Thursday, July 01, 2010

Just watch it, dearhearts. Please.


  1. Anonymous2:21 PM


    Roughly 15% of people's salaries go into social security (split between employee and employer). This compares to a 24% contribution rate under STRS/PERS (state teacher pension)(14% employer, 10% employee).... so it's no surprise that the benefits aren't as good.

    But do the benefits really need to be so bad? 15% times 45 years (from 22 to 67) is almost 7 years of salary. Compare this to 24% times 30 years of salary under PERS/STRS - also around 7 years of salary. And yet, PERS/STRS allows people to retire 10-15 years earlier, on average, and the average retiree salary is about twice as high as a percentage of career pay.

    Social security has a couple very fundamental problems:

    1.A lot of the money has already been spent. On an actuarial basis, PERS and STRS could stop collecting money tomorrow and still have enough cash to pay 90% or more of commitments to people who retire. In contrast, social security was funded with 1% and 2% contributions from retirees for many years. My grandfather called this "a good investment". And it was, for him. Now our generation needs to make up the shortfall. The question is whether we want to sit back and tell our own generation (which paid more than enough good money into the system) that they can't get full benefits because the preceding generation spent their investment... or whether we want to spread the pain. Washington keeps splitting the difference and pretending that the problem doesn't exist. This is expedient. Some people (like you and I and federal employees) aren't effected. Others (like the super-rich) know that spreading the pain would hurt them disproportionately. And so we pursue the default option - which will ultimately lead to reductions in the (already) lousy social security benefits (compared with PERS/STRS).

    Interestingly, all of this really only hits the working class. Dividends and other non-earned income (like rent) are excluded from social security. And earned income is capped at $80,000 per year or so for social security taxes. If social security is a good deal, wouldn't the rich WANT to participate in the program?

    2.A further problem is that the social security program's assets are invested in federal debt. This creates issues... (1) federal accountants don't count that debt as part of the federal debt, since it's all money that the federal government "owes" to itself, and the government doesn't have a contractual obligation to pay social security benefits at any particular level, and (2) to the extent that we invest social security savings in federal debt, it understates the federal debt, and (3) federal debt obligations have historically earned much lower rates of return than the mix of stocks/bonds that PERS/STRS invests in.

    If the benefits that people might realistically expect to receive from social security really only equates to 7.5% of their salary (instead of the 15% that is currently paid), then I would propose a restructuring of the system:
    -- Reduce Social security tax obligations to 10% (reflecting the actual value of the pension - don't make people pay for more than they're likely to receive.
    -- Create a new tax to make the social security plan solvent. This tax would be perhaps 5%, and it would be paid by EVERYONE -- The purpose of this tax would not be to fund benefits for anyone, but merely to restore solvency to a fund that does not have sufficient assets to pay current benefits. None of this would make a bit of difference to "normal" employees (workers making less than 80,000 per year without investment income) - they'd still pay 15%, just like now, but the pain of unfunded costs would be absorbed by everyone.

  2. It is important to remember that Social Security is NOT a retirement plan. It's insurance. It also pays widows and orphans benefits and (this is really important) disability benefits.


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