Future bankruptcy of the Social Security system and what can we do about it !

Every week “they” take away $41.40 from my paycheck, under the abbreviation “Fed OASD/EE” which stands for Federal Old-Age, Survivors and Disability Insurance which in turn is a glorified term for Social Security “taxes”. I understand that the Federal / State Income taxes pay for the common good and the Medicare Taxes could potentially pay for my needs in the long run. Yet after all the hard work I put in for the week, I still hate to see around thirty percent of my income go away from my pay check. I convince myself that in the grand scheme of things, it is okay. My weekly social security contribution of forty one dollars and forty cents may not sound a lot, but when you add the magic of compound interest at eight percent ¹ over approximately fifty two working years ², that pee wee number would turn into $1,673,615.53. Now that is one handsome number I would not mind getting my hands on, once I am retired. Obviously there is a lot that went into the calculation of that number. An average employee, for the sake of the above calculation, is the one who has no more than a bachelor’s degree and makes an average of $1,700,000 over a lifetime or $35,000 a year. Employees without a bachelors degree and lower income, are nullified with employees that have more than a bachelors degree and higher than average income. The number was calculated using the Social Security Services recommendations that an average employee would work from age eighteen to age seventy while contributing to the Social Security kitty for all those working years.

This last assumption is where the problem starts. Since there cannot be a law that mandates the retirement age, people between the ages of forty five and sixty two today are choosing to retire early. Unlike the generation of early twentieth century, people in the above mentioned age group would rather cherish their lives than continue working. These rebels are better known as “baby boomers” and because they chose to retire from age forty five onwards, they are not contributing their “forty one dollars and forty cents” into the kitty. However the moment they turn seventy, they will join the same line with people who contributed to the kitty all the way to age seventy. Once again “forty one dollars and forty cent” contribution from these “baby boomers” may not sound a lot when considering that the contributor will be of retirement age in just twenty years, but this time around when you add in the wrath of compound interest, the Social Security is missing anywhere from $24,106.02 to $ 187,008.54 per person ³ in contribution. Since Social Security works on a rolling basis, today’s contribution of the working world, pays for the social security benefits of the contributors of yesterday who are now retirees of today. However if the baby boomers retire early thus reducing their overall contribution, the retirees of tomorrow will not get paid as much Social Security Benefits, even though they contributed today.

In the early part of the twentieth century, the working class depended on the security of their lands as that provided for virtually generations to come. However during the industrial revolution of the 30’s, the government devised the Social Security Act to lure the farmers away from their lands and contribute to the industrialization of America. This act, some critics say, is utilized beyond its original purpose, which in turn has created this self feeding monstrous dilemma of today. Retirees today are more and more dependent on the Social Security income, as compared to saving a portion of their income for retirement. According to the Social Security Administration, ninety percent of a retiree’s income comes from Social Security disbursements.

In his State of the Union Address on February 3, 2005, President Bush said “The system, however, on its current path, is headed towards bankruptcy. And so we must join together to strengthen and save Social Security.” He further went on to make a calculated prediction “By the year 2042, the entire system would be exhausted and bankrupt. If steps are not taken to avert that outcome, the only solutions would be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.” According to the calculations behind Bush’s speculation, in the year 2018, Social Security will start paying more benefits than it collects and the problem worsen after 2042, after which the Social Security Administration will have the ability to pay only seventy three percent of the promised funds. One solution President Bush urged was to create private Social Security Accounts. According to his plan, a child born now would be able to collect 2% returns after adjusting for inflation. The benefit to the Personal Retirement Account solution as proposed by President Bush is that this is the only choice that would give future retirees an option receive a better standard of living in the future as the individual would exert total control over the allocation of these accounts.

The other obvious recommendation by experts is raising Social Security Taxes from 6.2% to whatever is deemed appropriate to reduce the $4 trillion deficit we anticipate in the next 75 years, if things were to run the way they are running. This hike in Social Security taxes would also be coupled with reducing benefits or the total amount received by contributors of today and retirees of tomorrow. While Democrats may be open to this suggestion, Republicans are staunch opponents of it. Raising taxes would mean that the economy would face undue burden in the present, caused by reduction in consumer spending. This would mean trading the quality of life today, for a not so better tomorrow.

In my opinion the best solution to the problems of social security is elimination of upper cap on taxable earnings, with regards to Social Security taxes. As it is right now, workers pay 6.2% of their income of up to $90,000 in Social Security taxes. Therefore someone making a gross income of $50,000 will pay 6.2% or $3,100 into the Social Security system. However, with the upper cap at $90,000 someone making $5 million will still contribute just $5,580 to the Social Security system, which is a mere 0.1% of their annual income. However, this solution is also not as easy as it seems. It comes with a strings attached. The first catch is that, the contribution of people making well over $90,000, say for example John Smith the CEO who makes $5 million, would jump from $5,580 to a whopping $310,000. However, when time comes for disbursement, they will not get a higher monthly payment, just because they contributed more. If they were given back an amount that was parallel to their contribution, the Social Security system would dig a deeper hole for itself and bring itself back to square one, like they are in today. We as a country have already stiffed the high net worth population by charging higher income taxes and the elimination of upper limit for Social Security Taxes would only add fuel to the fire. On the other hand, are these individuals really relying on their Social Security benefits during their retirement?

The second string attached to the proposed solution is running that elimination of upper caps would run the Social Security Administration into the same challenge as they are in today. In other words, charging more Social Security taxes to people with high net worth individuals would increase the chances of them retiring even earlier than the higher middle class “baby boomers” of the present. Let’s get back to our example of John Smith the CEO making $5 million. If John’s Social Security contributions are increased from $ 5,580 to a monstrous $310,000 overnight, the chances of having him work until the recommended retirement age of 70 are bleak. A counterargument to this problem is the assumption that after a certain level of income, it is the drive to have the most, and not more, that make these ultra high class people work hard for the most hard cash. A more solid solution to this roadblock could be, making the extra Social Security contribution, tax deductible. In other words, in case of our CEO John Smith with a salary draw of $5 million, with this new plan, $304,420 (which is derived by subtracting the original contribution of $5,580 with an upper cap from increased contribution of $310,000 without an upper cap) of his excess contribution after the upper cap is removed, would be income deductable. Although it is lose – lose scenario for John, the CEO, the tax deductible option would let him lose a little less than what he would otherwise.

Clearly, this solution is much more organized and well planned for the long run to take us out of the Social Security glut that short term thinking has put us into today. President Bush’s suggestion of partially privatizing Social Security system would be unfair to citizens who rely on the investment expertise of analysts allocating their Social Security funds for long term growth and returns and therefore would be more susceptible to massive market correction like the one we are facing right now. Besides, the market correction of today would dramatically reduce the contributions in these private Social Security Accounts, which in turn she would expedite any recession because of the spiral effect on the spending. Most importantly any such move would not shore up the much needed finances in the Social Security system, which in turn would be unfair to recipients who contributed into the system throughout their working years. According to the Social Security Administration, it will dole out more money than what it takes in as early as 2018 and privatization of Social Security would further accelerate that because of the diversification of funds. In fact in a press conference that followed the February 3, 2005 State of the Union Address, President Bush himself acknowledged that his own plan is “not the way to fix the system” but is instead “a way to make the system better for the individual worker.”

As far as the other recommendation of increasing the taxes and reducing the benefit is concerned, like President Bush’s plan, increasing Social Security taxes from employees and withholding more from employers would only de-motivate economic progress in the long run. Reducing benefits would mean that lesser money would go into the hands of the retirees that were once contributors. With the ever increasing population and the inflation, reducing disbursement by over 5% would mean zero returns on investment, inflation adjusted. More importantly, such a meager reduction in benefits would not solve the core problem of slowing contributions by the aforementioned “baby boomers”. Any larger cut would mean negative returns and therefore unconstitutional.

The elimination of upper limit would solve the core issue with much more solidarity than the two proposals mentioned above. The number-cruncher-in-chief for the Social Security Administration, Steve Goss, responded to the proposal of eliminating the upper limit with an astounding confirmation “It would eliminate the deficit entirely.” Better yet, it would leave the program with a surplus, at the minimum, until approximately 2090 instead of 2018 or 2042. Social Security system was devised with mandated major tweaks every century or so in mind. The last major tweak came in 1983 and with the elimination of upper limits; the next major tweak will come towards the end of the twenty first century – just as planned. When David Lazarus of San Francisco Chronicle enquired with Goss as to why is the axing of the cap not on everyone’s to do list in Congress. Goss – a Federal employee under Bush administration replied “When you’re elected senator, you can propose that yourself.”

Notes

_______________________________________________________________________

¹ The real total return for S&P 500 from 1950 to 2007 is 7.6%, inflation adjusted.

² The working age by the Social Security Administration is assumed from eighteen years to seventy years. Although, there are gaps in employment for most employees, for the sake of these calculations, those gaps are ignored by relatively adjusting the lifetime earnings.

³ Based on an 8% annual rate of return (see point ¹) compounded over eight and twenty six years respectively.


Works Cited

George W. Bush, "State of the Union Address," The White House, 2 Feb 2005.


"The Short- and Long-Term Outlook for Stocks," Knowledge@Wharton Web site, The Wharton School, University of Pennsylvania: 2 June 2004.


White House Office of the Press Secretary, "Background Press Briefing on Social Security," press release, 2 Feb 2005.

US Department of Health and Human Services, "Annual Update of the HHS Poverty
Guidelines," Federal Register 13 Feb 2004: 7336.

Lazarus, David. “Easy Fix for Social Security.” San Francisco Chronicle 25 Mar. 2005: C1. 10:52 PM | Add a comment | Permalink | View trackbacks (0) | Blog it | News and politics

Why Women Make Less Money

Why Women Make Less Money?

Equality has been the theme of the new America throughout the second half of the twentieth century and beyond. In today’s America, women can do every single thing a man can. According to the National Center for Education Statistics, more women enroll in 4 year universities then men yet for every dollar that a man makes, a women makes only seventy nine cents ceteris paribus (“Digest of Education Statistics: 2007” Table 179). Although this income gap between man and women has narrowed drastically from 59 cents in 1970 to 80 cents in 2004, the gap is still unexplained (Farrell, xix). This is the question most supporters of equality for women, and women themselves, for that matter, ask time and again. Understanding the root causes of this segregation might help us undo the mystery and probably give insights to young college-going women, with what they could do to not be just another victim of this bias and pose a genuine threat for men, when it comes to job hunting. Being a Professional Search Recruiter for 70% of the Fortune 500 companies, I have, first hand, seen this bias in practice in jobs throughout the spectrum. From a Staff Accountant to a Chief Financial Officer, this divide definitely does exist. My personal experience could be just that, but the fact that only 12 Women CEO’s exists in the Fortune 500 companies of 2006, is a universally accepted phenomena (“Women CEOs”). Logically speaking, if the fact that women make less money for the same job, in the same geographical area and all the other variables remain same, why would anyone hire a man to do the work? Would it not be more profitable for companies to hire women and keep the savings as profit? Or is it that the world is full of chauvinist pigs that deny equal opportunity to women? Well the answer to it is more complex then it seems and in some way is more intertwined with our original question “Why women make less money?”

Clearly the easiest baseless argument would be that of discrimination. Men feel insecure by a woman who is better than them in terms of professional achievements and therefore they do not choose to give equal opportunity to the opposite sex. In reality though, men at the executive level, do not see themselves intimidated by women who are successful. These men are rather in search of successful women. These executives hire women in the hopes that they would become successful under their leadership. There is more kudos to a successful team comprised of women team members, led by a male executive then a team of all men. Therefore the decision of not hiring women is motivated by confrontation with an equally successful woman is absurd. Besides most Executives in this capitalist society only care for profitability of the employee. Any other factor is almost negligible. To further prove my point, switch on the TV on a lazy Sunday and browse through all network channels and you will notice that there is heavy sales promotion for cars done by women.

Then there is age old folklore of men holding women back, or for that matter a women boss holding a hierarchical inferior back causing women to make less money than men. However, what happens when a women is self employed or does not have any boss to “hold them back”. In 2004, women who owned their businesses made only 49 cents to every dollar that an entrepreneurial man made (Farell, xxii). As a matter of fact, in today’s world external factors are more conducive for women to own a business then for men. Aerospace companies like Boeing, Northrop Grumman, and Raytheon among others, give preference to minority and women owned businesses, when it comes to spreading out the headhunting contracts for recruiting people on their behalf. This could be attributed to what Dr. Warren Buffet in his book “Why Men Earn More” calls “the high pay formula” and the “low pay formula” where men sacrifice the quality of their personal lifestyle in exchange of the former whereas women are less willing to commit to the same trade off, thus settling for the latter (Farrell, xxi).

Having considered two of the most commonly yet brutally false reasons used to explain the pay segregation, by ignorant yet opinionated people, could there be a possibility that there is a rift in publishing these startling statistics that point towards the gender that earn less for the same job? In his early feminist book “The Future of Marriage” by J. Bernard, he cites a study conducted by the Census Bureau that reflects that even during the pre feminist era as 1950 there was a mere 2% pay gap between unmarried women and men. But what was more stumping was that the single women between the ages of 45 to 54 earned 106% of their single male counterparts. This was before Affirmative Action first used in 1961 and the Equal Pay Act of 1963. It could be possible that the unequal pay is a mere controversy and nothing else.

Having taken into consideration, most scenarios’ that may explain the wage discrimination, or question its existence, there are at least two solid reasons that do explain the “wage discrimination”. Call it misfortune or destiny, but studies show that the most productive years for an employee in his or her career are between the ages of 25 to 45 – overlapping the child bearing years for women. More women at least until 2004 chose the latter than the former. It is a known trend that more women look for careers that are more fulfilling, safe and flexible. Demanding careers like Medical Doctors, Pharmacists, University Teachers, Engineers, CPA’s require at least 8 years of education post high school coupled with a few years of demeaning internship with miniscule pay. Fate also has it, that these careers that pay the most and collide with the child bearing age of 25 – 35 years for women. Therefore most women chose careers that are less demanding and more satisfying while giving them room for bearing a family. This can be further proven by equaling the playing field and taking into consideration Dr. Farrell’s “20 Lowest Paying Jobs” that do not require a considerable amount of education. Positions like Counter Attendants in Retail, Cafeteria or McDonald’s et al. have the least wage discrimination for men and for women alike. Men made a measly $14,872 while women made a pitiful $14,092; with the difference being 5.25%, yet this profession has 64% women. “Wage Discrimination” for Cashiers is 7% with women dominating the industry at 75%. The same stands true for Housekeeping where the difference is at 12% and women represent 78% of the industry (Farrell, xxxi). There is such minimal segregation in wage because these positions are ultra flexible. Women can take extended leaves from the industry to bear a family and comeback with the same or a little higher inflation adjusted pay rate. These unskilled positions are not known to buy performance related salary raises and bonuses and therefore while the women may take a break, she could still command the same salary as men who did not take breaks during the same period.

Women also tend to pick jobs that are safer for several reasons. The most important being, she considers herself as the most important ingredient in the growth of her children. For non child bearing women, it is socially unacceptable to be a Lumberjack or alike. After all how many “Lumberjill” women attract men. The ‘Prisoner’s Dilemma’ for men is to get the love of the family by separating himself from the love of the family. Men also cannot complain about the quality of the job because men are born with numbers around them. They grow up with the average steals per ball game; average points per basketball game etc. so in their minds, they will do whatever it takes to bring in the dough. Besides the manlier the job, the more he can convince himself of his manliness. After all how many of us remember the news coverage that one farmer got because of the responses he got for posting a singles AD on Craigslist! Women desire men that are … men. Some of the male dominated professions like Stationary Engineer (98%), Sheet Metal Worker (96%), Carpenter (99%), Boilermaker (100%) etc. are careers that may not require a lot of education, but are certainly more life threatening than an Administrative Assistant or HR Generalist (Farrell, xxxii).

Thus from ignorant assumptions to incomplete studies to valid statistics, there are several reasons that prove the existence of the wage gap. However there is something that women can do to minimize this on a personal level. In the early 20th century, women bore family at age 20 through 25 because the average life expectancy for a man was less than 50. Today the average life expectancy for men is 78 years and for women is over 80 years, with the child bearing age all the way up to 35. If women could put themselves through the rigors of education beyond a Bachelor’s degree post age 23 they would place themselves in a very strategic position right next to that of a man, earning a dollar for a dollar on the one hand and giving men a run for their money on the other. However in the grand scheme of things, statistics may show a more bias towards men, when it comes to paying the “man” for the job, there are exceptions to every rule and what separates women who make more than men and thus become exception to the rule, is their drive and desire to make more than men. Their commitment to success is much stronger than that of normal women who tend to succumb to peer/social pressure more often than not. Success, they say, is a choice.

Works Cited

Farrell, Warren. Foreward. Why Men Earn More: the Startling Truth Behind the Pay Gap – and What Women do about it (New York, New York: AMACOM, 2005. i-xxxii)

Berkowitz, Robert, What Men Won't Tell You But Women Need to Know (New York: Morrow,
1990)

Chaykowski, Richard P., and Lisa M. Powell, ed., Women and Work (Ontario, Canada: McGill-Queen's University Press, 1999)

Cose, Ellis, A Man's World (New York: Harper Collins, 1995)

Bureau of Labor Statistics. National employment and wage data for the 10 largest occupations by industry from the Occupational Employment Statistics Survey, May 2004.
(Washington, 2004)

United States. U.S Department of Education. Institute of Education Sciences. Total fall enrollment in degree granting institutions. Table 179. Washington: GPO 2007.

“Women CEOs”. Fortune. 5 May. 2005: 26-27

The Big Hoopla - Understanding the Federal Bailout

The street version of the “Federal Reserve” bailout

We are hearing a lot of usage of the term “bailout” from every politician and economists. As you all know there is a lot going on in the financial systems today. But what does this mean to you and me? What does the term “bailout” mean and how does it work?

Never fear, the Fed is here! Is something that came to mind when the Fed’s announced the infamous bailout package of $700BN (billion) to jumpstart the economy. Here is why, in my opinion it is being done. You see the Federal Reserve is bailing out only the biggest institution because that is where they have their 401 (k) plan. So if they don’t bail them out and the markets crash, their 401 (k) will be wiped out. But that is just my opinion and what does my opinion matter.

Here is how “bailout” works. Recently, one of my friends had a problem. He was about to overdraw from one of his checking account (let’s call it Bank Account A) because he needed the money and payday was three days from that day. The problem is, he had a balance of $0.18 cents in Bank Account A. So he “bailed” himself out.

He lived in another state where he had Bank Account B, which he never closed after moving to the state of California. Problem is, this Bank Account B also had $0.16 cents. He wrote himself a check of $500 from Bank Account B and deposited in Bank Account A. Why would he write a check of $500 from Bank B if he only had $0.16 cents in his account? Very simple, he needed the money! The Bank Account A gave him credit for the check and it would take 3 – 4 days before the funds would clear, and by that time it was payday!

Similarly, the Fed agreed to loan the money they just minted (similar to my friends check of $500 from Bank B that he deposited in Bank A) to businesses who had worthless loans (similar to my friends Bank Account A that was about to be overdrawn). The Fed gave all the money these defaulting companies needed to make them “look” strong and solid again. In return, Fed gets a claim to one of several important assets as collateral.

Hope this helps in understanding the big “bailout” hoopla. If you have further questions, or need further clarifications on any topics that affect your industry feel free to contact me. The Big Hoopla is all about topics that you care to know more about.

Val G. is a Professional Search Recruiter at Volt’s Professional Search Division. He is also a Six Sigma Yellow Belt. He works with leading companies as an additional resource in their hunt for exceptional, full time / direct hire talents.