Vincent Carroll had a wonderful opinion piece in the March 17, 2013 Denver Post about the powerful organization’s adamant resistance to doing anything to change Social Security. I suggest you read the entire article. It was inspired by the flood of radio ads bought by AARP to oppose a suggested change in the way cost-of-living increases are calculated. Mr. Carroll points out that the change would have reduced the growth of a $1,000/month benefit that began in 2002 from the current total of $1,309/month to $1,263. Continue reading
Category Archives: Social Security
Sequester and Social Security Withholding
Politicians are howling with threats about how bad things will be if the sequester legislation actually goes into effect two days after this posting. I can’t possibly list all the threats, but they include layoffs of first responders, teachers, air traffic controllers, and homeland security screeners. The President has warned that the unemployment rate will increase and the economy will suffer. All of this hysteria is over a cut of 85 billion dollars out of an annual budget of about 3.6 trillion dollars. We are being warned that the government cannot possibly manage a slightly smaller budget without draconian reductions in essential programs and harm to the economy. The same politicians issued barely a squeak of protest about the impact on families when they passed legislation that included an increase of two percent withholding from paychecks for Social Security. It would seem our legislators think citizens can easily adjust family budgets to deal with having two percent less money in their paychecks while the government cannot possibly find two percent of spending that is nonessential or at least less essential.
Where did the sequester idea originate? There is an interesting back and forth going on between Bob Woodward of Watergate fame and the White House. Mr. Woodward writes in his book “The Price of Politics” that sequester proposal originated within the White House. He adds that President Obama and the soon-to-be Treasury Secretary Jack Lew incorrectly accused during the campaign that the sequester proposal originated from House Republicans.
The White House first disputed Mr. Woodward’s version, but it seems they have decided they can’t dispute the facts. They are still arguing against the additional charge that “Obama is moving the goal posts by requiring that additional revenues be part of a sequester substitute.” The White House protests this assessment by saying the President has always considered that additional taxes must be part of any negotiations on budget issues. I’d say I agree with the White House, because President Obama’s campaign speeches, and all of his speeches are campaign speeches, have always advocated more tax income is needed. The Republicans mention that more tax income was added by the bill that avoided the “fiscal cliff.” Mr. Obama must think that bill that he signed into law didn’t add enough taxes.
Politicians will always think raising taxes is preferable to reducing the growth of government. They will also think the optimum amount of money they can spend is the current amount plus some additional amount. A slight reduction is enough to cause them to act the way they are now acting.
Social Security Projections
The U.S. deficit continues to grow out of control, and there should have been actions taken to address the problem long before now. However, President Obama’s comments that the deficit is not a short term problem indicates to me we won’t do anything about the deficit for the next four years. Much of the problem is caused by “entitlement” commitments, and President Obama said in his inaugural address that he has no intention of doing anything about those either.
I’m baffled how the American people and the media are going along with the “don’t worry, be happy” approach. Looking at Social Security alone is frightening. A recent article by Chuck Saletta on the Motley Fool points out that each new analysis finds that the program will reach “financial unsustainability” sooner than the previous analyses. The Social Security Trustees reported in 2008 that problems would not be encountered until 2041. The date has now changed to 2033, and that is going to continue to move closer.
Money taken from employees and employers is invested in bonds, and bonds that mature must be replaced with new ones. The older bonds were yielding much more in interest than the ones currently available. The program is projected to earn $5.4 billion less in bond interest in 2012. The fact the Federal Reserve has recently said they are going to artificially keep interest rates low until the unemployment rate begins to drop means the revenue is not going to improve. Continue reading
George W. Bush and Social Security
George W. Bush was vilified for “wanting to privatize Social Security” after he proposed allowing younger workers to voluntarily elect to invest a third of their Social Security taxes in a private IRA type retirement account. However, there has been little political outcry as Barrack Obama champions the continuation of reducing personal Social Security taxes from 6.2% to 4.2%. My rudimentary math indicates that workers are being allowed to keep just under a third of the taxes they were originally paying. A friend points out that Obama’s approach has the advantage that the government isn’t involved in what happens with the money left in the paychecks. Workers can use the money in any manner they elect, and they might even decide to put it into an IRA. However, it doesn’t do anything to repair or improve Social Security.
A brief history of Social Security was given in a posting titled “Weasels and Social Security,” and preparing that posting has me thinking more about the subject. I’m going to focus this posting on what Mr. Bush really proposed, which was a far cry from “privatizing Social Security.” The information I’ll be using is from a link that provides fact checks on several of his speeches beginning in 2000 on the subject.
Mr. Bush said in his State of the Union address on January 20, 2004,” Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account. We should make the Social Security system a source of ownership for the American people.” He continued his advocacy for changes in his acceptance speech at the Republican national convention on September 2, 2004. “We will always keep the promise of Social Security for our older workers. With the huge Baby Boom generation approaching retirement, many of our children and grandchildren understandably worry whether Social Security will be there when they need it. We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account a nest egg you can call your own, and government can never take away.”
Mr. Bush clearly stated that his ideas were for workers under 50, and that benefits promised to older workers and people who were already retired would not be changed. However, I learned that elderly relatives were sending money to organizations promising to prevent George W. Bush from gutting Social Security with his plans “to privatize it.”
The outcry against what Mr. Bush had proposed was reinstated when the stock market tanked in 2008. There were frequent news reports that the market collapse would have been even more devastating to people if Bush’s proposal to “privatize Social Security” had been accepted. I’ve done some calculations based on a worker who has a static salary of $50,000/yr to estimate the results. That worker has Social Security “contributions” of $6200/yr. Half would be taken from the paycheck and the employer is required to match it. The Bush proposal would have allowed the worker to voluntarily invest one third of the total, or $2066.67/ year in a private account. The worker could also choose to leave all the money in Social Security.
Everyone who has investments in the stock market knows that 2008 was a scary year. The hypothetical young worker who elected to open the private retirement account would have been just as spooked. There would have been about $8300 added to the account if the account had been opened at the beginning of 2005. The value would have dropped to about $5700 at the end of 2008 if it had been invested in a Standard and Poors 500 index fund. The good news is that more shares are purchased per dollar invested when the market drops if you have the guts to keep buying when the market is plummeting. Continuing to invest the $172/month in the same S&P 500 fund would have resulted in your account being worth about $16,400 (including a net dividend of about 2 % after expenses) versus the $14,469 put into the account by the end of 2011.
What would the account have in it at the end of a career? Who knows? The stock market has historically been a good place to invest. However, as all those financial documents say, “past performance is not an indication of future performance.” Mr. Bush’s proposal was that people could invest the money according to their willingness to take risk. People could have put the money into insured CDs, and those could have very high yields if surging inflation happens a few years as many predict.
I’ve provided a fun link to a calculator to allow a reader to play with various investment scenarios. I entered data for a person opening a private account beginning in 2005 that is worth the $16,400 estimated above. I kept salary static at $50,000/yr for the worker who retires at age 62. The account would be worth $58,000 for a person who began the investments at age 40 and $94,000 for someone beginning at age 30 using an annual rate of return of 2%. The account would be worth about $81,000 for a forty year old and $154,000 for a thirty year old worker with a rate of return of 5%.
I see at least two important lessons. It is important for people to begin preparing for retirement as early as possible. That is especially true for young people who can’t depend on Social Security unless our politicians suddenly develop the courage to improve it. The other lesson is to be successful in politics you must dress up your policies and criticize others with selective language. For example, you can explain your idea to let people keep about a third of their Social Security contributions is a tax break for the middle class while Bush’s idea about allowing people to voluntarily put a third of the money in a private account is “privatizing Social Security.”
Weasels and Social Security
I’ve tried to maintain interest in politics, but it is challenging. Republican candidates demean each other while the Democrats demean the Republicans ranking highest in the polls at the moment. The spectacle brings to mind an article titled “On Weasels and Removal Thereof Though Unified Action” by Susan Westfall. The author wrote that she “…decided to settle on a word to use when referring to politicians…and special interest groups who work so hard to sell the sovereign countries of the world down the road for personal gain, all the while espousing their good intentions for the ‘general welfare’ of the people.” “Ultimately, I settled upon the term ‘weasel’.” That term is used to describe people who are acting in “…a cunning/and or deceitful fashion to achieve desired ends.”
We need fewer politicians willing act like weasels to buy enough votes to be reelected. Government entitlements such as Social Security and Medicare are popular with voters and any politician mentioning changes to improve the long term economics of the programs will face the wrath of voters. Too many politicians buy votes by defending both of the programs even though they know the programs need to be fixed.
President Clinton spent a year at town hall meetings talking about Social Security and that we should “…fix the roof while the sun is shining.” He was and is a clever politician, and he didn’t lay out details of how to fix the program. That resulted in people nodding knowingly that something should be done.
George W. Bush wasn’t as clever. He actually suggested that we begin to fix the Social Security by letting younger people voluntarily put a third of their Social Security “contributions” into private retirement accounts similar to IRAs. The account owner could then select how the money was invested, and they could select treasury bills or insured certificates of deposit if they wanted to be conservative to assure the money was there for them when they retired. They could also select the beneficiary, while Social Security is limited to dependent children and legal spouses (and is therefore homophobic). Democrats were mortified. Robert Reich, who had been Clinton’s Labor Secretary, responded, “If it ain’t broke, don’t fix it!” Alliances were formed with older people who were told Bush wanted to destroy Social Security by “privatizing it.” I was discouraged that members of Congress and evidently their voting constituents believed the government could more intelligently manage money than the people who originally earned the money. Bush lost, and future politicians received a clear message. Act like a weasel if you want to be reelected.
I have one hope, and that is some future politician will have the courage to offer what Franklin Delano Roosevelt proposed in an address given November 14, 1934. “It takes so very much money to provide even a moderate pension for everybody, that when the funds are raised from taxation only a “means test” must necessarily be made a condition of the grant of pensions.” He not only recommended a means test to determine whether people should receive a benefit, he also said he believed the taxpayers should only support the program for thirty years (until about 1965) at which time it would be replaced by private accounts. When Bush’s opponents commented that Bush wanted to “destroy FDR’s legacy program,” they apparently believed what he had proposed didn’t go nearly far enough to implement FDR’s vision.
(Some readers might hesitate to believe the previous paragraph. A link is provided for those who want to read FDR’s comments in context. I predict you will find what I’ve written is accurate. Links are also provided to speeches by President Clinton and George W. Bush on the Social Security web site.)
Realistically, FDR probably would have been pleased with the backlash at Bush for suggesting changes. He even predicted that once the program was put in place “…no damn politician…” would ever be able to change it. An advisor told FDR that Social Security wasn’t good economics. FDR famously responded, “I guess you’re right on the economics, but those taxes were never a problem of economics. They were politics all the way through.”
A few years back there was a bumper sticker popular in areas of the country where you would find large concentrations of retirees on vacation that read, “We’re spending our children’s inheritance.” I hadn’t seen the sticker lately, and it occurred to me that message is no longer valid. We retirees are no longer satisfied with spending only the children’s inheritance. The Social Security program is diligently collecting substantial portions of incomes from the salaries of young workers and transferring it to those of us who are retired after skimming the cost of operating the bureaucracy. Not fixing the program means we are willing to take that money with the promise workers under the age of about forty won’t receive equivalent benefits unless more money is taken from paychecks of the shrinking numbers of employed younger people.
I have advocated ending the cost of living adjustments to Social Security beneficiaries, and I’m guessing that one suggestion means there’s no risk of me being elected to any political position. However, I promise I’ll vote for people who show the courage to do something to improve future prospects for the country. My appeal is for others to join me in a quest to show the weasels the door. The other alternative is to wait for the eventual bankruptcy of the U.S. economy and the end of those monthly Social Security checks. I don’t think I’m the only grandparent who is willing to see changes to the Social Security program that would give our families a better future.