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Friday, June 27, 2008

Social Security (Providence Journal)

Here is my Providence Journal Op-Ed Published: June 24, 2008.

With few exceptions, the Democrats have been unwilling to offer a program for Social Security reform. The problem facing the Social Security System is that it is under-funded. The Democrats’ argument has always been that the governing party must take the initiative and we will improve on or reject their proposals. This has to change, we are in the run-up to the November elections and the Democratic Party, if it is to do more than capitalize on the peoples' disapproval of the Republicans, will have to develop sound policies of its own. What are its policies on Social Security? Does anyone know? There is nothing recent on the Democratic Party web-site about their position on Social Security. Candidate Barack Obama has an unspecific plan to “raise the cap” on Social Security earnings but that is based on the 2007 cap! Candidate Hillary Clinton offers each American a new form of 401(k) which will be partially funded by the Federal Government.

These suggestions are not good enough. That of Obama is not specific enough; that of Clinton follows President Bush in ignoring the “Security Component” of the current Social Security program: that the payout is not dependent on an individuals investment skill, nor is it dependent on the individual living long enough to build up a nest egg and not living too long that the nest egg be depleted..

We can do better: here is my very specific suggestion designed to build on the present program.

We can solve the under-funding 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 $100,000. 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 an increase of benefits for poorer persons. The payout from Social Security is, unlike the contribution, quite progressive. 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 $7501.00 and $10,999.99 a month would be paid 10% of that tranche while those between $11,000.00 and the cap at $15,000.00 would be recompensed at 5% of that salary. If the cap we re 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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