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Last week’s article on Social Security generated a lot of comments and questions. For example, one reader said that President Obama was correct in his statement that the program just needed a little “tweaking.” And another asked why I’ve previously recommended delaying taking benefits if the program’s financial outlook is so grim.
I’d like to address both of those points today.
Now let me be the first to say that, yes, the program can easily be shored up for a couple more decades with some relatively “simple” moves — such as removing the current cap on the amount of money that is subject to payroll taxes and/or raising the retirement age for people in my generation.
But even if we put aside the deeper philosophical issues surrounding those types of moves … and even if we ignore how lawmakers continually abuse the program’s trust fund … I think the program’s very design is a problem in and of itself.
To Understand Why, You Have to Recognize that
Social Security Is a Pay-As-You-Go System …
It’s interesting — and very instructive — to look at the history of the U.S. Social Security system.
The program’s first payment reportedly went to a man named Ernest Ackerman.
He retired a day after the program began, and had contributed a whopping nickel. Yet his lump sum payout was $0.17 — more than three times what he had put in.
Meanwhile, the first person to receive a monthly payment from Social Security was Ida May Fuller.
During the late 1930s she contributed $24.75 into the system. Her initial monthly check was $22.54, so by her second check she had more than recouped her entire investment!
And get this: She lived to be 100 years old, collecting $22,888.92 out of the system over her lifetime!
Sure, it’s an extreme example. But it demonstrates the real problem with Social Security … the problem that has existed since day one … and the problem that is only worsening as more and more people live to Ida-May-Fuller-like ages:
Social Security’s pay-as-you-go structure means a never-ending game of catch up.
When Social Security was first instituted, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage. What’s more, the average life expectancy was about 60.
Today, Social Security covers virtually everyone and the average American is living to age 76.
To accommodate this widening gap of money coming in and money going out, the initial payroll tax rate of 2 percent — which is split between employer and employee — has already risen to a combined 15.3 percent.
That latter figure includes Medicare taxes and ignores the temporary payroll tax cut set to expire at year end, but you can see my point: Over and over again, the payroll tax rate has risen … and the odds are extremely good that it will go up again in the near future.
Meanwhile, higher-income folks may get hit by a double-whammy if the earnings cap is removed, too!
Okay, So Why Do I Still Advocate Delaying Benefits Then?
Despite Social Security’s flaws, I still suggest that folks consider delaying benefits as long as possible.
It would be political suicide for anyone in Washington to mess with near-term benefits. Instead, the preference will remain — as it always has — kicking the can further down the line.
The real issue is simply who will suffer most under the next round of changes!
Meanwhile, there are also logistical problems with changing soon-to-be-retirees’ benefits. After all, the government uses formulas to calculate benefits at age 60 and 62 for each recipient. They are unlikely to retool the entire process overnight.
But please realize that there is nothing wrong with taking your benefits right away, either. If you’re even more pessimistic than I am — or if you think you won’t live long enough to benefit from delaying — by all means start collecting as soon as you can.
The most important thing is to understand how the system works, how to get the most benefit from it, and also how future changes could further impact your bottom line.
Best wishes,
Nilus
{ 7 comments }
Social Security was not intended as a “pay-as-you-go benefit. Not until LBJ and subsequent congress and presidents began their yearly rape of the Federal Deposit Insurance Corporation, taking all receipts into the general treasury and comingling it with the general fund rather than depositing it in the trust fund..
Go back and calculate what compounded effect the retention of these receipts in the trust fund would have produced. The cost of these dishonest acts will boggle the mind. Comments, please.
Now we are getting closer to reality. I am amused that so many intelligent people still believe in fairy tales and a SS Trust fund. Yes, as A Wayne mentioned, there is now no money left in the Trust. It only contains special US treasury Notes of no value which represent about 2.5 Trillion. Wow, imagine that amount compounded!
What comes in each month from payroll taxes is no longer enough to cover what is paid out and that difference has to come from the US Treasury. Borrowed, increased taxes, or printed money. I guess SS really is a pay as you go program after all. Look up what’s in the fund at http://www.ssa.gov
Nilus, how can you say “the program can easily be shored up for a couple more decades with some relatively “simple†moves…” with your tongue in your cheek? Somehow the fact that the Trust money is all gone simply defies the logic that a little tweaking will fix it. But rest assured, those 2.5 trillion IOU Notes are backed by the full faith and credit of the US treasury, and it (they) have never failed paying off an obligation….yet!
So, what is the alternative which you failed to mention? I’m totally against privatizing SS because playing in the gambling casino on Wall St. is doomed to failure. The stock market is rigged as we’re beginning to realize why so many average American retailers have not come back into the market. They realize that the computerized trading is a boondoggle as several times, they’ve raised havoc on the markets. I’m also against paying commission and fees to stock brokerages as they will never be satisfied until they rape the Social Security funds for all they can get. We’ve now seen that Wall St. traders including the big banks almost tanked the entire economy and they got bailed out. To be salt on the wounds of the American taxpayer bailouts, they paid themselves handsomely with huge bonuses. Hardly any of these casino gamblers were indicted for their criminal acts. There is no way that I could ever trust Wall St. with playing around with trillions of dollars of taxpayer funds. They’ve proven to be untrustworthy. There is a lot of chicanery in the markets, and the Congress has failed to provide enough oversight to stop the criminals. Also, I want to see these criminals do prison time. No more slaps on the wrists and paying fines. That is not enough.
I realize that your SS payment increases the longer you wait to start payments. However, few of us will ever see eighty (males that is) and of the 6 or 7% that do few are mentally or physically sound. It is almost like trying to draw to an inside straight. The insurance industry refers the age from 75-77 the great die off because the mortality rate is so high during those years. You cannot eleminate dying. Remember, your retirment years are whose years while you are healthy and able to do. The post retirement years follow those and these are not so good. I have never heard of anyone dying whose last words were “I wished that I had spent more time at work”. I am retired and I can tell you that work is vastly overrated.
I doubt anyone hear wants to consider this, but I think the biggest flaw of Social Security is how earned income can disqualify you from benefits — while interest/dividend income won’t.
It seems perverse. When someone earns income they contribute more dollars to Social Security in the form of FICA deductions. But, we discourage that. When someone reaps investment income, they don’t pay into Social Security and — even if they have a $100k annual income, they get their Social Security checks.
On the one hand, the treatment of earned income shows how Social Security was intended to be an insurance policy against destitution in old age. If you earn more than destitution-level wages, you don’t get Social Security benefits.
To me, that seems wise. But, if we’re going to do that, it seems like we should treat investment income similarly. If someone’s receiving $20k of investment income they don’t have a “claim” (using terminology which is appropriate to insurance, which is what Social Security always has been.).
We keep losing sight of this very simple fact. Social Security was *insurance*. Not savings. Not welfare. Insurance! (The “I” in FICA is for… wait for it…. INSURANCE). Democrats have helped undermine this important point by referring to it as a “tax” and calling on increasing the “taxable income.”
That’s also why I believe Nilus’s “pay as you go” point is a non-sequitur. Any insurance company, when it first opened for business, paid claims to someone who had a car accident, death or medical emergency the first week of their claim.
Big deal. That’s the nature of *INSURANCE*.
Also, it’s misleading to talk Ernest Ackerman as if you can pay nothing into Social Security and receive a benefit. From what I’ve read, you must work 40 quarters in “covered employment” to be eligible for filing a claim after age 66. (A “claim” being defined as not earning income from wages in excess of basic poverty level.).
Ackerman obviously had 40 quarters prior to Social Security’s implementation. But, as mentioned in a prior post, there are similar instances of new insurance companies paying claims to drivers who had many years of driving before that new company’s first week in business (and having to pay their first claim).
Of course, Social Security was perverted by the inclusion of disability benefits in the 1960s. As retirement “insurance” it would have been better for SSI to remain distinct from welfare.
Definitely a lot has gone wrong with Social Security. But, it’s original goal was useful. A social insurance policy so a future generation wouldn’t be faced with the proposition of starving elderly on the street, or paying the cost of caring for them with their own (future) dollars.
Social Security is a freaking mess that will eventually collapse. I don’t know why anyone in their right mind and still working would not plan for retirement based on the premise that SS will NOT contribute to your future retirement. If by some miracle you do get something, well & good, but I wouldn’t plan on it. I think you can be sure that when push comes to shove a few years down the road, people who HAVE planned and saved, and have a certain income level in personal retirement funds, will be barred from receiving federal benefits, regardless of what you contributed. It will be the ultimate act of wealth sharing.