First: September 21, 2011
Last: September 22, 2011
What's going on in Congress?
Cut Social Security spending, eliminate Social Security, cut Social Security medical benefits ...
They don't get it.
Congress thinks eliminating Social Security is a viable plan to reduce government spending significantly in the current economic crisis. They're absolutely right: immediately eliminating social security would reduce government spending significantly. Unfortunately, they don't understand that there's simply no way to do that without breaking all sorts of social contrats.
If it can't actually be done, it's not a viable plan.
Now, I have a plan for eliminating most] of Social Security spending. Notice I said most. We can't elimintate it all; the reasons will become clear in a moment.
Social Security, as you know, supplies more than just a glorified 401(k) fund. Social security supplies:
So right off the bat, we know we can't eliminate Disability Benefits and Medical Benefits. Social Security Disability and Medicare/Medicaid need to exist to satisfy our important social contracts.
- Disability benefits to those disabled while unemployed - This should not be supplied, ever. It's economically non-viable, and nobody should ever make the attempt. As such, it is only feasible as a government service. Since these disability benefits are both extremely important to the social guarantees we want to make in our society and economically non-viable, the government must supply disability benefits.
- Medical benefits - It's complicated. Something about medicare/medicaid, but those are a separate thing, yet partly handled through social security. Again, economically non-viable: insurance companies want to minimize risk (and costs) but maximize the insured basis so that they can pass the most money at the lowest rates and attract the most customers. The more money an insurance company passes, the more they can profit (they're Not-for-Profit and can keep something like 5%), so they want more insured, and lower premiums attract more customers. Thus, shifting old people onto another system takes a large amount of cost (and, more importantly, a lot of volatility) out of the public insurance system. The government probably should supply this.
- Retirement benefits - The obvious. Money coming in from current taxpayers goes out to current retirees based on credit from how much you paid in social security taxes when you were working. This is questionable
That leaves Retirement.
Retirement is big.
Can we eliminate retirement then? Let's look at a few plans for this...
Immediately Eliminating Social Security Retirement Benefits
Eliminate the tax. Maybe a 1.5%-2.5% payroll tax to cover Social Security Disability. Medicare/Medicaid is covered as a separate tax already. Immediately stop paying retirees.
This won't work.
This will immediately drop taxes and reduce government spending by a lot. Unfortunately, it will also leave retirees with severely reduced income. This violates our social contracts: they paid taxes under the understanding that they would receive a benefit, regardless of the mechanics of the thing. The more important social contract violation is more obvious: retirees just can't live on no money; they need to buy food and pay rent or property tax.
So, immediate shutdown doesn't work.
Keep collecting the tax, but don't pay out to the next generation
Wind back the tax as retirees die off. Don't pay out to new retirees; they've been warned, they know they need to save up some cash.
This won't work either.
Yeah, save up your own retirement money. I don't know. Find it somewhere. Ask the Tooth Fairy for a raise. Tell your girlfriend to be a stripper for a while, that'll bring in some cash.
We can't do that.
The economic drain of social security is HUGE. Keeping that drain but also taking away the supplied benefit would put too much weight on the system at once. The sudden shock would devastate the economy.
Besides that, this would take time. About 40 years, maybe more. So not an immediate strategy.
Roll Back Slowly
The last plan--and my newest revision (the above was my first, but it had problems)--follows a balance between the last two.
To roll back Social Security safely, you need to tick down the Social Security tax by, say, 1%. This will put some strain on social security, but eh; it's manageable over time. In fact, you can pull a dirty trick to draw magic money out of the system.
I often cite 401(k) for this, but you could use IRA as a base. 401(k) is easier, but relies on employee retirement benefit. Given that, I admit that my plan here requires some deeper thought (perhaps the percentages could confer as a total of retirement contribution--i.e. rather than, say, 6% salary in 401(k), you say 6% of income in all retirement accounts; but this makes ROTH and Traditional account disparities complex).
I digress. Let's sketch the basic (albeit incomplete) plan for examination.
The median 401(k) contribution rate is, let's say, 6%. Most people contribute roughly 6% to their 401(k). Let's start there.
So, day 1. We'll say that the Social Security system can handle a drop of 1% in taxes for the short term (currently Obama has a 2% reduction in place). With a median of 6% 401(k) deferral, we'll ammend the tax code: For 1% above 6%, all pre-tax deductions into 401(k) are 100% covered by a reduction in Social Security tax equal to that deferral not covered by a reduction in other taxes.
What this means is, say 1% of your pre-tax income is $10 and you pay 30% in taxes.
If you raise your 401(k) deferral by 1%, then $10 comes out of your income. Your tax burden is reduced by $3, and thus your paycheck is smaller by only $7. Under this policy, that $7 comes out of your Social Security tax for your contributions between 6% and 7%--your paycheck isn't reduced at all. Up to 6%, nothing happens; above 7%, nothing happens; but between 6% and 7%, the government gives your contributions back, for free, no future obligation.
What actually happens here is people gain 1% more retirement funding for free, but Social Security takes in 0.7% less. That's a stress of 0.7% initially, with a gain of 0.3% in a generation: the new retirees have paid less into the system, and thus have fewer "Credits" and will receive less benefit.
In other words, they have:
After this, we make the 1% tax drop in Social Security permanent. We then move the bar: Between 7% and 8%, you get that discount. At retirement, the next generation gets:
- 1.0% more personal retirement savings
- 0.7% less social security benefit
- 0.3% less paid in non-SS taxes
- Thus a net gain of 0.3% in retirement
Repeat, again and again, until people are paying 12% into their 401(K) and IRA as just a normal thing. Payroll tax (your employer also pays 6.5%--social security is a total 13% tax!) may need to be addressed by mandatory employer contributions (with a tax roll-back to match) for this overcontribution, with no vesting period. Again, the money comes directly from tax collection, rather than adding financial pressure to the business. To encourage higher contributions, you may want to just keep that part permanent, so people will get a lot of free money for putting in 10% instead of 6%.
- 2.0% more personal retirement savings
- 1.7% less social security benefit
- 0.6% less paid in non-SS taxes
- Thus a net gain of 0.3% in retirement
- ...AND a net gain of 0.3% less paid in total taxes!
This works, but not fast.
This is the only plan that vaguely works. It also takes around 100 years to roll back Social Security retirement benefits.
This plan addresses the following social contract issues:
Notice that this is the only plan that does so. It needs refinement; I wouldn't implement this as-is. But still, this is what we need to do: We need to provide a controlled drop, making sure that current retirees still get all benefits and making sure that future retirees will have a viable financial situation.
- Keeps Disability and Medicare - The Medicare tax stays, as does part of Social Security's tax. We must cover these, because the economy simply can't supply them.
- Keeps Current Retirees on Benefits - We don't drop current (or oncoming) retirees' benefits.
- Prevents Stupidity-of-the-Masses Economic Crises - if we just roll back the tax, people will spend the money. Then in 20 years we'll have retirees that don't get as much Social Security and didn't build a retirement fund. Then we'll have an economic crisis. My plan actually looks at the median 401(k) contribution and says, "Hey, if you increase it, it won't cost you a dime!" This is critical. If you fail to capitalize on this... you are truly an idiot.
That takes a hundred years, or more.
What part of that says, "Big red button that gets us out of the current debt crisis"?
The politicians just don't get it. They put Social Security on the chopping block, but it's simply not viable to chop it off. You have to whittle it down slowly, and build society up to handle that.