benefits (say age 61), the family receives only the death benefit, which the last I checked was $250. Anything else-- insurance or an investment, delivers the entire account value to the survivors.
That's an interesting tool. I wonder if it accounts for the amount EMPLOYERS pay into SS, because that would cut returns by as much as half. I also have my doubts that it is calculating returns based on an annualized investment, nor correcting for inflation, nor adjusting for longevity. In short, lots of assumptions that could make my 1% number as good as any. Even juggling the numbers, the best I could come up with was 2%, and even US savings bonds (way more secure than the SS trust fund) pay better than that.
One other thing, running it for somebody age 25-- the point at which most privatization proposals phase in full privatization-- I get about 2% ROI, so to me the only sensible thing to do with SS is to transition to private accounts. If you think people are too stupid to manage their own affairs even with a mandatory deduction going to their private accounts, give them the option of staying in SS.
J. Ewing
Based on these Median Net Worths, it looks like most don't know how to save and invest for retirement.
Net Worth
Making it Private would fail, since we aren't going to let the spenders starve then any more than you are willing to today.
Look at the links, your $250 belief is wrong.
By the way, didn't Hiram and You agree that Payroll Taxes are taxes? And that anything you get back is actually an entitlement / govt welfare?
You really have to make up your mind. Is it forced savings/insurance where a return is expected? Or is it a tax and you should be thankful for anything you get? Very puzzling...
If I am forced to contribute 6% to my private account, that's forced savings. If I'm forced to pay 6% into FICA, that's a tax, because nothing I put in there is guaranteed to me and in fact goes out immediately to current beneficiaries.
Private accounts DO work, and they do wonders for the economy because instead of a tax that is immediately spent, you have a huge new capital stream that grows the economy. Federal spending is gradually and greatly reduced and retirees are better off, with more money at retirement. How can there possibly be an objection to that, other than political power? I mean, if Democrats can't threaten seniors that "Republicans will take away your Social Security," how will they get votes?
J. Ewing
If FICA is a tax, then all the people receiving SS and Medicare are on the equivalent of welfare. (Ie public assistance) Which probably indicates we should be doing means testing, and be evaluating if they should still be working...
Are you ok with that concept?
By the way, I agree that ideally the systems should be privatized.
The pragmatist in me says that won't work unless we are willing to let people suffer the consequneces of their bad decisions. Which is unlikely to happen...
The best way of means testing is to let people invest their own money as a REQUIRED percent of income. The rich will invest more and get more back from their private accounts; problem solved. That also solves the problem of people not saving because it's still mandatory.
The reason NOT to means test these "welfare benefits paid by FICA taxes" is because they have always been described as "insurance" or an "investment" to which people were "entitled" in the sense of ownership. Social Security used to send out a letter every year telling you how much money was in your "account," but they ceased after the Supreme Court ruled there was NO vested interest requiring Congress to pay anybody anything.
I think they are still sending the letter. Maybe the content has changed.
I haven't seen such a letter in many years. Apparently they got tired of the pretense.
Apparently they stopped in mid 2011 as a cost saving measure. Thank heavens.
Apparently you can still access it on line.
US News SS Statements
SS Online Statement
Ah. Now I see. It has become an "estimate of benefits." That is a world away from "the value of your account."
Apparently it has been "estimate of benefits" since at least 2007...
SS Letter 2007
Probably before that. I wonder if the actual transition date correlates with the Supreme Court ruling that says, in essence, "you have no account with us."
Is this the ruling you are referring to?
SS 1960 SC Ruling
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