Social Security

For Many People, It is Best to Delay Taking Social Security

From MarketWatch:  It pays to delay taking Social Security

A “delay” strategy is particularly beneficial for married couples, according to Laurent Belsie, a writer for the NBER Digest. The primary earner can delay claiming benefits, while the secondary earner takes benefits early. If the secondary earner outlives the primary earner, he or she gets to step up to the primary earner’s benefits.

Read the article for a complete explanation.

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Thursday, July 12th, 2012 Social Security Comments Off on For Many People, It is Best to Delay Taking Social Security

Three Things You Can’t Say About Social Security

“Social Security needs a big fix, and soon.   If you have any doubt, take a look at this week’s analysis of Social Security’s annual trustees report, by Alicia Munnell of the Center for Retirement Research at Boston College.” — Eric Schurenberg, The Fiscal Times

The year in which Social Security will no longer be able to pay all of its promised benefits is 2036 (Last year, they thought it would be 2037).

Social Security began running at a deficit in 2010.  This wasn’t supposed to happen until 2015.  This means that every year, Social Security pays out more in benefits than it collects in taxes.  It theoretically has enough in its Trust Fund to continue paying benefits until 2036, but there is no money in the Trust Fund.

The Trust Fund has IOU’s from the federal government.  Tapping the Trust Fund means that Social Security presents a bill to the US Treasury, and the Treasury has to pay.  Of course, the Treasury has to get the money from somewhere, and that means higher taxes, reduced spending elsewhere, or more borrowing.

These facts, reported by Eric Schurenberg on July 28, 2011, publicly expose points I made in my previous posts about Social Security.

Schurenberg lists Three Things You Can’t Say about Social Security:

1. You can’t say that Social Security doesn’t increase the deficit. As of 2010, we are permanently running in the red.

2. You can’t blame it on the boomers. The usual explanation for Social Security’s funding problems is that the baby boomers are too big a load on the system.  But the program doesn’t get any better after the boomers die off.  The reason:  The boomers’ kids aren’t having enough kids themselves.

Remember, Social Security is a pay-as-you-go system: today’s workers’ taxes pay today’s retirees’ benefits.  [I told you, Social Security is Welfare.]  To keep going, the program needs a lot more workers than retirees.  Or as financial writer Jane Bryant Quinn put it, “It’s a saving program in which you deposit children.”  The younger boomers and Gen-Xers haven’t been depositing enough future workers to take care of their parents.

3.  You can’t say the payroll tax cut is temporary. You and everyone else with a paycheck got a two percentage point cut in your Social Security payroll tax this year.  Taxes, once cut, are hard to reinstate.  (Remember the Bush tax cuts that were supposed to expire in 2010?)  And, in fact, the main topic among policy makers regarding this year’s Social Security tax cut is not when to restore it, but how long to extend it and whether to stretch it to three percent and maybe to offer it to employers as well as employees.  That’s great for your pocketbook, possibly helpful for the economy, but it, too, widens the deficit.  The law says the payroll tax cut  has to be replaced by general revenues, so the tax cut doesn’t change Social Security’s accounting, but that’s just fiscal sleight-of-hand: you the taxpayer eventually cover the cost, whether it comes out of your FICA taxes or your income taxes.

More to the point, the shifty accounting dodges the “Big Question about Social Security.”  While Social Security’s shortfall is manageable, it is also real.  The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits.  There is no silver bullet.

[I have quoted extensively from an article by Eric Schurenberg.]

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Tuesday, June 28th, 2011 Social Security Comments Off on Three Things You Can’t Say About Social Security

How Much Do We Spend on Social Security?

For Fiscal Year 2009, Social Security, Medicare and Medicaid accounted for 39% of all Federal spending.

US Federal Spending

Here is a chart of the US population by age:

Age of US Population

Notice the number of people currently over age 65 relative to the number of people under age 65.

Something has gotta give.

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Monday, October 18th, 2010 Social Security 1 Comment

Why Social Security is Welfare and Not a Retirement Savings Program

Americans have been led to believe that the Social Security program is a government mandated retirement savings program. Most Americans believe this, because that is what they have been taught by government information services and by their fellow citizens.

First, let me say that I am not claiming that Social Security is bad. I know that it has been extremely beneficial for many, many people. In this article, I will not even address the debate of whether Social Security is a bad idea or a good idea. I will simply argue that it isn’t what you think it is.

Since I claim that Social Security is Welfare, let me point out a few reasons why it doesn’t look like Welfare:

1. The government holds the Social Security taxes in a separate account which is used to pay benefits. This looks like a national retirement account.

2. The amount retirees receive in benefits varies according the amount of Social Security taxes they paid during their working careers. This looks like a “defined benefit” retirement plan.

3. Retirees can receive Social Security even if they don’t need it.

Let me address these points.

1. There isn’t really a separate account or “lockbox” holding the money that workers have paid as Social Security taxes. This “account” is merely a bookkeeping fiction that keeps a tally of all Social Security taxes collected and all benefits paid. The government has actually spent all the money collected and replaced the money with Treasury bonds. I have another blog post that talks about this.

You don’t have an individual “account” with Social Security. The taxes you have paid are not held in your name for future disbursement. Not even a specified percentage of your taxes is guaranteed to be paid to you in future benefits.

2. The government calculates your benefits based on your earnings the last thirty-five years you worked (approximately), not based on your total contributions. This calculation is complex and changes from time to time depending on the priorities of the current administration. Your contributions are not credited to an individual account as in a 401K or an IRA.

If you die, the government may pay some benefits to your surviving spouse, but there is no retirement account that can be inherited. The money you pay in Social Security taxes is no longer your money; as soon as it is collected, it is the government’s money. The government has promised to pay you something when you retire, but you won’t know for sure how much benefit you will receive until you apply for benefits.

3. It is true that you don’t have to prove that you need Social Security to receive benefits, but I believe that will change.

So, why do I claim that Social Security is Welfare? Because working people are taxed and the tax money is given to people who aren’t working. Unless you are a senator, a congressman, a preacher, Amish or a member of one a few exempt groups, you don’t have any choice but to pay the tax. Actually, this is logical, because the government can’t hand out Welfare benefits without forcing workers to pay for them via taxes.

Since the beginning of the Social Security program, we have been over-taxed. What do I mean “over-taxed?” Well, each year, the government has collected a lot more Social Security taxes than it has paid out in benefits. We have been led to believe that this is a good thing and that reserves have been accumulating. In fact, the money has just been spent on other government programs, and we have been grossly over-taxed.

Today, we are fairly taxed. Social Security pays out in annual benefits just about the same amount as it receives in Social Security taxes. Hurray! We are no longer over-taxed.

In the future, Social Security benefits will exceed the taxes collected. We will then be under-taxed. I sure hope the government doesn’t realize that it is not taxing us enough, but I won’t hold my breath.

The government admits that Medicare is Welfare, but claims that Social Security is not Welfare. However, they look almost identical. You have to reach retirement age to collect either benefit. You have to pay the tax whether you want to or not. The taxes you pay while working are used to pay benefits to people who are not working.

What’s the difference between Medicare and Social Security. Well, Medicare taxes aren’t capped whereas Social Security taxes are only paid on the first $106,800 of your earnings. Let me point out that Medicare taxes used to be capped just like Social Security, but the government changed the rules. You can bet that there will be more rule changes in the future.

Another difference is that the benefits you can collect from Medicare can be nothing or almost unlimited, depending on what you can prove you need. Social Security benefits are fixed at a specified amount per month. To me, this just sounds like Social Security is Bad Welfare. Retirees who need Social Security benefits are probably receiving less than the retirees who don’t need the benefits.

Looked at objectively, Social Security is a Welfare program where the government taxes your earnings, but instead of paying benefits to needy people today, the government promises to pay benefits to you in the future when presumably you will be needy.

Unlike a retirement program, the government changes the rules on how much you have to contribute as taxes. They have also changed the rules on what you have to do to qualify for benefits. To receive benefits, you have to accumulate 40 “points” during your working career and you have to reach “retirement age.” The government has changed the retirement age from 65 to 66 or 67 depending on your birth date.

I think we all can see that the retirement age will need to be increased even more for the government to afford to pay the benefits. I believe that sooner or later, the government will admit that Social Security is Welfare, and retirees will have to prove financial need to receive benefits. It won’t be hard to convince the voters that this is the right thing to do. Why should the government give retirement benefits to Bill Gates or other rich retirees? It’s just a waste of money. That money is better used by giving it to poor retirees.

The next step will be that the benefits will not be computed based on the wages you have earned. Once we decide that the benefits are based on need, why should your contributions have anything to do with it. At this point, everyone will see that Social Security is Welfare.

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Saturday, October 9th, 2010 Social Security 1 Comment

Why I Think It’s OK That The Government Has Borrowed And Spent All of Social Security’s Money

You may be surprised that I don’t object to the government “borrowing” Social Security’s funds and replacing it with IOUs.  Here’s why:

Imagine a cartoon where a man sits at a desk in front of a wall marked “Social Security Vault.”  Consider it to be a big lockbox.  The Treasury Dept./Tax Collector brings this clerk an envelope every month marked “Social Security Payroll Taxes.”  The clerk takes the money out of the envelope and puts it into a slot in the Vault.

Social Security Vault

Also, every month, a Social Security agent comes to the clerk and tells him how much money is needed that month to make the payments to old people and disabled people.  The man goes over to the Vault, opens a drawer and takes out enough money to make the payments.

This goes on for decades.  Everyone assumes that the Vault is holding money for future payments.  Then, a curious reporter under the Freedom of Information Act, demands to look inside the Vault.  There he finds a furnace and a printing press.

When money is put into the slot, the money is burned in the furnace.  When money is needed, it is printed and put in the drawer.  The reporter is outraged and confronts the man at the desk demanding why this is done.  The man replies “What does it matter?  You can’t tell the difference from outside the Vault.”

Behind the Vault

“But, as time goes on and payments go up,” the reporter says, “This printing of money, will cause future inflation!”

“Same as if I handed out the original bills from the Vault,” says the clerk.

“But what if someday you end up printing more money than you have burned?” asks the reporter.

“Hey, I’ve promised to pay these benefits regardless of how much money I’ve burned.  I would eventually need the printing press anyway.”

“But,” says the reporter, “Just printing new money makes Social Security benefits look like welfare instead of returning savings.”

The man replies, “When you tax people who are working and give the money to people who aren’t working, it IS welfare.”  (I have another blog post about this.)

“OK, I see that,” says the reporter, “But for all these decades you have been taking money out of circulation.  The economy could have used that money.  You’ve been destroying the money that we worked so hard to earn and contribute to Social Security.”

“You’re right,” the man replies.  “It would have been better if, instead of burning the money, I had put it back into circulation.”

Well, that’s what the government has really done.  They’ve put this money back into circulation thus avoiding deflationary pressure for all these decades.  The government has spent the money as it was collected.

You see, the government can’t just keep money in a vault.  It has the same effect as just burning the money.

Now, the remaining controversy is:  How should the government put the money back into circulation?

What the government has actually done (we’ll call it Method 1) is spend the money, as soon as it is collected, on all the things that government does.  Liberals will generally favor this method.  Why tax people if you aren’t going to use the money?  If payments will exceed taxes, either raise taxes or it’s back to the printing press.

The other alternative (Method 2) would be to buy some assets that could be sold later to raise money for payments.

Using Method 2, money also stays circulating.  Tax money collected is immediately spent to buy assets.  When benefit money is needed, assets are immediately sold and the money is put back into the economy via benefits paid to pensioners.  Conservatives will favor this method.  If asset values go up, good for us.  If asset values go down, well it’s back to the printing press.

From a social perspective, Method 1 has advantages over Method 2.  Under Method 2, the government can’t do as much today as it could under Method 1.  Under Method 2, more taxes would have to be imposed today to have the same level of government services, or services would have to be reduced.  Also, under Method 2, rich people (who have assets to sell) would get the re-circulating money, whereas under Method 1, presumably, less affluent people might get the money.

Now, you may claim, the government actually has “invested” the money by giving Treasury Bonds as IOUs to the Social Security Vault.  Treasury Bonds are considered safe investments.

For individuals, Treasury Bonds ARE investments.  But for the government, it is the same as promising to print more money (e.g. about 3% more – the bond’s yield) in the future than they have spent today.  Selling yourself your own IOU is not investing.

Let’s say that you have a checking account and a savings account with $1,000 in it.  You want to spend more money than you have in your checking account, so you move $500 from your savings account into your checking account and put an IOU for $500 in your savings account.  Nobody would claim that you still have $1,000 in your savings account, but that’s what the government claims about Social Security.

The government is right to either buy gold, stocks or real estate, or spend the money on welfare and war.  Just don’t burn the money.

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Saturday, October 2nd, 2010 Social Security 14 Comments

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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