the absurd observers

Thursday, February 24, 2005

Some concrete proposals to end the unfairness of social security

Since CB and others have been demanding some concrete proposals on this site, here are a couple on how to make social security more fair.

First, it should be noted that Social Security allegedly has two purposes, to make certain that retired people do not neglect savings and therefore have enough money when they retire to avoid poverty and second to insure people against the dangers of living past their retirement savings.

As currently set up, social security punishes people who die young by taxing them yet not providing any benefits to them and also drains the federal budget over time becasue, in the aggregate, the amount of benefits retirees receive exceeds the amount of contributions they make (plus a reasonable interest rate).

To address these problems, while simultaneously protecting the goals of social security, the following things should be done.

First, benefits should be limited to the amount of money people contribute plus a reasonable rate of interest. Second, benefits should be converted to a lump sum payment made at the time people retire, or if they die prematurely, their estate should receive their accrued contributions plus interest. Third, upon retirement people should be required to purchase an annuity that will pay them enough anually to be kept above the poverty threshhold, but not significantly higher. Any excess money should be returned to the beneficiaries to do with it what they see fit. Lastly, people should be ineligible to receive social security until they can demonstrate the ability to purchase such an annuity with their accrued benefits.

Such a system would continue to force people to save for retirement. It would preserve the insurance function by requiring people to purchase an annuity that would serve the same purpose. It would eliminate the unfairness to people predisposed to die young, by paying their estates the benefits they had paid into the system if they died before retiring, or if they retired would give them a greater amount of money becasue the cost of their annuity would be smaller. lastly, it would eliminate the endless budget drain by making sure that the benefits paid do not exceed the contributions.

Obviously, such a system would have to be phased in, given the number of people who have either already retired or have planned retirement around an inflated rate of social security, but, transition costs aside, it would preserve the goals of social security while eliminating the unfairness inherent to our current system.

5 Comments:

  • Seth,

    Thanks for proposing something.

    But there's no way it would work. Without doing complex calculations, your plan would have an even bigger shortfall than the current system. First, you're paying out way more benefits by paying the estates of those who die prematurely. You try to balance that by saying "benefits should be limited to the amount of money people contribute plus a reasonable rate of interest", but that's happening now. Benefits are currently calculated based on the amount you earned in your 35 highest earning years, indexed to the growth in wages over time. If you don't index it in that way, you cut benefits enormously, and are back to where you started - millions in poverty.

    You talk of an "inflated rate of social security"? Do you think most seniors who collect SS are going on cruises and buying vacation homes?

    I think where you "misfire" is in treating social security as retirement "savings". It is not savings. 401ks, pensions, bank accounts, taxable investments - those are savings, and it is hoped that most retirees have significant assets in those types of accounts. Social security is a different idea. It is an understanding that the younger generation owes something to its elders, and therefore is a contract that we will take care of you in your retirement, with the understanding that our offspring will take care of us in turn. And it is meant to supplement private savings.

    Seth, your plan sounds just like George Bush's, without the words "personal savings accounts". And your "phase in" would cost trillions of dollars. I suggest you read some Josh Marshall: http://www.talkingpointsmemo.com

    By Blogger CB, at 8:46 AM  

  • Colin, your positing misses three crucial points.

    First, precisely becasue it is not like Bush's insane personal savings accounts, my plan would not cost trillions of dollars. Unlile Bush, I would not take money out of the system now, and isolate it into personal savings accounts. Rather I would have people continue to pay into the system, but tie future benefits to what they actually paid in. Thus there would not be the immediate shortfall where money comes out of the system on two ends simultanaously.

    Second, I am not sure how you get the idea that people are not getting more out of the system than they put in, but your claim is just patently false. You do not take into account the fact that people receive benefits for many years beyond what their contributions could support becasue they are allowed to retire at an sbsurdly early age. See William Saletan's articel on Slate making this point http://www.slate.com/id/2113883/.

    You say my system would throw people into poverty, yet you neglect the point that people would not be permitted to receive benefits until they were able to pay for an annuity that would keep them out of poverty for the remainder of their lives. In other words, they could not retire prematurely and simply live off an intergenerational wealth transfer.

    Finally, you say social security is justified as a duty that the young owe to the old. I have no idea where you derive this duty from morally, but it is patently unjust to have poor working people subsidizing the retirements of rich old people.
    Your system with its continued payroll tax, no limit on benefits and premature retirement age foster exactly this type of redistribution.

    By Blogger Seth Y, at 11:48 AM  

  • Seth,

    The numbers don't add up. If you want to strictly tie benefits to what's paid in, low-income earners are totally screwed.

    I did some calculations: assumptions: 3% inflation, 4% wage growth, 4% return on invested capital.

    A $35k earner would end up with $667k paid in after 40 years, but that's only $210k in today's dollars. If someone lives 20 years, like Saletan says, that's a little more than 10k per year... below the poverty line.

    By Blogger CB, at 2:20 PM  

  • .. which is exactly the problem with the system if people continue to retire twenty years before their death. that is why my proposal would tie eligibility for retirement benefits to proof the ability to procure an annuity that would keep people out of povery. They could not retire and expect other people to subsidize them, if they had not adequately saved for their retirement. (Note that if they became physically unable to work, they would still be eligible for disability.)

    I am all for redistributing wealth from rich to poor, but I see no reason to distribute from young to old. Why should a 30 year old making $35,000 who is raising a family pay money into a system so an able-bodied 65 year old, no longer raising a family, but also making $35000, retire?

    By Blogger Seth Y, at 2:57 PM  

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