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Sunday, May 1, 2005

Social Security

Date: May 1st., 2005
Sent to but not published in the New York Times

At last George W. Bush is starting to come clean on the Social Security issue. He still has a way to go.
There are three major issues that he has to put forward with complete accuracy:
  • There is NOT a crisis in Social Security funding; but there IS a moderately serious financing problem. I will suggest one way of dealing with it later.
  • The suggestion that creating privatized accounts will solve the problem is false; other steps will have to be taken. Privatized accounts, by taking money OUT OF the Social Security system will acerbate the problems.
  • The suggestion that there will be money remaining in those privatized accounts for one's heirs is also false. People will be compelled to purchase an annuity. An annuity yielding enough to top up one's social security benefits to current levels will cease on the death of the individual.

Any solutions that are put forward have to be based on these truths, not on the administration's current scare tactic distortions. They misled us once on the Iraq war, shame on them; if they mislead us now on Social Security and we believe them, shame on us.
We can solve the underfunding problem with some modest changes to the current tax regime: remove the cap on individual income (not the employer portion as that might prove to be a job killer) which now stands at $90,000. Doubling the cap would solve the problem for the foreseeable future; removing the cap altogether would add additional funding to the program and would remove the regressive nature of the current Social Security tax.
This additional funding could be used in one of two ways: reduction of the tax rate or to increase benefits for poorer persons. Right now the Social Security formula for computing one's pension depends on Average Lifetime Earnings. Now Social Security pays you 90% of the first $627.00 of monthly income, 32% of income between $628.00 and $3,779.00, and 15% of income above $3,779.00 to the cap of $7500.00 ($90,000.00 per year). It would make sense to increase the lowest bracket to about $800 which is the poverty level for a single person in the US today. It would also make sense to reduce the percentages at higher average incomes. If the cap were doubled, then two new brackets should be added so people earning between $3800.00 and $9,999.99 a month would be paid 10% of that tranche while those between $10,000.00 and the cap at $15,000.00 would be recompensed at 5% of that salary. If the cap were to be totally removed then those earning over $15,000.01 per month would be paid at the rate of 1% of that income; or perhaps an even lower rate.
These suggestions show that there is a relatively simple way out of the problem facing us. It is essential that these actions be taken now before the problem turns into a crisis. As for private accounts, we have them now, the 401(k). These are useful supplements to Social Security, they should not be its core.

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