In my post on 401ks, i quoted a line that mentioned "uncertainty about the future of Social Security". It was incidental to the article and i was going to just ignore it, but it's been bugging me so i had to come back and correct it.

Despite all the fear mongering you may be hearing, Social Security is actually doing just fine. Here's the story:

In the past, current Social Security benefits were paid by current workers. So the current generation of workers supports the previous. In the 1980s, people realized that when the baby boomer generation retired, there would be more retirees than current workers. Due to the fact that our GDP continually increases (so a smaller group of more productive workers could support a larger group of retirees), this wasn't going to be a catastrophe, but there was going to be a gap. In order to fix it, Alan Greenspan worked with Ronald Reagan and the Democrats in Congress (led by Tip O'Neil) to increase the payroll tax that funds social security. This was probably the most regressive way to fix the problem, but it did fix it. The Social Security Administration began developing a surplus, basically putting money in the bank so that when the boomers retired, it could make up the gap.

(This next paragraph is irrelevant to the debate but i'm adding it just in case it comes up... in the 2000 presidential election campaign, there was a debate about what to do with the surplus. To date, it had been kept as an untouched fund - you may remember Al Gore getting made fun of on SNL for going on and on about a "locked box". The Republicans wanted to 'borrow' the money and include the funds in the general budget. The Republicans won, and now the SSA holds treasury bonds instead of actual dollars. But they'll come due and get traded in for actual dollars when they are needed. So, like i said, irrelevant.)

Now, it was estimated that Social Security would have to start dipping in to the surplus fund between 2012 and 2014. It'll probably be sooner rather than later because with the current recession, people are going to be retiring earlier (which also could mean they'll take the early retirement packages, which means SSA pays out less benefits in the long run). With the surplus, everything will be fine until about 2037. At that point, the surplus runs out and the SSA will be obligated to pay out more than it will take in until our demographics shift again (when all the boomers die, essentially, but it's a little more complicated than that).

Does that mean the fund will be completely bankrupt and go out of business? No one gets any social security at that point? The country goes bankrupt?

No. It means one of two things: Either in 2037 people start receiving 80% of their guaranteed benefits instead of 100%, or the government steps in and covers the remaining 20% out of the general funds budgets. Neither would be a catastrophe.

And that's assuming that no new laws are passed. Right now, there's a very simple and obvious change that would fix the problem completely. Currently, you only pay the payroll tax on your income up to $107,000. If you make more than $107,000, you pay the payroll tax as if you only made $107,000. So if you make $120,000, $250,000, $1million, etc., per year, you're paying less of a percentage of your income into Social Security than people who make $107,000 or less. Eliminating this cap would close the Social Security gap completely.

My opinion is that in addition to doing that, we should also raise the payroll tax in general so that we can actually increase Social Security benefits, either by lowering the retirement age or by increasing payments so that older people can actually live off Social Security. As we saw in the 401k post, people are generally not very good about planning for their future and many people wind up at retirement age without enough savings. Plus with our seemingly increasingly deeper economic downturns, people are forced into unemployment earlier and unable to find new jobs. Having a lower retirement age and/or higher benefits would help. But i'll concede that essentially forcing people to save for retirement is a bit of a Nanny State thing, so i'm willing to debate it.

As for the current proposed solution of raising the retirement age, that is absolutely nuts. First, as we saw above, the coming 'catastrophe' is really about reducing future benefits. So we are going to solve the problem of reducing future benefits by... reducing future benefits? Looking at that solution in its best light, all we are doing is reshuffling the benefits around. It solves nothing. At worst, what it does is ensure that only people that can survive to the higher retirement age will receive any benefits. Poor people who won't have enough savings to make it to age 70 or whatever, and people with physically demanding jobs would couldn't possibly work that long, will never see any money from Social Security, while those who do have money and/or jobs that permit them to work until 70 will get 100% of their benefits. Ridiculous! Better that everyone get 80% benefits than those who need it least get 100%.

Republicans and opponents of Social Security have done a fabulous job of sowing panic about the program, despite the facts. Obama and the Democrats either actually believe it or feel like it's pointless to resist the rhetoric, so they also seem ready to make a benefit-reducing compromise. It needs to be resisted. We're better off letting things reach "catastrophe" in 2037 than make any of the changes currently being discussed.

Finally, and this is really a separate discussion, our long term deficit problems are actually due to rising medical costs. The recently passed health care bill actually addresses those problems to a degree. If we want to go further in addressing our deficit problems, we have to do more on the health care front. A public option would be a good start; single-payer would be even better. Social Security has nothing to do with our deficit problems since it is funded entirely by the payroll tax through 2037.