Solving the Entitlements Puzzle, Part II
by Richard
And now the other shoe drops.
Benefit changes have the political virtue of appearing to be a free lunch, in the sense that the tax and wage base may remain unchanged, but the final product is diminished in scale and scope.
Like a frog being slowly boiled in increasingly heated water…
…the hope is that the public will acquiesce over time to the shrinking pie before they realize that they have been cooked.
A good example is what happened when the Alan Greenspan-led task force in 1983 brought forth changes that barely registered on the radar screen, such as stealthily increasing the full retirement age from 65 to 67 (incredibly, most approaching retirement age today have no clue that they are falling short of the mark–this after a full quarter century of advance notice).
The other stinkbomb was the low threshold at which Social Security benefits would be taxed…so that a prudent and diligent saver could easily find up to 85% of their Social Security benefits taxed…again.
Remember, payroll taxes are not deductible like your IRA or 401k contributions. Decency once mandated that you only taxed income once. No more.
It’s like a shrinking candy bar being sold at the same price.
The smaller product is the mirror image of a price increase. This is best done in tiny, incremental stages.
But will eventually be found out.
You can’t fool all the people all the time.
Here’s what to expect.
- If full retirement can be increased from 65 to 67…it can easily be raised to 70. This action alone could erase over 60% of the projected shortfall in funding. And don’t expect the early retirement option with reduced benefits at age 62. That is a relic soon headed for the scrap heap.
- There will be a big push to revise the annual cost of living adjustment from the more generous wage linked index to the more modest price linked index. It sounds arcane, but bottom line, future increases will increase at a decreasing rate.
- Social Security allows benefits to be calculated on your highest 35 years of career earnings. Assuming a first job a age 20 and retirement at 70, this policy allows you to discard your lowest fifteen years of earnings.
Simply by upping the range to your highest 40 years of earnings, this would penalize the workers who had shorter careers and would prevent one from discarding their lower earnings history, thereby reducing benefits.
It all sounds sneaky and underhanded, but we got ourselves into this mess by allowing bloviating pols to promise more than they could ever possibly deliver.
Yes…they deceived us. But we wanted to believe. So we are all equally culpable.
Check out the classic Western movie “Unforgiven“. There is a dialogue where the young gunslinger says of his victim, “He had it coming.”
To which Clint Eastwood’s grizzled character replies, “We all had it coming…”
June 18th, 2009 at 3:09 pm
If the retirement age goes up by the same number of years as used to calculate the benefits, the net change to the benefits is immaterial: that’s because during those extra years of employment one will have earnings on the high end of the scale, thereby including those years in the computation of benefits will not affect the end result much.
Separately, the US should consider itself lucky to have a relatively sensible system in place now - despite the need for changes and fixes. European countries had gone way overboard on their social security programs, and their reforms are much more painful. For example, Greece is a country which, despite leading the world in per-capita smoking, has residents among whom longevity is common (thanks to the Mediterranean diet, some say); yet the mean actual retirement age is 59 for men, 57 for women (in a study conducted during 1994-9). Good luck getting politicians to raise the retirement age to 70 in Greece.
Lastly, an interesting piece of data: the earlier you retire, the less you live (even if you exclude early retirement for health reasons). This study discusses this odd result, and includes pointers to other studies:
http://aje.oxfordjournals.org/cgi/content/full/167/5/561
So maybe raising the retirement age will be a good thing (assuming you like your parents). Or a bad thing for the economy if a longer retiree lifespan requires higher lifetime Medicare expenditures per capita.
June 19th, 2009 at 9:17 pm
Payroll taxes are not deductible, indeed. But they are not “taxes” in the usual sense of the word: in theory at least, they don’t go in a black hole that you cannot touch. Instead, they are more like early insurance premium payments (for Medicare: a health plan in which eventually one can participate) or annuity premiums/contributions (for Social Security: a pension plan, for the most part). Since health insurance and annuity premiums are made with after-tax money and (eventually) annuity payments constitute regular taxable income, the argument can be made that payroll “taxes” are less like taxes and more forced premium payments into government-run health insurance and pension programs. And, as right-wingers love to point out, it’s only fair that government-run programs play by the same rules as private programs.
Mind you, I personally would rather not pay the government payroll taxes, and instead manage my own health care and pension needs. However, I realize most people don’t have a clue how to plan for the future, so having the government plan on their behalf is better than nothing. Even for me, it’s reasonable to pay a portion of my income into a government plan; that’s the essence of diversification. Or so I’d like to think to make myself feel better about payroll taxes since, short of starting a new American Revolution, I’ll be paying them (and more and more of them as time passes) whether I like it or not.