How To Fix Social Security: A 4-Point Plan That Faces the Brutal Realities   (January 19, 2011)

Social Security is unraveling, and aligning its outlays to its income requires a new understanding of tough truths.

Social Security is imploding before our very eyes. As I laid out in The Fraud at the Heart of Social Security (January 17, 2011) and To Fix Social Security, First Ask Why It Is Deep in the Red (January 18, 2011), the system is already running massive deficits in 2010 that weren't supposed to occur until 2018, and the deficit in 2011 is transpiring 15 years earlier than the seers at the Social Security Administration (SSA) anticipated.

There is no mystery why the system's revenues are collapsing: 9 million jobs have vanished, and millions more have slipped from full-time to part-time or temporary. The Social Security payroll tax (including the Medicare sliver) is 15.3% of payroll. So as total payroll plummets, so does Social Security's revenue.

Roughly 8% of all private-sector jobs have vanished for good, despite what various cheerleaders project. Another 8% have slipped to "part-time for economic reasons," and another 15% are self-employed/free-lance/contract workers who have seen their incomes decline by 5%.

All of these factors have reduced taxable wages and income, cutting Social Security's tax receipts by $66 billion just from 2009 to 2010. As noted yesterday, The End of (Paying) Work (January 21, 2009) is not cyclical, it is structural, and the decline is far from playing out. SSA payroll tax receipts will not recover to 2009 levels, they will continue to decline.

Meanwhile, an aging populace is flooding into the system at an unprecedented rate. As noted yesterday, millions of financially crimped Boomers are applying for Social Security benefits the moment they qualify at 62 years of age rather than wait another 5 years for their full benefits. Many can't afford the luxury of waiting 5 years, while others anticipate the system's insolvency and are prudently extracting something before it runs aground.

Recall that the "bulge" of the Baby Boom will be entering the system within the next eight years: over 3 million new beneficiaries a year. Live births were 3.4 million in 1946 and quickly ramped up to over 4 million; the last year of the Boom generation (not an exact science--the Baby Boom is generally divided into two cohorts) in 1964 saw over 4 million births.

The first Boomers qualified for Social Security in 2008, so roughly 75 million beneficiaries will enter Social Security between 2008 and 2026. (Of course current beneficiaries leave the system when they die, but the absolute number will rise as new additions exceed departures.)

As noted in the two previous entries, the Social Security "Trust Fund" is an accounting illusion. The "safe, guaranteed" non-marketable bonds are merely markers for actual Treasury bonds which must be sold, and interest must be paid on. Social Security is as totally dependent on Federal borrowing as the Pentagon or any other program.

The brutal truth is the system is facing flat or declining revenues while its vast army of beneficiaries will rise from an already monumental 53 million. That's significantly larger than the entire population of Spain (46.5 million) and will soon equal that of Italy (60 million) or Great Britain (62 million).

Social Security is entirely dependent on the Treasury's sale of new bonds for its own solvency. If interest rates spike and/or global buyers become wary of Treasury bonds, costs for borrowing will skyrocket, crowding out all other Federal spending.

Being dependent on Treasury borrowing, Social Security will be as impacted as any other program.

Somebody who's been "promised" benefits won't receive them. That much is obvious, so the question boils down to triaging who gets benefits and who doesn't.

Income disparity has been rising in the U.S. for decades. This reality has been sliced and diced here and elsewhere, and the basic truth is that it has some structural causes (globalization, etc.) but much of the disparity is the direct result of tax and legislative policies which favor the super-wealthy (who coincidentally also happen to be politically powerful). For example, Income Inequality on Course to Hit Record Levels Thanks to Tax Compromise.

Why Growth May Still Leave 95% of Americans Behind

Middle class squeeze: The deep roots of an economic and social transformation

Without getting distracted by endless and pointless debates over income disparity, let's stipulate that Social Security is the foundation of income security for working America. People qualify for Social Security by working and paying into the system. It provides a modest pension for all qualified workers and their dependents or survivors, and the disabled.

The surest way to minimize income disparity is to put Social Security at the top of the priority heap, and the people within the system who have no other pension at the top of the priority heap within Social Security.

I would hope that much is self-evident.

The counter-arguments against changing anything are plentiful: the system only has political support, we're told, because everyone gets their check, regardless of need. OK, go ahead and leave the system untouched. Then when the whole thing implodes, the neediest recipients will suffer more than those with other pension income.

Is that fair? Or just? Does that serve the nation better than recognizing income and wealth disparity are realities?

The notion of noblesse oblige needs to be restored to American culture. The cultural drift to self-absorption and limitless greed has poisoned the society to the point that we are told millionaires will stop investing in productive businesses and will move to Tortuga if they have to forego some consumption to pay additional taxes.

Noblesse Oblige is the sense that those who have gained or earned great wealth have an obligation to those below them on the financial ladder.

Here is my short prescription of how to adapt Social Security to reality, with the single goal of protecting the pension income of those who have no other retirement resources. Are any of these politically possible? No. But just because they cannot be done in the present doesn't mean that they shouldn't be done.

I am not including slowly raising the retirement age for two reasons: 1) it's basically a given and 2) it won't solve the revenue/outlay misalignment by itself. We need to make much more fundamental realignments:

1. Jettison the illusory "Trust Fund" and remove the SSA from the unified Federal budget. Social Security is a "pay as you go" system in which current workers' payroll taxes are distributed to current beneficiaries, with a surplus that accumlates to fund future shortfalls. Unfortunately, the surpluses accumulated over the past 27 years have already been squandered, and the Treasury will have to fund any shortfalls between Social Security outlays and income with 1) tax increases or 2) additional borrowing.

Will politicos ever let go of the fat income stream from Social Security? No--but they should.

2. Replenish the squandered surplus in two ways: eliminate the $106,000 cap on wages and impose a 5% Noblesse Oblige tax on all households with incomes (from any source) above $1 million. If you're pulling down $1 million annually, you're already paying a lot of taxes--but then your tax burden was lowered tremendously by the Bush-era cuts. You can afford a $50,000 Noblesse Oblige payment to Social Security, with the explicit understanding that the money is for those in the bottom tier who have no other pension.

Why should earnings above $106,000 be except from the 7.65% FICA tax? If you're making $156,000, please don't claim you can't afford to pay 7.65% on the last $50,000. Anyone claiming that means they don't want to forego some consumption they desire. Come on, the 7.65% on the $50,000 is a modest $3,825.

3. Reduce the benefits for everyone with another fixed-benefit pension. According to the SSA, the average benefit is about $1,100 per month. All beneficiaries with other fixed-benefit pensions will forfeit their Social Security above a total monthly gross pension/retirement income of $3,000 a month.

Again, the idea here is to recognize income disparity as a reality and to protect the most vulnerable citizens who have worked and paid into the system. The idea that "everyone who paid in should get their share" is gone, triaged out of existence.

The reality is that double-dippers and triple-dippers (those with military and/or civil-service pensions, for example) drawing $3,000 or more a month can survive without their Social Security check; the same cannot be said of those who have no pension other than Social Security. The whole idea here to protect those workers first. There simply won't be enough money to pay everyone, so those with pensions of $3,000 or more a month will not draw anything from the system; they will survive without it.

Those with private non-fixed pensions will be subject to the same limitation (above $3,000 a month, no Social Security), but with the caveat that should their private pension fall below $3,000/month, then they would be eligible for a modest SSA benefit.

This recongizes that IRAs and 401Ks are not guaranteed; annual income in such plans will vary with interest yields and investment returns. Again, the idea here is that Social Security is a backstop for those with no other pension resources.

4. Encourage people to work past 62 years of age, and encourage disabled citizens to earn whatever money they can. The key disparity in Social Security is demographic: the number of workers paying into the system is stagnant while the number of beneficiaries is rising.

The easist way to forestall collapse is to maintain the working populace. Yes, I am aware that enabling the over-62 populace to keep working means fewer jobs for younger people, but anything which keeps people as contributors rather than just as beneficiaries is a net positive.

Demographics are against a retirement system designed in the 1930s. People live longer and retire earlier now. No system that leans on two workers to pay for one retiree is sustainable. These trends have been described in depth in numerous books, for example:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

As for the disabled, many disabled people could earn some money (doing computer work, for example) if the system didn't preclude them from earning any income.

The idea here is simple: stop punishing productivity and work. Encourage people to contribute to their own livelihood until they can no longer do so.

The heavily promoted idea that the Social Security system is "sound until 2037" is false. We can stand by and let the system implode, hitting the most vulnerable the hardest, or we can do some adult-level triage and recognize that those who will do OK without tapping Social Security will have to relinquish their claim on the system for the good of those workers beneath them on the financial ladder.

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