Friday Reading: Social Security Reforms

By Harry Sit

In the spirit of giving, some tips on giving defensively from Brent Hunsberger at The Oregonian. How many mailings do you get from charities? Some get hundreds. How do you get them to stop?

Cheaper to Eat at a Restaurant than at Home? from Five Cent Nickel. I agree with Nickel it’s ridiculous to claim that it’s now cheaper to eat at a restaurant than at home, just as ridiculous as someone saying retail banking has become an oligopoly.

Is "Spend Less, Save More" Ineffective Financial Advice? from Michael Kitces. Yes it’s ineffective when it’s not specific. Spend less, how much less? Less on what? It’s also ineffective when it requires sacrifice and lifestyle changes.

People are willing to pay for guidance. They pay for exercise classes and weight management programs. The problem is that financial advisors want to be paid more than fitness coaches. As a result, they only help those who already have money and don’t really need help with "spend less, save more."

Social Security Reforms: Like Putting Lipstick On a Duck from Scott Burns. What to do with Social Security funding shortfalls? Scott Burns wrote about a report from National Center for Policy Analysis which puts the proposed solutions into four categories:

  1. Eliminating the taxable maximum income (and raise the payroll tax rate by 1.3 percentage points)
  2. Raising the retirement age (and also raise the payroll tax rate by 1.3 percentage points)
  3. Progressive price indexing (and raise the payroll tax rate by 0.6 percentage point)
  4. Changing the benefit formula (and keep the payroll tax rate unchanged)

He seems to favor #1. I favor #3 and #4.

The root cause of the funding shortfall comes from generational imbalance. The current and near-future beneficiaries paid taxes to support the previous generation. It isn’t difficult because the previous generation is smaller than the baby boomer generation. The next generation is also smaller than baby boomers. Even with the surplus built up over the years, it’s still not enough to support the benefits for baby boomers.

Selectively raising taxes on baby boomers would make up the difference but it’s not very practical. We don’t tax people by age. Reducing benefits would be the next logical thing to do. Forcing the shortfall entirely onto the next generations doesn’t seem fair. If baby boomers draw a little less from the pot, the pot will last longer, maybe forever, for all generations to come.

If we cut benefits now, it won’t be a permanent reduction for the young. Benefits have a tendency to creep up, as they have many times in the past. Once the generation hump passes, the ratio between the young and the old will improve. Benefits will be improved when there’s more money.

The Tragic Death of the Temporary Tax Cut from Joseph J. Thorndike at Time Moneyland. I agree with the author here. Temporary means temporary. You must be willing to let them go. Take pain killers when you have pain. Don’t get hooked on them.

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Posted on December 9, 2011 under News. Keywords: .

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3 Comments on Friday Reading: Social Security Reforms

  1. Random Poster on December 9, 2011
     

    “We don’t tax people by age.”

    Actually, the federal government does. See, for example, Schedule R to the 1040 and higher standard deductions for those over the age of 65.

  2. David on December 11, 2011
     

    For a high percentage of retired people, Social Security represents all or nearly all of their income. Reducing benefits for these folks would cause real hardship and significantly increase poverty in this group. A potential solution is to means-test the benefits, and reduce benefits only for wealthier people. The problem with this is that it turns a broad social insurance program, with nearly-universal support, into a welfare program. There is a dire political risk to Social Security if we means-test benefits, and I think it is a really bad idea.

    My favorite solution is to eliminate the cap on income that is taxed. The cap now is over $100,000, and more than double the median family income. People making more than that can afford to pay a bit more.

    Also remember that the so-called shortfall is based on forecasts that extend 75 years into the future. I am very skeptical that anyone can say what the world and the economy will be like in 2086. There may, indeed, be a shortfall, but estimates of its size have to be very uncertain.

  3. dd on December 13, 2011
     

    Four good solutions and yet our legislators will still not agree enough to correct the projected shortfall.

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