Friday, June 29, 2012

Social Security Reality: Summary Related to Old Age and Survivor Benefits.

Realities That Have to Be Addressed.

Social Security as enacted in the 1930s is obsolete.  Demographics and technology of the twenty-first century will have to be accommodated.  Planners need to face the facts.   The most important change is a need to address longer life expectancies and the longer work lives they necessitate.  Ten realities that should be addressed are:
(1) Planning for a twenty-first century retirement isn’t easy or fun, and many people don’t bother.  The framers of Social Security never envisioned a broad-based need for such plans.  People didn’t live that long.  There’s a need for financial education.  Not sophisticated stuff.  Just basics like the fact that Social Security isn’t an adequate retirement plan. 

(2) In response to the difficulty of planning a twenty-first century retirement (and politicians’ continual lying to the public about Social Security), most baby boomers are financially unprepared for retirement.  They’re providing for retirement as if their life expectancies are no longer than their grandparents’.  Perhaps things like the “catch-up contributions” to IRAs and 401(k)s should be mandatory.  Even making IRA contributions mandatory should be considered. Something as simple as an “opt-out” tax may be enough.
(3) The best available data indicate other generations aren’t doing any better at providing for their retirement.  Their behavior in terms of financial management resembles their parents’ at the same age.  They too are ignoring their longer life expectancies.  There “opt-out” taxes could be used to fund their longer retirements.

(4) The public is often misled into believing that someone else can fund their retirement.  They choose to ignore the fact that no subset of the public provides a reliable enough potential income stream to justify depending upon it.   Social Security deserves and needs reliable funding.  Everyone needs to contribute.
(5) Much of the population knows it isn’t preparing for retirement and refuses to address the issue.  Thus, whatever incentives and penalties are used, they have to accommodate their choice while ensuring that they experience the full impact of their choice at the time the choice is made.

(6) Many people are planning not to have to retire.  That is true of people approaching what traditionally was a retirement age.  Even those slightly younger or slightly older than a traditional retirement age are deciding whether to retire based on factors other than age. Social Security should accommodate that fact that people make choices based on their needs, not the government’s wishes.
(7) Productivity changes with age and experience.  At some age it begins to decline.  The burden of the wage tax that we call Social Security contributions become harder to absorb as productivity declines. The current outcome, unemployment, is extremely in efficient.  Reduce the tax.

(8) At a national level, retirement is about producing the goods and services that non-working older people consume.  The potential productivity of older worker can’t continue to be ignored.  It is an easy part of the solution.  Accommodate longer work lives.
(9) Retired people are the capitalist class.  They live off of their capital.  Let retirees earn a reasonable return on the capital that they spent a lifetime accumulating.

(10) A society that consumes its capital stock can’t survive.  It is possible that Social Security can't survive as a pure pay-as-you-go system.  Stop draining the trust fund.
When these inconvenient truths are viewed collectively, they tell a story with obvious implications:

It seems obvious that if people aren’t able to plan for twenty-first century retirements, we shouldn’t be surprised that the baby boomers are not prepared.  It’s a bit more surprising that younger generations are witnessing the boomer’s failure, yet they are not preparing any better.  The fiction that someone else can provide for one’s retirement seems to appeal across generations.  
When forced to address the issue, the public acknowledges it hasn’t provided for retirement.  Overwhelmingly people display a preference for adjusting their own individual retirement age rather than providing for retirement.  That’s true of their pre-retirement planning and their actual retirement (labor force) behavior.  Unfortunately, often the decision isn’t left to the individual.
Meanwhile, our politicians seem even less capable of addressing twenty-first century reality than the public.  The Government aggravates the problem by pretending Social Security is a viable retirement option.  It wasn’t envisioned as a retirement plan, and it has never been more than a part of a viable retirement plan.  That would be easy to address.  It would just require some honesty on the part of politicians.  It could be started with accurate disclosures on Social Security statements. 

However, the biggest issue isn’t disclosure.  It’s the failure to recognize that retirement at a national level is an output issue.  It is only aggravated by pretending it is anything else.  The pretense that it can be overcome by making someone else pay (i.e., produce the output) is extremely counterproductive.  Social Security isn’t made more viable by narrowing the funding base or excluding part of the public from benefits.  One of the major problems is that demographics are already narrowing the funding base. We should be trying to expand, not narrow, the part of the population making a contribution to Social Security.
Probably nothing is more important than encouraging and enabling older Americans who can continue to add the goods and services that a growing older population will consume.  Older Americans are a growth sector.  For starters, all Social Security and wage/income tax penalties related to benefits should be eliminated.  That will require recognition that older Americans may contribute by working, or they may choose to contribute by holding/investing in capital.   Further, a realistic approach would recognize that with age the amount a person can produce from one’s labor decreases.

Inadequate retirement savings, work/employment plans, and actual labor force behavior indicate the importance of employment as a potential and necessary component of how older Americans will secure (both finance and produce) the goods and services that they want to consume.  The government should recognize the fact that at some age workers can no longer produce enough to justify both their wages and the wage tax that we refer to as Social Security contributions.  The narrowing of the funding base that implies can be addressed with a small sales tax on all consumption. 
Social Security taxes paid by employers could phase out on workers age 50 or 55 thus reducing the employer’s cost of continuing to employ the older worker.  The employee’s contribution could phase out at age 55 or 60.  The revenue loss could be replaced by the general sales tax thus allowing the wages to be counted toward benefits.   The tax base for Social Security would be more stable since it would be expanded to include expenditures of “retired” workers and those not in the labor force.   Output and income would be increased by the continued production of the older employees.

More than anything else, the Social Security component that addresses “old age and survivor benefits” has to be reformed in the context of retirement planning.  Reformers who approach it as if Social Security is a standalone approach to retirement system are doomed to failure.  They aren’t protecting Social Security.  They will destroy it.

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