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
No comments:
Post a Comment