Make High Earners Save Social Security

In these days of presidential interregnum, the American public has seen newspapers and digital media filled with discussions of tax cuts, increased military and infrastructure spending, economic growth proposals, regulatory relief, immigration reform, repealing Obamacare, reducing the national debt, keeping deficits on a short leash, draining the swamp of political and economic favoritism and other domestic traumas.

Social Security, however, has received little attention. How the new administration will accomplish all these promises without yielding to the temptation to cut programs like Social Security is an open question. President-elect Trump, who enjoyed the support of working class Americans, promised during the campaign not to cut Social Security. Speaker Paul Ryan said he has no plans to change Social Security, although he has been outspoken on the need for entitlement reform.

Funny how a politician can forget campaign promises after election day. Loyalty appears to be paramount for these folks until all of a sudden it isn’t. Politicians all too frequently forget, to put it in the cant language of the ‘hood, that a deal is a deal.

Social Security is a promise to all eligible Americans that they will not live in abject poverty if they become disabled or when they get old, but the Social Security 2015 Trust report finds that the fund has enough money to pay full benefits until 2034. After that it will collect only enough in taxes to pay 79 percent of benefits.

With the number of workers available to pay for Social Security benefits falling rapidly, there will inevitably be calls for benefit cuts, higher taxes or both. But there is a better way.

Social Securityis not an entitlement program; it is a “pay-as-you-go” system funded by the payroll tax. Companies and nearly 168 million working people pay into it to provide benefits to about 60 million retirees. Each generation pays for current retirees in return for a commitment that the next generation will do the same.

It is the backbone of retirement planning for millions of Americans. Almost a third of retirees receive practically all their retirement income from the system and about two thirds receive the majority of their retirement income from Social Security.

The top 100 CEOs, in contrast, have platinum pension plans. On average, their massive next eggs are large enough to generate about $253,000 in monthly retirement payments for the rest of their lives. Heaven for them, hell for the ordinary American worker.

Dealing with the coming Social Security funding crisis by raising the payroll tax places a significant burden on low-wage workers, especially when the Federal Reserve has kept interest rates so low that their saving accounts are yielding next to nothing, forcing baby boomers to work longer and retirees to rely even more on Social Security income.

An alternative that merits serious consideration is to increase the ceiling on annual wages subject to Social Security payroll taxes, which is currently at $118,500. All annual income above that amount is exempt from the tax, meaning that 94 percent of Americans pay Social Security tax on all their income but the wealthiest 6 percent do not.

Expanding the payroll tax to all earnings above $118,500 would wipe out funding issues. According to Social Security actuaries, it would keep the Trust solvent for the next 45 years.

Since Social Security began, the need for retirement income has risen as life expectancy has increased by 17 years. This is particularly true for top earners who need Social Security the least and whose jobs are less physically demanding than those of construction workers, janitors, etc.

Political leaders have time to decide how to address Social Security’s long-term funding problems. As they contemplate potential solutions, they should consider expanding the payroll tax to include all earnings. It’s a fair way to rescue the program from financial limbo and provide lasting stability without taking draconian measures that would harm tens of millions of hard-working Americans.

Originally Published: December 23, 2016

Chaining seniors to poverty

The latest deficit-cutting proposal in the fiscal cliff negotiations has seniors up in arms. President Barack Obama and House Speaker John Boehner have agreed to a new measure of inflation that would reduce annual cost-of-living adjustments, or COLAs, for Social Security and other government programs.

The new measure is called the chained consumer price index (CPI). If adopted, it would have far­ reaching effects because annual adjustments to many government programs are based on year-to-year changes in consumer prices.

The change is another assault on the once sacrosanct middle-class safety net. According to the Congressional Budget Office, Social Security payments would be $108 billion less over 10 years with chained CPl.

When certain products become more expensive, consumers switch to cheaper ones. Chained CPI attempts to account for that by looking at purchasing changes over time and linking, or chaining, the data together. For example, if beef prices rise faster than chicken prices, consumers will substitute chicken for beef.

So chained CPI takes spending changes into account, not just the price of goods. Nearly every conversation about using chained CPI is based on the notion that market exchanges are always voluntary, the products equivalent and that the elderly use the same goods as other Americans. They ignore how much more seniors spend on health care, the cost of which is increasing at an alarming rate.

Under chained CPI, annual increases in Social Security payments, government pensions and veterans’ benefits would, on average, be reduced by about 0.3 percentage points annually. For example, next year’s 1.7 percent COLA would be about 1.4 percent.

Changes to ¬∑Social Security are politically delicate because the program touches so many people. Nearly 56 million people -one out of every six Americans -receive Social Security benefits. The program accounts for about 20 percent of the Federal government’s $3.7 trillion in spending.

The average annual retiree benefit is $14,800. Those with lower wages get less and those who had higher wages get more; even Warren Buffett gets a Social Security check.

It is estimated that nearly half of Americans 65 or older would be below the poverty line if not for Social Security; a quarter of the elderly get at least 90 percent of their income from the program. Given their standard of living, many retirees are already making onerous trade-offs.

For a long time, there was more money coming into the Social Security Trust Fund then going out. The surplus was turned over to the Treasury, which promptly spent it.

Still, the Trust Fund is sound until 2036. So why is Social Security even part of the fiscal cliff negotiation? It is not driving the deficit. The gap going forward between revenue and expenditures for Social Security does create problems over the long run, but they are manageable.

If we really want to protect Social Security, remove the $106,800 income cap that results in less than 86 percent of wages being subject to the payroll tax. Economists estimate that taxing incomes over $106,800 would entirely eliminate the projected Social Security shortfall over the next 75 years.

Other common-sense reforms include reducing or eliminating benefits for the wealthy and raising the retirement age to reflect longer life expectancy.

Still better, subject investment gains to the payroll tax. Hedge fund managers’ earnings are taxed at the capital gains tax rate of 15 percent instead of being treated as ordinary income taxable at 35 percent.

All these reforms could be phased in over 20 years. Finally, we have to make Social Security a real trust fund, insulating it from Washington politicians who raid it and use the money for other programs.

These are the adjustments politicians should be considering, not technical tweaks in the cost-of-living formula that are not widely understood and are easily manipulated.

We face trillion-dollar annual deficits and total debt of more than $16 trillion. But the Washington political class is talking about $2.4 trillion in new revenue and spending cuts over 10 years.

Clearly there is much to be done, but we shouldn’t do anything to Social Security right now. That should work because the folks in Washington are awesome at doing nothing.

originally published: December 29, 2012

Consider a national pension system

During most of our adult lives the value of the stock market and other traditional assets (including owner-occupied houses) followed a roughly upward trend. This instilled in most people an assumption that greatly influenced thinking about employer-sponsored pension plans.  But in recent years, this formula has come unwound. With no sign that conditions will return to the former status quo, it may be time to take a radically different approach.

Middle-class American employees traditionally saved a portion of their income during their working lives to build a personal retirement fund. They would leverage the savings by investing them in low-risk assets whose value would increase over time.

They could do roughly the same thing by selling their homes for a nice profit, then using a portion of the profits to buy smaller, cheaper houses in a low-cost retirement community.

Together with Social Security, these “lifetime annuities” from personal savings and employer-provided defined benefit pensions would enable middle-class retirees to enjoy something close to the same living standard they enjoyed during the later stages of their working careers.

But employers started to control their pension costs by piggy backing on the assumption that employees would save for retirement by squirreling away a portion of their salary and investing it in the growing value of assets like their homes.

This allowed employers to replace their defined benefit pensions with defined contribution pensions, under which they would contribute fixed sums to employees’ 401(k) plans.

And in recent years, several things have wreaked havoc with the traditional arrangement. Since 2008, the credibility of investing has been shattered for most middle-class employees. The stock market’s long-term upward trend has been replaced by chaos punctuated by periodic scandals. Now “safe” investments like treasury bonds, government guaranteed bank savings accounts and CDs, and money market funds pay such low interest as to be virtually meaningless as a means of leveraging personal savmgs.

So the basic mind-set of middle-class employees has returned to what it was in the 1940s and ’50s, when memories of the 1929 crash were still vivid enough to leave them with no confidence in pure financial assets. This helped fuel demand for employer-provided defined benefit pensions.

The collapse of house prices coupled with high vacancy and abandonment rates has wiped out the assumption that home ownership is a safe investment vehicle.

Over a somewhat longer period, purchasing power has stagnated, even as the prices of goods have risen. There is no longer any realistic chance that middle-class employees can offset the absence of personal savings leverage with investments or home ownership. More than likely, they will save even less in an effort to maintain their living standards.

With respect to retirement, middle-class employees face two disagreeable options: Work until you drop or accept forced retirement (from layoff or illness) and be prepared to survive on the lower living standards that employer pensions and Social Security provide.

Surely it’s only a matter of time before the AARP or another organization marshals senior citizens who vote at a high rate to tell members of Congress they must increase Social Security and Medicare benefits. If huge tides of senior citizens are directed to vote for challengers who promise to do right by seniors, is there any doubt about the electoral outcome?

Maybe it is time to create a national pension system that replaces all existing retirement plans and provides everyone with a defined benefit pension, which should be indexed to inflation. It should be fully funded by an initial debt issue and sufficient payments from working taxpayers.

This giant pool of money could then be invested in public and private projects that offer respectable returns and help rebuild America.

Many would view this as another step away from personal responsibility and toward socialism. But this Basic Income Concept was first proposed by no less of a wild-eyed socialist radical than economist Milton Friedman.

Separating employee pensions from the bottom-line pressures employers face by creating a national pension system can restore the fading promise of a comfortable retirement to millions of Americans. At the same time, money paid into the system can be invested to rebuild our country for future generations.

originally published: September 1, 2012

Questionable calculations keep checks small for people who have shrinking options

As the prolific and insightful author anonymous once said: “The two things you don’t want to see being made are legislation and sausage.” The latest evidence for this same observation is how the federal government manages and calculates the Consumer Price Index.

Looking at how the CPI is calculated shows how inflation is underestimated and denies Social Security recipients full cost of living adjustments, eroding the real value of their Social Security income.

For the uninitiated, the standard CPI is the benchmark measure of inflation calculated monthly by the U.S. Department of Labor’s Bureau of Labor Statistics. Widely used and closely watched, the federal government uses it for multiple purposes. For example, the CPI is the standard means for adjusting Social Security benefits paid monthly to about 56 million Americans. The goal of this cost-of-living adjustment, first paid in 1975, is to prevent a decline in the purchasing power of retirees’ benefits.

However, 35-plus years later, elders and Social Security recipients are being hammered by how government measures inflation. Here’s how.

Let’s consider the inflation rate, a key driver of the CPl. If the federal government mistakenly underestimates the rate of inflation as part of the standard CPI, Social Security recipients receive a smaller earned benefit check than they need to stay even. From Quincy to Carlsbad, Calif., understating inflation means a substantial reduction in retiree’s standard of living. For the feds, understating inflation makes real GDP growth appear higher and makes budget deficits seem smaller.

For starters, in the turbulent decade ofthe 1970s the concept of”core inflation” was invented by the feds by subtracting food and energy in calculating CPl.

The feds argued for this changed definition of inflation because oil and food prices -two large components of the average family’s budget- were rising too rapidly, outpacing the rest of the economy.

Does it still make sense to exclude these two categories? Certainly, food and energy have been going up for quite some time. And fundamental global demand for food and fuel, in particular, have changed dramatically: surely these impact inflation on a consistent basis? Fortunately for our seniors, the core CPI is not used to set Social Security payments.

Then a few vintages ago in the mid-1990s, more changes were made in the standard CPI methodology that understates inflation. Experts argued that when consumers could no longer afford the rising price of a specific product, they would purchase a cheaper substitute. If steak, for example becomes too expensive, the consumer would switch to hamburger. Brand names give way to generics. And so on. So the CPI would reflect hamburger price for consumer meat purchases, not steak. Does this change in methodology reflect price changes? But wait- as with the Ginsu knife- there’s more! The CPI was also adjusted for “quality effects”. So if a car costs 10 percent more, but it is 10 percent higher in quality,  then presto there is no inflation to report. Same if a basic computer is 10 percent faster: a 10 percent increase in the price is not really inflation. Higher prices for gasoline subject to the government mandated use of ethanol are also left out because we get a “quality” improvement from breathing cleaner air.

We could go on but you all catch what the joke is now. When you consider how the CPI is managed and calculated, it raises the basic question never to be mentioned in mixed company: Is it a measure of inflation or is it pure propaganda? To be totally kosher, a combination of Fed policy of keeping interest rates low through the end of 2014 and the likelihood that the CPI understates inflation punishes our seniors. Many of whom are already living close to the ground; chasing certificates of deposit and other safe investment yielding less than 1 percent while their standard of living declines. Indeed, these interest rates are below the rates of inflation. Not only is their income lower but the effects of inflation have eroded their buying power.

Our economy is not just moving slowly, it seems as if it’s trying to grow with the emergency brake on. Perhaps it is time to correct the CPI calculation to give our Social Security recipients what they need for essential items such as food, shelter, clothing, transportation, and medical care. Of course, trying to explain this to our political class in Washington is like trying to explain psychology to someone who has never met a human being.

originally published: July 7, 2012