A Social Security Screed

Yeah, I know this blog is supposed to be about bonds.  But I only have one blog (to date), and I need to vent somewhere.

I just got a huffily aggressive letter from AARP.  On the envelope is the following reproach:  "You have not responded to our previous letters."  Right there, I'm peeved.  Am I somehow obligated to respond to every damn thing AARP sends me (endless offers for overpriced car and life insurance among other things)?  That's a bad start.

Then a cover letter indicating that it's urgent for me to protest to President Obama and Congress about unfair cuts to my social security benefits.  Hmm, and what are these unfair cuts?  Well, actually not cuts at all.  Actually, a proposal to reduce the amount by which future benefits will be raised (via the so-called Chained CPI).  In what world is a smaller raise a "cut"?   Why the deceptive language?

The letter then skips merrily into the realm of untruth.  The "average senior", I am informed, subsists on a mere $20,000 a year.  Gee, that's a bit of a surprise to me, and the figure is, in fact, just not true.  The average retiree drew in $29,000 a year in 2008!  So by now, this average person is clearly receiving substantially more, so at least 50% more than the AARP terror figure.  And, of course, consider that a majority of seniors are married, and therefore often pulling in two sources of retirement income.  In fact, the median (not average) income of a retired household is more like $36,000.

What's the difference?  Well, it's a lot easier to live on $36,000 than $20,000.  It's the difference between dignity and desperation, decent food and cat food.  I am not foolish enough to insist that the higher figure is great.  It's not.  Life on $36,000, depending on where you live, can be tight indeed.  And the poor oldster trying to live on $20,000 or less, is in desperate straits.

But why is the AARP trying to pretend that desperation is "average"?  It's cynical and dishonest, preying on the uneasiness we all have about an uncertain future.  I think this effort represents one of the worst things about our system: entrenched interests protecting their slice of the government pie, regardless of need, fairness or common sense.  Middle class entitlements of all sorts defy logic.  Why collect money (mostly from middle and upper earners) only to dole it right back to those very folks?  Subsidizing the needy is morally compelling; subsidizing the majority is dumb.

Here a breakdown of the Social Security problem.  Most people, particularly retirees, believe Social Security is a grand savings plan: you pay in while working, and collect in retirement.  So, you are getting back what you put in when your check arrives every month.  This is a comforting fiction, but it's simply untrue.

To quote the National Academy of Social Insurance:

By law, the funds are invested in special-issue Treasury securities that earn interest. In effect, the funds are loaned to the Treasury, which borrows the money just as it borrows money when it sells Treasury securities to the public. In other words, the surplus money collected by Social Security helps pay for the rest of the government. In return for the funds it loans to the government, the trust funds receive Treasury securities bearing a market rate of interest. The average interest rate on the portfolio held by the Social Security trust fund was about 4.1 percent in 2012.

Note: there is no saving plan, no separate account into which your monthly social security contributions flow.  Instead, these payments, both from you and your employer, are go directly into the government general fund (via the purchase of treasury securities), from which pretty much all bills are paid,  The result is an IOU to the Social Security Trust.  If you think that's terrible, well it's been terrible from ... the very beginning.  Social Security has ALWAYS been a pay as you go scheme.  Present retirees are paid, in effect, from the present stream of money going into the government, whether from income taxes or Social Security taxes.  My major objection to the scheme is not that it is deceptive (which it is), but that it's an open-ended commitment.  Today's promise must be honored in the future.  There is no provision for matching income and expenditures.  Old folks today are relying on their children and grandchildren to cough up the dough, regardless of whether that is affordable or not.

And, folks, the affordability of Social Security is very much in question.  It's a combination of demographics and dubious populism.  Demograpics matter because the cohort of retirees is mushrooming, while the working folks who must pay the bill is static, perhaps even shrinking.  Thus, while many workers supported each retiree in the thirties, we might face a situation where as few as two working folks will be supporting each retiree.  How much can these guys handle before something gives?

Populism matters because politicians of all stripes (yes, even Republicans, even conservatives) have succumbed spinelessly to the "plight" of the elderly, raising benefits relentlessly, even as the baby boomer wave rolls relentlessly forward.  So, Social Security is indexed to inflation, but at a rate that almost certainly exceeds real inflation.  And benefits have been expanded to the disabled, a category that has mushroomed far faster than the population.  Why do you suppose that is?  Well, for one things, it's a whole lot easier to achieve that designation that ever before.  Just take a look to see how many lawyers are eager to help you get on board.  And benefits are regularly given to children, not just those of dead retirees, but minor children of living pensioners!  I kid you not.  When I retired in 2008, my benefits were exactly doubled because both of my children were below the age of 18.  This ride will not end until my son heads off to college in another five years.

Above all, this tidal wave of largesse is distributed irrespectively of need.  In fact, it's worse than that.  The system is specifically designed to reward those with the least need.  Take a look at Social Security charts, and you'll see that payments rise steadily with income, particularly peak income.  So, if you have a few fat years just prior to retirement (I did), then you pull in maximum benefits.  Be unfortunate enough to have punk earnings, then you'll come in at the very bottom.  But folks, the whole point of Social Security is .... SECURITY.  It only makes real sense as part of the safety net. 

Here's a radical idea: suppose Social Security were need-based.  It would be payment designed to ensure a safe and dignified retirement, declining for those with higher incomes, disappearing with those whose need is spurious.  Since the number of people with such pressing needs is small relative to the entire population of retirees, the funding pressure from Social Security would ease greatly.

Now, what about the rest of us?  Well, how about a REAL savings plan?  Many of us already have (or had) one, an IRA or a 401K.  Since Social Security is a tax, and therefore presently mandatory, why not steer the excess into a form of forced (but real) savings, a government IRA perhaps?  Individuals could be afforded the same level of investment control they now have over their IRAs and 401Ks.  They would just have to wait for the money, as they probably should anyway.  The flow of funds into these saving accounts would be enormous.  One important side benefit would be the stimulative effect such investment might have on the economy.  It could be huge.

Would this fly?  The major problem is that government would no longer be allowed to spend retirement income flows on non-retirement matters.  That would be painful, particularly the transition.  The new approach would surely need to be phased in over a period of years.  It would, however, be logical, prudent and fair.

The political issues would be thorny:  worst would be the outrage seniors (egged on by the AARP) would feel at "losing" their benefits.  It would probably be necessary (although silly) to separate out "savings" Social Security from the payments directed to needy elders.  If  payments came from different buckets, regular retirees might feel less hostile to seeing part of their monthly working contributions diverted elsewhere.  So, ultimately, needs-based Social Security might come from the general ledger (as now), and savings Social Security (based on a lower tax rate than at present) going into a separate, shielded trust, a real one, not a sham.