OPINION & EDITORIAL
Social Security needs makeover
Looking for a print version?
Simply choose ‘Print’ on your computer and a printer-friendly document will be generated.
Also by Mike Hahn:
- Recent polls reveal... absolutely nothing (December 4, 2007)
- 'Right to bear arms' stands up to scrutiny (November 27, 2007)
- Democrats play dangerous game (November 20, 2007)
- The pitfalls of holistic admissions (November 13, 2007)
Related Stories:
- What Social Security crisis? (January 20, 2005)
- Social Security is a student issue, too (March 28, 2005)
- Baldwin defends retirees (September 26, 2006)
- Overhauling Social Security (September 27, 2005)
- Social Security in need of overhaul (March 10, 2005)
by Mike Hahn
Thursday, February 15, 2007
Social Security. For years, this has been the third rail of American politics, and if any politician dares to mention reforming the system, they would be committing political suicide — just ask President Bush.
The problem is that the longer we put off fixing the current system, the deeper the hole into which we dig ourselves. If we do not act, we will soon reach a point at which it will be impossible — politically and economically — to fix the system. As it stands now, the only way to save Social Security is to start again from scratch.
This idea is not my own. It is actually a solution suggested to me by UW history professor John Sharpless during a conversation last week. His solution is one that would work, but does anyone have the political will to try it?
Let's start with a very simple truth: Social Security must be fixed. On that, everyone agrees. Now, how do we do such a thing? First, we can no longer afford to view Social Security as an entitlement, because we simply cannot continue on that path without massive tax increases or cuts in benefits. Instead, we must look at it as an insurance plan for our retirement, something that the government kicks in to supplement our own retirement savings if they fall short of our expectations. Social Security would then be based on need and what the individual requires for his retirement.
Currently, we pay between 12 and 14 percent for Social Security taxes. Half that amount is paid by us and the other half by our employers. Would it not be better to pay less in taxes and actually have some real security?
Under the "Sharpless Plan" for Social Security, each person in the United States would be required to "purchase" a minimum amount of retirement insurance from the government — something in the range of 1 or 2 percent. However, if people want a greater amount for their retirement, they can selectively pay more based upon their needs.
For example, if they want to have a guaranteed $35,000 a year for their retirement, they would let their employer know, and they would be taxed accordingly — which would work out to around 3 or 4 percent. When they retire, whatever they have saved privately would be taken into account, and if it is less than $35,000, then the government would make up the difference. Therefore, the plan is a supplement to private accounts. This supplement would not, however, be unlimited and most likely be capped around the median income for the United States or the state in which a person resides.
Some people are undoubtedly thinking this is crazy or that this would be nothing more than a gigantic government pension plan. Not exactly. Changing from Social Security to the "Sharpless Plan" is not simply switching from the current system to an insurance-style program. Fundamental to its success is encouraging citizens to save for retirement, and to do this, the government must end taxes on interest for all IRAs, 401K plans, high-yield savings accounts and mutual funds. If the penalties on withdrawing funds from retirement accounts are lifted, it would add an extra incentive for people to save. Notice, too, that the tax rates would be around 10 percent less under the new plan than they are currently. That money could be better spent on either higher wages for employees or employer contributions to individual retirement accounts.
My generation has no hope whatsoever of benefiting from Social Security, unless it is completely overhauled. My parents' generation might see it if they are very lucky. The short version is that we need to fix Social Security, and it cannot be a minor tweak here or a slight adjustment there.
I realize current seniors and those about to start collecting Social Security would demand their benefits be left untouched. Fine. There must be a transition period where those over a certain age are guaranteed their benefits under the current system.
However, the most important thing is that there must be a change. Burying our heads in the sand will not make this problem go away. Nor can we afford to take the position that Social Security is solvent for another 30 or so years and hope to fix it then. We need real action, and we need it now.
Mike Hahn (mhahn@badgerherald.com) is a senior majoring in history and political science.
Anonymous (February 15, 2007 @ 6:14am):
SS can not be fixed now because that would require trusting politicians to NOT spend a huge pile of money. That's not a good bet given prior behavior - the so-called SS trust is filled with government IOUs, not actual assets.
Anonymous (February 15, 2007 @ 8:05am):
Mike, interesting take for sure. I think lifting the maximum taxable wage would work even better than all of the other proposals. The current threshold is anachronistic.
Also, the assumption that employers will pay higher wages to workers based upon their tax savings ("money better spent...") will not happen. Why would they? Profits are high (record high in some sectors) now and that dough is not being reinfused into payroll; its going right back into the dividend pool and/or other capital investment. Where little or no tax is paid on this asset income.
Anonymous (February 15, 2007 @ 8:49am):
Right. Majoring in history and political science. NOT accounting. It shows.
Here's the deal. Every year the governors of the current Social Security system issue a report that makes projections into the future for the system, based on different sets of assumptions. Please show similar projections for the Sharpless plan. Until you are ready to do so withdraw the plan from public discussion. I, for one, am exceedingly tired of right-wingers who come out with below half-baked schemes for replacing the current Social Security system. Right-wingers claim the system is failing but it's actually showing a surplus. what's failing is the rest of the government, that is running at a horrific deficit. Don't blame social Security because the President and the congress are incapable, unwilling, or both to run the country with a balanced budget.
As things stand I just as soon have Leon Varjian design a replacement for Social Security as I would Professor Sharpless. In fact, I'd rather have Varjian do it. But even then I'd want to see the full analysis, and if that analysis didn't clearly show an advantage over the current system I'd favor sticking with what we have now.
Anonymous (February 15, 2007 @ 10:47am):
Good luck getting enough people on board with taking some level of personal responsibility for their futures.
Anonymous (February 15, 2007 @ 12:08pm):
This is the dumbest article ever. Medicare is a far more serious problem than social security. Social security was solvent before the Richie Rich tax cuts and the war on terror-wmd-democracy-bin laden-hussein-9/11.
We're the richest country in the world, and we can fund anything we WANT to fund. We are shifting our ideals from individual rights and needs to what corporations want.
Our election system is the best example of this. Why else would fundraisers charge $10,000 per plate; who in their non-greedy mind would pay it?
What average American could pay it? Well, in the end, we're all paying for it.
Anonymous (February 15, 2007 @ 1:37pm):
The "richie rich" tax cuts did not change the SS tax. They only reduced income taxes. Look at a pay stub once and you will see they are separated.
Also, who the heck is saying that SS is solvent, or running a surplus? As baby-boomers start to collect it becomes increasingly more difficult to pay based on the number of people paying into the system.
Anonymous (February 15, 2007 @ 2:54pm):
Let's look at this in another way. The good professor wants people to invest in retirement insurance. "Insurance" is a word that means something, and in particular it means a way of sharing risk. I have homeowner's insurance. When I bought it I had full coverage for theft losses and other provisions.
After some big casualty losses due to storms the insurance company changed the terms of what they offered to me, changed the terms of my policy when I renewed. I still have full coverage for theft, except now that's after a $500 deductible. Premiums have increased, too. The situation changed, the insurance offered changed. Insurance doesn't eliminate risk, insurance simply distributes the risk.
The major point is that an insurance plan doesn't tap into some magical infinite source of money. Whether it's retirement insurance, health insurance, homeowner's insurance or any other kind of insurance the facts sometimes force a change.
So if US workers did invest in retirement insurance they'd face the prospect of some change occurring in the future: a change in benefits or a change in premiums. Insurance programs are not free of real world constraints. (If a plan were offered that guaranteed "no change in premiums or benefits" then that plan would have a lower rate of return than it would without that guarantee.)
So that's what insurance is like. The goal of many on the right seems to be to absolutely refuse to allow any such similar change (in "premiums" or benefits) in Social Security and to instead destroy that tax-funded plan in favor of a commercial investment plan. The goal seems to be to remove the guarantee to workers that they will receive benefits.
The goal on the right also seems to be to force through a change without ever showing the replacement plan in adequate detail so that it can be analyzed: they want to sell the people a "pig in a poke." If workers are to be switched from the existing Social Security to an "insurance" plan then show them the full description of that plan up front. Show them the projections for the plan that are similar in assumptions and rigor to the projections made every year for social security.
If I buy stocks or mutual funds to supplemt my retirement (which I have done) the law says that I must first be given a prospectus that describes the stock or fund, that gives an indication of what the result of my investing might be. The right-wing pushers of alternatives to Social Security would be thrown into jail if they were selling retirement-targeted mutual funds the way they're trying to sell replacements for Social Security. They do nothing that inspires trust. In fact they do such a poor job of selling that they were unable to get any of their schemes through Congress when they controlled both houses: even Republicans could tell they weren't being given a full story.
Anonymous (February 15, 2007 @ 3:15pm):
1:37, So, running deficits doesn't hurt social security? We can continue our current rate of spending without affecting social security?
Richie rich tax cuts purportedly helped us back on our feet after 9/11 (the blank check excuse for everything), but now what's the reason for helping the rich? Are they starving? Or have they run out of burning Benjamins to heat their mansions?
Attention everyone: You pay ZERO to social security for ever dollar you make over $90,000 per year.
Anonymous (February 15, 2007 @ 4:03pm):
SS is running a "surplus" in exact same way that a Ponzi swindle runs a "surplus". The pay the first "investors" with funds from the new "investors". It only works as long as you can find an increasing number of new suckers.
Once the boomers start collecting the game will be up. It'll be just like a life insurance company without enough assets to pay the policyholders as they start to die.
Anonymous (February 15, 2007 @ 6:57pm):
Mr. Hahn's premise is wrong. The costs of fixing Social Security through just a tax increase would be a tax increase of just under 2% of payroll (shared equally by employee and employer), according to the Trustee's report. There are good arguments for other changes, but the claim that "we can no longer afford to view Social Security as an entitlement, because we simply cannot continue on that path without massive tax increases or cuts in benefits" is just flat out wrong.
Anonymous (February 15, 2007 @ 10:01pm):
"costs of fixing Social Security through just a tax increase would be a tax increase of just under 2% of payroll "
Now pay attention - SS is ALREADY RUNNING a cash flow surplus but the government is spending all the cash for current expenses. The "trust fund" has no real assets. It's like spending your paycheck but writing yourself an IOU to even things out. The problem is when you try getting yourself to pay up.
Want a million dollar SS style "trust fund"? Write "I OWE ME $1,000,000" on a piece of paper, sign your name and put it in your pocket. You now have $1,000,000 of the exact same kind of asset that the SS "trust fund" has.
Anonymous (February 16, 2007 @ 2:49am):
You state in your article:
"As it stands now, the only way to save Social Security is to start again from scratch."
I don't think your going to convince >50% of the USA voters to agree with your premise.
So, politically, your solution is irrelevant.
Anonymous (February 16, 2007 @ 8:07am):
Hey, folks, let's get smart on the "spending the surplus" meme. It's just right-wing propaganda. If we dropped Social Security entirely and totally converted to a "personal account" scheme the money put into the "personal accounts" would be just as spent as the money in the SS trust fund. When you invest in something the money doesn't sit idle, it is used to buy something or to pay for something. There is an issue associated with the spending of the Social Security trust fund but that issue is one of Congressional fiscal irresponsibility. That's not the fault of Social Security. The fiscal irresponsibility is a problem but you do not solve that problem by changing Social Security, you solve it by requiring the Congress to spend responsibly.
Of course in reality "personal accounts" would be different from investing in businesses. If the "personal accounts" were to be mutual fund common stock accounts then the incoming money each month would be used to buy stocks on one of the stock markets. The money wouldn't go to companies as an investment in development and production facilities, it would go to current owners of stock, with that stock representing a portion of the development and production facilities of the company that issued the stock. If the stock price rose as a result of the purchases (which it usually would do) that would not provide any more money to the company that issued the stock. (Personal accounts as a means of providing general retirement security for a population like that of the US are a very bad idea.)
As students at a great university it would be fitting for all of you to actually learn what all this is about, to learn the basics of capitalism and (in particular) learn what a "market" actually is. The right wing sells the market as being a magic money machine. It ain't that, it's just a market.
The right wing dishonestly ignores the fact that whether or not retirees get their income via Social Security or through "personal accounts" it is the workers who are the source of the income. (You need to study this well and need to understand it. Once you understand it you will be better prepared to figure out what the right wing really wants to accomplish. What they are interested in is not retirement security for US workers - they've never cared about that and do not care about it now. So figure out their real goal.)
Anonymous (February 16, 2007 @ 8:53am):
re: Anonymous (February 15, 2007 @ 10:01pm)
The current surplus is invested in the safest investment in the world -- US Treasury debt. Were the trustees to give the money to commercial banks and order them to place safety of principle over investment return, the private banks would invest the funds in treasury debt and the only difference would be the banks would take a percentage of the interest as payment for handling the transaction. In fact, this is what banks do with their own "excess" finds (except they don't charge themselves handing fees.)
You are, however, partially correct -- when the federal government (particularly the executive branch) reports debt, the more commonly reported debt is actually "debt held by the public", which means the Trust Fund surpluses (and there are other, smaller trust funds apart from OASDI and Medicare) deplete the actual shortfall. But the proper way to look at this is to understand that we have been spending ourselves into penury and those are funds we'd have to replace regardless of to whom we owed them -- SS beneficiaries, banks, private citizens of foreign investors. You can't blame that on SS.
Anonymous (February 19, 2007 @ 10:23am):
One last word. The author of this article needs to learn the difference between reason and propaganda. He's well versed in the propaganda in favor of altering (that is, beginning the destruction of) Social Security but he has no actual rational basis for the position (because, of course, the proponents of Social Security destruction are relying exclusively on propaganda.)
The proponents of Social Security destruction (whatever they call it that is what they favor) don't provide a rational basis for the schemes they flog. It appears that the primary reason they don't provide a rational basis is that there is none.
("Rational basis" does not mean "start making accusations and claims about how flawed Social Security is" and does not mean "give a scandalously superficial 'analysis' of stock market performance over the last 70 years.")
Here's a challenge: show actual proposed legislation that describes the changes being advocated. That's not propaganda in favor of change legislation, that's actual text from an actual bill. Best of all would be an actual submitted bill.
I think we'll wait quite some time (maybe forever) before we see such a bill. They want to propagandize change and get that accepted before they reveal what the change would be. Why oh why do conservatives not see this as an extreme case of "we're the government and we're doing this for your own good. Just because it's what is claimed to be a conservative government doesn't magically turn that claim into truth, does it?
Add a comment
We welcome your thoughts, but please keep your feedback thoughtful, on-topic and respectful. Offensive language, personal attacks, or irrelevant comments may be deleted.
Login...
Not registered? Sign up now.
It's quick, free, and the email address you provide will not be sold or solicited.
