by Frank Hill, Telemachus
So to the opponents of such a measure for the past 45 years, congratulations!
‘You. Win’! (sic?)
Converting or transitioning to a combined private/public Social Security program has been one of the ways reformers have sought to improve the system for every single recipient from the minimum wage earner up. It has been steadfastly opposed by those who have bought into the status quo and swear on a stack of Bibles: ‘Everything is OK with Social Security! No changes need to be made, EVER!’
Anyway, according to the most knowledgeable person we know on the face of Planet Earth when it comes to Social Security matters, Chuck Blahous (see his great new book: ‘Social Security: The Unfinished Work’), we have almost passed the point of no return when it comes to being able to convert SS to a truly funded system that would offset much of the huge costs heading for us.
Because when privatization of some form was first discussed, we had at least 25 years to plan for the huge pig in a python’s throat that would occur when the Boomers started to retire with full benefits in 2012. In 1985 when we started work on Capitol Hill, advocates of such change realized at least that people at age 40 or below then could have started diverting a fair amount of their SS payroll tax each month into a true investment fund and earned dividends and interest compounded for the next 2.5 decades.
Now, we have virtually no time to transition. No time to invest and build for the future. With the first wave of Boomers now reaching the magic golden age of 66 and being eligible for full retirement benefits, plus those behind them who wisely opt to start benefits at age 62 (how do you know for sure you are even going to make it to 66, huh?), we are entering the maw of the entitlement hurricane that everyone was worried about 25 years ago. Now, we could still fund personal accounts even at this stage, but it would probably take some additional tax revenue to do it.
The most prevalent comment back then? ‘Don’t worry. We’ll never get to the point where this will be a problem. It will all be taken care of by then.’
By whom? The Tooth Fairy? Tinkerbell?
There is a way out, sort of. But it entails several mind-bending changes of beliefs that everyone will have to undergo before it will work.
Here they are:
1) SS is not a ‘real’ investment trust fund…never has, never will be in its current form.
2) SS is currently taking in less revenues than it is paying out in current benefits.
3) There is no ‘trust fund’ with trillions of dollars spilling out of it in a Wall Street brokerage house.
4) There is no 'real 75-year actuarial balance for SS'. When you hear someone say that, all they are really saying in Greek or Pig-Latin is this: 'If you are under the age of 50 or so, your taxes are going up by about 35% and/or your SS benefits are going down by 25% or some combination of both. That is the only way to 'balance' anything in SS going forward.
The time has come to recognize SS for what is really and truly is: A payroll tax paid by current workers to pay for the benefits for the current generation of retirees. Nothing more/Nothing less.
Once you grasp that simple fact, the following solution will make more sense to you and be devoid of all the propaganda and salesmanship finesse you have been fed by politicians of all stripes and commentators for years and years and years.
We don’t need to means-test SS based on income or household wealth, which is a complicated proposition anyway. We don’t even necessarily need to raise the retirement age, although we still strongly support the raising of the SS and the Medicare retirement age to 70 on an expedited basis since we are all living so much longer than our fathers and grandparents did.
According to Mr. Blahous:
‘You COULD very easily draw a new ‘bend point’ in the benefit formula, and then slowly phase down the bend point factors above it. Basically phase down to a flat minimum benefit for everyone – above that minimum poverty-protection benefit that everyone is eligible for, you don't get any more if you have higher income. If you went all the way there, you could probably still fund a small personal account. Or, if you just wanted to scrap the account or were willing to put in some more tax revenue, you wouldn’t have to phase the factors all the way down to zero.
You could solve the entire shortfall that way.’
Now, you’ll have to buy Mr. Blahous’ book to get the full comprehension of what a ‘bend point’ is along with his other very well thought-out and thoughtful solutions. (We think we can even get him to autograph it for you)
But a ‘bend-point’ is defined as follows by Mr. Blahous:
‘The Social Security benefit formula is rather like a system of tax brackets in reverse. Whereas the income tax system imposes higher tax rates on those with more income, the Social Security system delivers lower benefit returns to those with more wage income.
Currently, there are three benefit brackets— 90 percent, 32 percent, and 15 percent—the borders between which are indexed for national wage growth. The 90 percent bracket delivers high returns to the lowest earners; the 15 percent bracket delivers low returns to the highest earners.’
One solution? ‘Bend’ the benefits formula down to the point where everyone gets the minimum poverty protection benefits and then phase-down the formula to where no benefits are paid above a certain amount. Doing so could even leave some revenue left over for personal accounts – though very small ones.
Social Security would then truly become the ‘security’ program, the ultimate ‘safety net’ everyone wants for themselves and their parents and grandparents when they reach their golden years. Donald Trump and Warren Buffett would not get anything over the basic poverty protection benefits level...and we would propose an ‘opt-out’ for anyone who does not want to receive any SS benefits since they have made it on their own during a prosperous life.
Isn’t that really what we all want for the future of this nation and our children? A program to protect the elderly poor from being thrown into the streets and into the poor houses like in a Charles Dickens novel? Instead of a ridiculously high and growing national debt and a bankrupted SS program?
It is time to start thinking along these new lines.
(Editor's Note: Frank Hill's resumé includes working as chief of staff for Senator Elizabeth Dole and Congressman Alex McMillan, serving on the House Budget Committee and serving on the Commission on Entitlement and Tax Reform. He takes on politics from a fiercely independent perspective at the blog Telemachus).