Social Security & Savings

Social Security is underfunded. This is widely known, although a few folks challenge the extent to which there is a deficit on the horizon, or fail to understand the implications of having to cash in government IOU’s that currently form the OASDI trust fund.

Solutions to this problem are politically difficult to stomach, as they are somewhat painful, and will only become more so the longer politicians stall. I would like to see our leaders have the guts to make the hard decisions, and adopt a more fiscally responsible approach to Social Security.

A few of the changes I would make, if it were my call, would be:

• Once upon a time, the cap on income which was subject to FICA tax was pegged at the 90th percentile. Over time that peg has slipped, because the cap has been increased at approximately the same rate as average wage growth, but incomes have grown more at the high end rather than the low end. I’d like to see the 90th-percentile peg re-established, and perhaps gradually increased, but not so rapidly as to shock employers’ payrolls.
   
  Similarly, I would be willing to consider implementing a floor, perhaps exempting income up to the (say) 5th percentile, or tax that income at a lower rate, thereby creating a back-door increase in minimum wage without appreciably impacting employers.
   
• I’d like to see the age for full eligibility for benefits to be increased, to reflect increased longevity in our society. However, to maintain political acceptability, I would be inclined to maintain the age for partial benefits at the current 62-year mark.
   
• Promised benefits ought to be reconsidered. Currently, individuals getting Social Security checks get annual increases reflecting average wage growth in the country, which has historically increased faster than inflation. I’m not so sure that that’s appropriate or necessary, at least at the upper end of the income spectrum. Some thought needs to be given to reconfiguring that formula to reduce the future burden on Social Security while maintaining a safety net for those more likely to need it.
   
• Finally, the use of government securities in the Social Security trust fund bothers me. To the extent that Social Security will one day have to tap those funds, there will be an increased burden on the federal budget because we’ll have to find/borrow the cash to pay off the IOU’s being tapped by Social Security to cover revenue shortfalls. To the extent that the trust fund is expected to be tapped, I would like to see a requirement that the government start converting trust-fund held securities into cash or other assets before tapping occurs, in order to smooth out any shock of paying off those securities.

I have not mentioned “privatizing Social Security” or “personal accounts”. I’m not opposed to those ideas in principle, but the implementations I’ve seen proposed only aggravated the Social Security funding problem.

However, parallel to the Social Security issue, I also have a gripe with the alphabet soup of tax-advantaged accounts we have these days. We have accounts dedicated to retirement savings, other accounts dedicated to health care savings, still other accounts dedicated to saving for college…. Middle- and low-income families are disadvantaged when it comes to these accounts, because funds in one account cannot currently be “repurposed” to another account, and households face the challenge of figuring out how to allocate their limited savings ability.

I would like to see a simplification of the mess into essentially one single plan (or one set of plans, equivalent to the IRA/Roth-IRA cousins of the current system). Let folks save pre-tax money in a tax-deferred account, and have the ability to draw from that account funds for medical care, for education, for retirement income, for income in the event of unemployment or disability, and for other similar purposes for which the government wants to incent savings. Families wouldn’t have to go guess how best to allocate their savings, potentially keeping some “saveable” funds outside the tax-advantaged system in order to maximize flexibility.

Also, a few words should be uttered about Medicare/Medicaid and health care situation. Medicare is facing similar funding issues as Social Security…but much sooner. The potential solutions are rather ugly, and I’m not qualified to make an intelligent suggestion here.

However, I can say that I think there ought to be an intelligent public debate on the subject of health care in this country. We have arguably the best, most advanced health care system in the world in this country, and the advances on the horizon are simply amazing. However, that comes with a price, literally. To what extent are people entitled to health care? Is everyone entitled to access to the latest and greatest medical tech, or should society accept a two-tiered system where those who can afford the best can get it, but less-affluent folks accept a lower standard of care in order to maximize availability?

These are questions for which I don’t have good answers. But a good political leader will have the courage to face them, rather than letting the country continue to run around with fingers stuck in its ears, chanting “lalalalalalalala…I can’t hear about this problem!”

One thing I can say is that I do not want to see a government-run monopolistic health care system as has appeared in some parts of the world. These days, my faith in the government to run anything in an efficient, cost-effective manner is nonexistent.