What's the best plan to fix Social Security?

Surcharge on the wealthy and gradually raise the retirement age.

Leave the current cap in place, but reinstate it for income above 250 K.

Privatization is the worst idea. Imagine if Social Security had been privatized during 2008/2009, or worse yet, from 2000 to 2003.

Best plan I’ve seen is from this analysis by Nancy Altman. I’ve summarized the key points below.

Restore the maximum taxable wage base to the levels Congress originally intended (84% back to 90%)

Convert the Federal Estate Tax into a dedicated source of funding for Social Security

Allow the government to diversify its portfolio into stocks as well as trust funds. Further, this would adequately fund the system so the system could bear the bulk of the risks associated with private investment, not the retiree

Protect against a draw-down of reserves. This includes a possible contingent tax should the reserves deplete to a certain level that is removed when appropriate levels are restored.

Remove the cap on income that is “taxed” so that the people who will be hurt the least by an increase pay into it for more than the first 120,000 $ (thereabouts?) of their income.
Stocks and bond market “investing” is completely unnecessary and do you really want to trust the value of a substantial proportions of the social security monies to market manipulations by the usual suspects?
The system becomes even more what it was intended to be an insurance program with costs to participants based on means to pay it.
The reason that is fair is because the same people benefit disproportionately from civil structures of all kinds than regular folk, and they wouldn’t do so if those civil structures weren’t there. And they suffer the least from extra cost.

@Qingu I agree we could slowly raise the retirement age with people living much longer now. And it seems that people who stay busy and do meaningful things in their later years tend to be happier and live longer. But we also have to protect seniors from forced retirement. Profit driven businesses have an incentive to toss out the older workers who have risen up the pay scale, and bring in new hires that work at minimum wage. It won’t do to regular workign to 68 to retire when you get tossed aside at 60 and have 8 years of no income at all.

@zenvelo That would go a long way to fix the system.

@cockswain Thanks for the link. THose are some great ideas.

@dabbler Sounds good if we also ensure financial transparency so investment fund managers can evaluate the real risk of investments. Privitization is a terrible idea in my mind. It’s a massive taxpayer transfer of welath into Wall Street and it leeaves the most vulnerable and least savvy investors raw meat to be eaten up by the casino capitalism set that engineered our recent financial crisis.

A couple of points on privatization. First remember that if you were retiring in 2002 when the market crashed, your initial investments in the DOW were when it was around 400. So even when it crashed to 7200, you were still looking at an 1800% increase. And it was only there less than a year before rebounding back to about 12000 (a 3000% increase). Meanwhile social security has gone from an average of about $70/mo to about $900/mo (about 1200% increase). Again in 2009 it dropped but rebounded.

Also we all know that SS will either not be around or is not sufficient to support retirement. Current average is just over $1000/mo or about $12000/yr. In order to supplement that we expect to have additional savings in a 401K or some such instrument. And guess what, that is invested privately. Good for our personal savings but not good for social security? A little consistency would be in order here.

Now for the bad news. We can’t simply privatize SS, there is no money. The government has spent it. The SS bonds we think will take us to 2037 are simply debt, about $4 trillion of it. So if we wanted to allow everyone to invest privately there would be no money to pay existing retirees. The only possible way would be by putting a very small part of it aside, say 5% for private investment. But Bush already tried that and the screams were deafening.

As for raising the retirement age, we tend to forget that as we grow old we lose physical strength and endurance. Sure we are living longer by curing disease, preventing strokes and such but the physical deterioration persists. Those in the working class, those that need SS the most are also those that are most likely to have more physical jobs. Expecting them to work til 68 or 70 is asking a lot.

Means testing has been suggested and although I am inherently against such schemes, some level may be in order. I find it difficult to tell those that did everything right, those that saved thier money for retirement, that they will be losing their SS because they did it right. Had they been a little less diligent, spent a little more and saved a little less, then we would happily contribute to their retirement.

The only viable solution I see, is to eliminate the cap on SS wages. I am inherently against raising taxes, especially in this recession but we are in dire straights. Remember that SS only pertains to wages consequently would not affect small business owners. Large corporations that want to pay the CEO a million bucks would have to pony up the employer half and the employee (CEO in this case) would pony up the other half but most of their pay is in stock options anyway and would not be affected. Most people that reach the cap live on the wages they earn while paying SS and when they reach the cap each year it is like a raise in salary that lasts til the end of the year. They’d have to learn to live without it. If we went down this road, I would like to see some insurance that the government would not use the increase as they have for decades. That they would not simply use it as another piggy bank to rob. Otherwise we solve nothing.

The only viable solution I see, is to eliminate the cap on SS wages.

I’ve heard there is some loophole people exploit, where if their income is over $100,000, they can file as an S-corporation and avoid paying SS taxes on the difference. Something like that, I’d have to research it a bit to clarify exactly what it was, but that would need to be changed too.

@cockswain

That is true if they are a small business. But if they are receiving wages, it won’t work. I suppose they could work as a contractor and call it business income but that carries it’s own pitfalls. And if they are not paying SS wages, they are also not receiving SS benefits at retirement time. Nonetheless, it may need some study even though I’m not sure how to resolve it without hurting small businesses.

@Jaxk You raise some very valuable points. I further agree that raising the cap is probably the fairest and most viable fix.

You are quite right that there is no SS Trust Fund as in a bank account somewhere. The two funds hold US Treasury Bonds amounting to about $4 trillion, which is debt. And since the money borrowed with those bonds goes into the general fund, Congress spent it to pay mainly for tax cuts, the unfunded prescription drug benefit, and two endless unfunded wars.

But I would remind you that in 1999 we were running the largest budget surplus in history. The Clinton years had left us on track to eliminate the National Debt and to set aside the money to pay for the wave of Baby Boomer retirements which is happening today and will go on for another decade.

Mr Bush looked at that surplus as a terrible problem, and even got Alan Greenspan to tell Congress that paying off the debt too quickly might cause terrible financial consequences, and we should therefore have a big tax cut for the rich. The projected surpluses Mr. Bush thought would pay for his extravagance vanished in the recession of 2000–2002, but his zeal for tax cuts for the rich did not. He went from claiming that tax cuts were needed to avoid paying off the debt too quickly to claiming that all along he had planned the tax cut to stimulate the economy out of recession.

He ended up not only squandering the Clinton surplus, but nearly doubling the national debt and leaving a debt ridden economy in deep financial crisis to Mr. Obama. THAT is where the problem with social security came from. More of the same tax cut medicine that made us so sick in not the cure.

Yes, tax increases are bad for a recovery. But spending cuts are far worse. According to the CBO, the least stimulative action possible in a recession is tax reductions for the rich. Such cuts will do virtually nothing to help the economy while piling more debt on, making any meaningful stimulus that much more difficult.

@ETpro

Just a point of order here. First even under Clinton and his booming economy we were still borrowing from SS. The national debt has not actually declined since 1957. And with $5 trillion in debt and the debt still growing we were never in danger of paying it off, let alone paying it off quickly. I don’t mean this to diminish his accomplishment, it was by any measure a good thing, just not a real surplus. You’re trying to isolate external debt by paying it off with internal debt. It’s still debt. The Social Security problem has been with us since it’s ineption (or is that inception).

The tax cuts proposed by Ryan are not intended to be real cuts but rather to offset the loss of deductions. Whether that is a good idea or not is open to debate. What is proposed by Obama is both the loss of deductions and a tax increase compounding the problem and making the tax code more complex. I can’t think of anything worse. Kennedy cut taxes and the economy grew. Reagan cut taxes and the economy grew. Bush cut taxes and the economy grew. Now Obama wants to raise taxes to make the economy grow. Did he not get the memo. It doesn’t work.

Clinton didn’t cut taxes and the economy grew.

Moreover, Reagan cut taxes and, while the economy grew, debt skyrocketed because revenues fell. Which is, if you’ll recall, the whole point of your tirade.

At a certain point, Jaxk, I am wondering when your brain is simply going to break.

Also, for reference:

http://www.econdataus.com/taxcuts.html

@Qingu

Not to worry, my brain is fine. You may want to worry about your own since the violent twists and turns you need to make to keep up with Obama’s changing policies, can be quite stressful. If I recall during the Bush years the continuous liberal chant was that the Bush tax cuts were only for the rich. No one else benefited. Now we are in recession and virtually all economists agree that raising taxes during a recession hurts the economy. So you want to argue that raising taxes only hurts if they are raised on the middle class (lower income earners don’t matter because they don’t pay taxes anyway). That way you can keep the tax cuts, at least partially satisfy the economists and isolate the group you don’t like anyway. You’ve totally abandoned the argument that the tax cuts were only for the rich. Somehow during the two years of Obama the tax cuts have helped the middle class. I wonder what changed.

Now you seem to want to argue that since tax hikes worked OK during a major economic upswing, they must work during a major economic downswing. I can’t even fathom where you got that theory. You may want to look into a course in economics 101.

Let me try to make this clear enough for you. We are approaching a point where debt is 100% of GDP and it has no signs of slowing. In fact if you actually listen to Obama he intends to accelerate (just look at his budget proposal). That is a clear danger sign. We have got to slow the growth of government debt. I’m not proposing tax cuts. I’m proposing spending cuts. Two years ago, it would have been different but the debt has grown too far, too fast. It’s too late for a tax cut so spending has to stop.

Even the Ryan tax cuts aren’t really cuts. He eliminates the deductions so our AGI goes up. Then reduces the rate so that you pay a lower rate on a higher base. Net result should be the average pays about the same. The difference is that if you’ve used the deductions to artificially lower your AGI, eliminating the deductions would put that back where it should have been. Consequently you pay more taxes even with the lower rate. As I’ve said all along I haven’t enough detail to know if this will do what it is supposed to do and will wait to hear more before jumping on or off this wagon.

@Jaxk It is confusing and deceptive to talk about the national debt as a dollar value, and claim it’s bigger han some years in the past. That sophistry ignores inflation and it ignores the fact that a growing percentage of the debt is in bonds held by the Social Security Trust Fund. A much more meaningful measure of debt, that automatically zeros out inflation, is debt as a percent of GDP. After WWII, the debt as a percent of GDP was heading steadily down till Reagan was elected. It exploded under Reagan and continued to skyrocket under George H. W. Bush. Clinton cut spending and raised taxes (revenue) and that turned the curve on debt a a percent of GDP back down. George W Bush reversed Clinton’s sensible tax and spending policies, and sent the debt as a percent of GDP into the stratosphere while crashing the economy—leaving President Obama the Hobson’s choice of driving the debt up much further or letting the nation slide into a second Great Depression.

How Republicans can claim to be the fiscally responsible party with results like that is a fantastic testament to their ability to lie and the almost unfathomable gullibility of the American electorate to believe them.

@Jaxk About economies growing thanks to tax cuts, that’s some more sophistry. You have to bear in mind that the Kennedy and Reagan tax cuts were at a time when tax rates were extremely high to pay down the debt of WWII. Our debt had hit 120% of GDP in 1945. So naturally, when you pumped back hundreds of billions into the economy, the economy grew. But there is an obvious limit to that magic. If that were not true, then we should be done with it. Make taxes -100%. For every dollar you earn, the IRS will send you a matching dollar at tax time. Earn $100,000, get a matching check for $100,000. Would that be a great idea? Would it magically increase federal revenues? Of course not!

The truth is Reagan struggled with recession for much of his first term and while the economy grew a bit under his watch, the federal budget exploded. He spent money like a drunken sailor. That, more than his tax cuts, stimulated the economy. His tax cuts, more than his spending, contributed to the debt.

But he did not achieve the growth in GDP or jobs that Clinton did, and Clinton did it without launching the debt into the stratosphere. In fact, Clinton created more jobs than any other post-war president. Bush Jr. had the worst jobs record of any post-war president.

@Qingu

Better arguments. A bit myopic but better. Trying to give Clinton credit for the DotCom boom is like trying to give credit to Eisenhower for the boom in the 50s. Both had the luxury of serving during times of high economic growth not of their creation. The during the 50s we were still rebuilding the world and as a result, our manufacturing grew like a weed. During the 90s the Internet revolution changed the way the world did business. whole new industries were created and once again we were the envy of the world. Neither of those guys created those boom times but neither killed them either so I have no problem with giving them credit for that. But to try and credit them for the boom is going to far.

Reagan, Bush, and to a lesser extent Kennedy didn’t have that luxury. Reagan and Bush inherited rather severe recessions and had to dig us out of a hole rather than ride a wave of prosperity. Just for the record, Clinton did not cut spending but rather slowed the growth of spending. I applaud that and with the booming economy he was able to bring spending as a percent of GDP down. The effects of reducing the tax rate during Reagan’s term are discussed here. The reduction in tax rates actually moves the tax burden to the rich and increases the revenue. Who’d a guessed? I especially like the conclusion by Clinton’s counsel of economic advisers.

“The economic benefits of ERTA were summarized by President Clinton’s Council of Economic Advisers in 1994: “It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.””.

Overall you don’t see the debt as a problem for economic recovery and I do. You don’t seem to believe that tax rates have any impact on taxpayer behavior, and I do. You seem to think that government can drive economic growth and I think the private sector will drive it. We seem to be at an impasse.

You want to use selective statistics to make your points. Measuring from the pre-recession peaks for Republicans, while measuring from the trough for Democrats. That’s OK, that’s how statistics get manipulated. Just to demonstrate how the statistics get manipulated, you say:

” In fact, Clinton created more jobs than any other post-war president. Bush Jr. had the worst jobs record of any post-war president.”

Yet when you look at unemployment, their records are virtually identical. Average unemployment throughout the Clinton years averaged 5.2%. Meanwhile under Bush it averaged 5.27%. And Clinton had no major recessions to deal with while Bush had the DotCom Bust, 9/11 and the beginning of the current recession. So which is more important, number of jobs created or number of people unemployed? I guess you manipulate the statistics to say whatever you want to say.