Social Security has been a hot topic lately, and, as is usual for controversial issues, the discussion includes a LOT of misinformation. It's argued that Social Security is “broke”, that it is a “pyramid/Ponzi scheme”, that it’s “doomed to fail”, that it's "too expensive", and that people get back more than they have paid in. None of these arguments against Social Security are true.
"Social Security is a pyramid scheme” can easily be debunked just by examining the elements of a pyramid scheme. Pyramid and Ponzi schemes have an element of inherent fraud and secrecy, and truly are "doomed to fail". They promise incredible, too-good-to-be-true financial returns to investors, returns that are initially paid out, but will eventually be impossible to meet, because the number of potential investors is limited. Investors are not aware of the structure of the scheme. A pyramid scheme takes the funds paid by investors and distributes it amongst the people who invested before them. This provides "proof" of high returns, which the creator of the scheme can use to convince more people to invest. The catch is that pyramid schemes are "doomed to fail". The creator of the scheme must continue to convince more and more people to invest; when the stream of new investors dries up, so do those fantastic financial returns, leading to discovery of the scheme and the collapse of the pyramid.
Social Security lacks the secrecy and the element of fraud. It doesn't promise fantastic financial gain; it merely guarantees modest, regular financial assistance during retirement or disability. Payroll deductions are deposited into the Social Security trusts, and by law are invested in securities guaranteed by the federal government; the cash from those transactions is deposited into the General Fund. To make benefit payments, securities from the trusts are redeemed or sold. At times, there may be more payments going out than money coming in. This may happen when the number of people working decreases, when people make less money, when the number of people collecting payments increases, or a combination of circumstances. During these periods, more securities would be sold than purchased. The Social Security trust funds boast a hefty surplus, which ensures Social Security payments during difficult times. Since contributions are automatically withheld for most working people, there's no lack of "investors", and contributions can be adjusted to manage long-term trends. Social Security isn't "doomed to fail"; simple adjustments are all that is necessary to ensure that everyone who pays into Social Security will benefit from it.
Social Security is not “broke” [though creative accounting by the federal government would have you believe otherwise]. In fact, total assets held by the Social Security trust funds total nearly $2.5 trillion.By law, SS’s $2.5-trillion-plus surplus has been loaned to the federal government. The Social Security trust funds exchange cash from payroll contributions for government-guranteed securities; the federal government adds the cash to the General Fund, and includes Social Security expenditures in the national deficit. This provides the federal government, lobbyists and political pundits with an excuse to claim that Social Security is "too expensive".
Social Security should simply be separated from the rest of the federal income and obligations, since Social Security pays for itself through our payroll contributions, but it’s beneficial for the government to use Social Security as a budget expenditure. The cost of Social Security can be pointed out to the public, which doesn't seem to realize that the money to pay out Social Security benefits has already been collected from our paychecks for that specific purpose.
Loaning money to the federal government is a very bad idea, as the only money the federal government has comes from the taxpayers. When the government borrows money from the taxpayers, the only way they have to pay our money back to us is to get even more money from us. We, essentially, pay ourselves back. The federal government can only raise money by raising our taxes or by borrowing money, which requires the taxpayers to pay back the amount of the loan, plus interest. Either way, the taxpayer will still be paying for their Social Security benefits twice over or more as a result of loaning money to the federal government.
Unless, of course, Congress can convince the public that Social Security is too expensive, and should be eliminated or significantly changed. They’d really like to do that, because the $2.5-plus-trillion trust funds would be up for grabs. To the government, getting their fat, greedy hands on our money is much preferrable to the alternative of paying it out to those who paid in. When expenditures exceed contributions, and Social Security needs to sell additional securities from the trust funds to pay beneficiaries, Congress will have to come up with additional income from the taxpayers to cover the redemption of the securities they issued. That additional income will be provided, in one way or another, by the taxpayers.
Getting more back from Social Security than we put in is a fallacy. SS is taxed at 6.20%** from employee and employer, for a total of 12.40%. This tax is imposed on earned income up to the annual wage maximum of $106,800.*** The 2011 median American income is around $50K, and we'll say that people work around 45 years, on average [start work at 20 and retire at 65]. So, around $6200 annually in combined individual and employer contributions on average is paid to Social Security on each working person's behalf, which totals $279K over 45 years, not including interest. The average Social Security payment is around $1200, which means that our total contributions cover us for around 19 years. That brings us up to age 84. The life expectancy for women in the U.S. is around 81 years; for men, it's only around 77 years, according to the most recent available U.S. Census figures. So, essentially, women are leaving about 3 years worth of benefits, or $43200 in the trust fund, while men leave behind about 7 years of benefits, or $100, 800. Of course, some people live longer; some are on disability; some get dependent/survivor benefits, etc., but some people die a lot sooner, too. We’re not individually taking out more than we put in. We didn't even account for all the accrued interest.
**The employee payroll tax contribution percentage was temporarily decreased to 4.2% under President Obama for 2011.
***The annual wage maximum is scheduled to increase to $110,100 in 2012.
[Here's the math: 12.4% x $50,000 = $6200 annual contributions; $6200 x 45 years = $279000 total lifetime contributions; $279000/$1200 average monthly payment = 232.5 payments; 232.5/12 months =
19.375 years; 65 years + 19 years = 84 years; 84 - 81 female years = 3 years/36 uncollected payments; $1200 average monthly benefit payment x 36 payments = $43200; 84 - 77 male years = 7 years/84 uncollected payments; $1200 average monthly benefit payment x 84 payments = $100800.]
Fixing SS is simple. We can even use this opportunity to stimulate the economy by implementing my simple, four-step ISEE solution.
1.] Increase payroll contributions by 1%;
2.] Stop loaning the money from the SS trust funds to the government;
3.] Establish small business/alternative energy investment program, loaning to creditworthy, low-risk small-business and alternative energy technologies borrowers instead;
4.] Eliminate the tax cap on earnings.
ISEE will stabilize Social Security for the long haul, and allows an increase in benefit payments from around the average 1/3 earnings to 50% earnings. This increase provides a regular, dependable source of funds for beneficiaries. This is of particular assistance to low-income beneficiaries, who tend to spend extra funds rather than save them. The extra money spent stimulates the economy by increasing demand for goods and services, which creates jobs. Job creation puts even more money into the hands of even more people who will spend it, creating even more demand, and as a result, more jobs. Additionally, loaning excess Social Security funds to credit-worthy, low-risk small business owners and those developing promising alternative energy technologies [and promising business plans] will also stimulate the economy, as the owners will use the loans to start or expand their businesses, creating jobs and helping us achieve energy independence.
Elimination of the SS tax cap on earnings is often controversial, but it's necessary. Social Security is an entitlement program; it's not means-tested. This means that wealthy people who have reached retirement age receive Social Security payments, too. The poor and middle class making up to $106,000 annually pay Social Security tax on their entire incomes; in other words, 100% of their income is taxed for Social Security purposes. These are people that must often spend 100% of their incomes to provide for their basic needs. In comparison, someone making $1 million is only taxed on about 10% of their income for Social Security. Unearned income, such as investment income, capital gains, etc., is exempt from the Social Security tax.
Some argue that the wealthy don't need Social Security, and shouldn't have to pay Social Security tax. But they can and do collect it anyway, despite not needing it. Social Security is meant to be a safety net. If a wealthy person loses all his money in a stock market crash, Social Security will be there for him, too. Ensuring the wellbeing of our elder citizens is part of what makes America great. American citizenship provides great opportunity, and opportunity costs. Part of that cost is doing our part to ensure the wellbeing of our seniors and disabled citizens. The poor and middle class do it; the wealthy should, too. They can certainly better afford to do it than the poor and middle class: the wealthiest 20% of Americans control 85% of America's wealth, leaving 80% of America to share the remaining 15%. Fair taxation? Perhaps we should tax based on wealth rather than just income; I'm sure a lot of people could get behind that.
Social Security is absolutely necessary, preventing an estimated 40% of senior citizens from living a life of poverty. Social Security is intended to act as a safety net, to assist seniors and the disabled with their financial needs in concert with retirement funds and investments. But for many, their Social Security checks all that keeps them from living on the streets. Many people struggle just to make enough money to pay all their basic bills every month; there isn't any money left to save for retirement. These aren’t lazy people. They work hard, but some people will just never make the money one needs to cover all the expenses we face these days. Some people did save for retirement, but lost it through bad investments, unpredictable market events, expensive illnesses, disasters or fraudsters. Charities and churches can help, but charities and churches are funded through the generosity of citizens. When times are tough, citizens have less money to give, and churches and charities have less resources to provide help during a time when more people require greater amounts of assistance.
Politicians LOVE it when we don't take the time to arm ourselves with facts; they prefer that we remain ignorant, and believe what the people on the "news" tell us to believe. Don't be a sheep; be a leader. Doesn't take long to get the facts; let's arm ourselves and spread the word. The slimy politicians [and the wealthy special interests who buy them] won't be able to get away with nearly as much in an informed society.
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Comments
Enjoyed reading your post very much, but my faith in what our elected officials could and might do to our SS and Medicare benefits, is shrinking, like the dollar.
The one slight detail I'd add, which won't surprise you, is that taxing wealth has the same issue as taxing income. You need a base exemption that protects a necessary quantity of basic wealth that is really not wealth at all but buffer against problems. In particular, everyone should be entitled to a normal home (not a mansion, but a house if they have been able to afford one) and also to a cash account of some amount (I have tended to think up to $100K per person should not be taxed and should be insured by FDIC, to encourage personal savings; above that should be taxed and should not be insured by FDIC, both to reduce government exposure and to encourage customers to be responsive to risk and not just rely on government to bail). Basically, I think what you want to tax is loosely “luxury” and that works for me.
In particular, I have never understood why payroll tax stops around $100K. If people make more than that, good for them, but it's wages that you could argue ought to be going to the less-well-paid people anyway (I was just listening to a story on TV about Verizon and its strike and the notion of cutting labor's benefits while raising management's benefits), so at least taxing the excess gets some of it back to where it may by moral right have been appropriate to put it.
The lesson I learned from corresponding with my Senator is that good plans won't go anywhere unless they can somehow be sold to the opposition--be it personal financial gain, or extortion--so I try to anticipate objections and adjust my ideas accordingly. I also consider it a personal mission to, at the very least, ensure that those closest to me are in possession of the facts [whether they want to be or not, oft to their dismay], and that the facts are simple enough to be passed on easily. I am lucky enough to have some very intelligent relatives, but [no offense meant to any relatives who may be reading this] some of them believe the STUPIDEST things, like FoxNews talking points; I think a little piece of me dies every time I read one on their status. But I digress.
I also tend to try to cover too much in a single post, and I've been trying to correct that. People seem to avoid lengthy posts, and truths can't spread if no one knows about them, so I end up leaving stuff out and addressing it in later posts. Comments help me decide what specifics to include, so many thanks for the details. I won't ever be offended by someone telling me something I may already know; too risky, as you may miss out on something you DON'T know in future.
I completely agree that a base exemption is needed; I'd address that with a living wage in a system of income tax, and with excluded basic assets for a tax system based on wealth. I'm not sure if it was NYS or the feds that recently passed a law preventing bill collectors from freezing/seizing entire bank accounts, but I believe around $1700-$2700 is now immune, depending upon circumstance; I think it may depend on whether you're receiving some type of Social Security benefits or government assistance. Will have to check back into that.
Additionally, my mother has dealt with Medicaid eligibility for nursing home care for the last 30 years; the means test for Medicaid was recently eliminated--except for people who are disabled, which is completely stupid and makes no sense--and there have been cases of people with multi-million-dollar bank accounts and homes receiving Medicaid to cover nursing home costs. I was astounded. I don't think that, say, an elderly man should lose everything to cover his wife's $5K+/month nursing home bill, but for everything they have to be protected when they have so much is a bit crazy. A base exemption would work well here; exclude the house and maybe $250K, but the rest should be used to pay for her care, especially since long-term care insurance exists, they clearly could afford it, and chose not to pay for it. Even better, require private insurers to either cut into profits and cover nursing home care, or stop offering stupid programs that don't work and use those funds to help pay for it. Or, eliminate Medicaid and Medicare altogether and just implement single-payer universal healthcare [I did a series on this--including how to pay for it--that I should probably revisit], with built-in protection for provider payments [to reduce fraud, ensure access and get the healthcare industry on board].
Did I mention that I tend to be lengthy [and tangential]?
Right on, Sister. Well said.