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The Lie Upon Which Rubio’s Social Security Plan is Built
Marco Rubio has laid out his plan to save Social Security in the 21st century at National Review Online. As with pretty much every other Republican candidate’s plan save Huckabee’s, it basically entails three steps.
The first: Raise the retirement age for receipt of Social Security benefits:
With Americans now living longer than ever before, the strain on Social Security’s finances is steadily increasing. … First, we must gradually increase the retirement age for individuals under 55.
This is often (nearly always) the first idea. Were this healthcare, it would be called rationing. Yes, people live longer today than they did when the system began. The system was never designed to pay a person for 20 years of inactivity in the labor market. Well, duh: The system was never really designed to pay out at all. It was merely a tricky, feel-good way for the government to confiscate even more of a person’s wages. People were to pay into the system their entire working lives, and if they won the genetic lottery, maybe collect a few years of benefits before the Reaper made his appearance.
Well, innovation has again thwarted the money-grubbing politicians, and people are living long enough to force the system to make good on its so-called promise. The most immediate and obvious solution is to change the promise. Sure, government may have said you were paying into an “insurance” program, investing in your own future with the backing and surety of the United States Government, but it was a lie. The Supreme Court long ago decided that taxes paid into the Treasury belong to the government; the government is at liberty to spend the money as it sees fit; and taxpayers have no rightful claim on any money once the government takes possession of it. Government can, should it will, simply alter the time and amount of “return” you get after a lifetime of seeing 12.4% of your wages confiscated and squandered by the government. This leaves the question of whether or not it should.
To those who have never done physical labor, it probably makes sense just to inch up the retirement age. Sitting at a desk shuffling papers and staying awake through gawdawful PowerPoint presentations is one thing, humping load chain and slinging it over cargo on a flatbed is something altogether different. Working past 65 because you’ll live beyond that (with whatever quality of life that entails) is a completely different experience for different people in different occupations. At 43, I already fear doing my job at 53, and I cannot imagine being physically capable of performing it at 63 or 70.
This ties into Rubio’s second step, means-testing Social Security benefits:
[W]e should do more to protect seniors on the bottom of the income scale, who are too often consigned to poverty in old age. This can be done by reducing the growth of benefits for upper income seniors while making the program even stronger for lower-income seniors.
Again, this is a very common approach to the problem. Return more to those who require more. The stink of Marx is all over the idea, but that’s another problem. Those to whom this is directed are likely the very same ones the first idea tries to kill by keeping them in the labor force longer. The amount of physical exertion required in an occupation seems to often be inversely proportional to the compensation received for it. Like the first, this suggestion is rationing. It is worse because it returns more to those who contributed less financially, and makes the redistributive quality of the program more blatant without acknowledging it plainly. It embodies the Marxist maxim, “From each according to his ability, to each according to his need.”
Rubio’s third idea (also standard conservative dross) is the least bad of the set, but comes with its own negatives. He calls for private retirement:
[W]e must empower our people to save more for retirement. Social Security should be one component of retirement security along with employment-based plans and personal financial assets like IRAs, mutual funds, and personal savings accounts. Americans should also be able to save for retirement without paying taxes on their retirement investments. My tax-reform plan eliminates taxes on interest, capital gains and dividends. Educating Americans on the benefits associated with retirement saving and planning is also important.
This is a model the government is already mostly behind, at least for its own workforce. People make a big deal of federal government pensions, but for a couple of decades these have been a tripartite system comprising a small pension, Social Security, and the Thrift Savings Plan (a contribution-based retirement account with some employer matching contributions). If such a system is good enough for the Feds, surely it’s good enough for everyone else. What the Senator describes is exactly what is already in place for him and his staff. In this system, Social Security becomes less important to one’s retirement. The individual is mostly left to sink or swim based on savings and wise choices about how that money is invested and grown.
Mind you, the same disparity exists here as it does in the other points of reform. Those who make less have less to save; their physically useful work life limits the amount of time they can contribute to their own savings; and, let’s face reality here, they may not have the wherewithal to give appropriate attention to the husbandry of their retirement accounts. The same people who work harder will still have less to show for it, and they will be just as dependent on the benevolence of government in the end. Things could turn out better for them, but there’s no guarantee. So it’s easy to see why Huckabee’s call to keep the status quo is appealing to the blue-collar segment of the electorate. Of course, using the tax code to compel desired behaviors is yet another un-conservative idea that’s widely accepted when couched in the right terms.
Well, smarty Prawn, you might ask, what exactly is your prescription? I can’t lay out a nice three-point plan to save Social Security or provide comfort in old age to the populace. I hate to point out a problem without suggesting a solution, but this matter is way bigger than me. The key thing, in my uninformed opinion, is to start hacking away at the very root of the problem: The entire Social Security system is a lie. This is not an insurance plan where you pay your premiums and receive your reward when it’s your turn.
Social Security is a direct payment welfare program. The wages of the barista at Starbucks, struggling through on $11/hour (or $15 in Seattle), are confiscated and given immediately to her grandmother. The young are taxed to subsidize the old. This often takes from those with the greatest need and just as often gives to those with the least. If we really believe this program satisfies a collective moral obligation, then let’s treat it as such. Let’s abolish the myriad taxes and replace them with “one tax to rule them all.” Take from all without bias or favor, give to those actually in need. If we must redistribute wealth, if we must ration the redistribution, then let’s do it all above-board and honestly. If we want our elderly population to live in dignity, if we believe a redistributive welfare program accomplishes that goal, then let’s do exactly that and nothing else with the taxes we confiscate for that purpose.
Rubio’s plan is tinkering around the edges and playing with the balance sheets. But never touches the real problem, which is the lie upon which the system is built.
Published in Domestic Policy, Economics, Elections, General
We should note that at some level, there isn’t a huge difference between raising the retirement age and decreasing benefits.
Because most people can’t find a way to work longer, they are forced to live off of their own savings (provided they have some) to bridge the years until their benefits kick in.
But reducing benefits also requires people to fall back on their savings to bridge the gap between what they thought they would receive and what they actually receive.
So either way, we cut payments and force people to spend more of their own savings. The main difference is that it’s easier to means-test cuts in benefits vs. means testing retirement age.
If this is a fact of Nature (need more proof) then trouble looms. For, as BDB evidences in another thread, the younger generation seems to be getting restless. They are not very happy about seeing their payroll taxes mount and mount to pay folks for living longer.
Useful analysis.
There are two other options besides cutting benefits or raising taxes.
1. Massive deregulation to allow the economy to grow such that new tax revenues can make up the difference. It won’t happen any more than taxes will be raised or benefits will be cut; too unpopular with the people who actually run the government.
2. Massive inflation to allow benefits to effectively be cut without needing to pass unpopular legislation or new administrative rules. Frankly, I think this will be the solution.
I really don’t know why this is the case, or if it is permanent. Perhaps working lifespan simply lags overall lifespan and it’s only a matter of time before people start working happily into their 70s. But given the long-term trends toward earlier retirement, I’m not convinced.
As to the societal restlessness, I think that can go both ways. I was recently shocked to visit a Safeway where over 80% of the public-facing staff appeared to be at least 55 years old, and many seemed to be well over 60. I can imagine a fair amount of turmoil from this age group when they find themselves laid off from their white-collar career at age 55 and are forced to spend another 15 years bagging groceries until their arthritis becomes too much to bear (not to mention the unrest among underskilled teenagers who can’t get a first job anymore).
Manfred, I’ve been thinking that benefits should be cut and payroll taxes kept the same. I don’t think the younger generation should have to pick up the bill. The salesmanship would be needed for the over 50 crowd, and it will take a doozy. But it’s the right direction to head because the younger generation did not do this to us.
Do you have any idea how much benefits would have to be cut? I don’t, really. My guess is 30%. But that might vary between 0% for the poorest to 100% for the richest with means testing. Yes, the rising lifespans will also force monthly benefit cuts.
MFR, raising the retirement age keeps SS an “entitlement” for the healthy and employed till the higher retirement age. If there’s begging to be done, make it for everyone, which is what SS means testing does. Also, if SSDI ends up being substituted for SS, there’s not much cost saving.
Yes, both raising the age and cutting benefits require people to use their own savings. The difference is, raising the retirement age puts an immediate severe burden on a limited group of people, while cutting benefits puts a prolonged lesser burden on everyone.
Historically, increases in retirement age have been announced well in advance, giving those affected some time to prepare financially. I agree that, inasmuch as it applies to everyone equally, increasing the retirement age has a relatively regressive effect (i.e. hurts the poor more), while cutting benefits can easily be done in a progressive fashion. Nonetheless, from a 30,000-foot perspective, I don’t think there’s a huge difference (in spirit) between the two – the main feature is less spending on current benefits.
Of course, we could theoretically also make retirement age a means-tested factor (albeit with much more difficulty).
Good and thoughtful essay! I too wondered how the usual bromide of working longer would work for those involved in heavy manual or physical labor. Ditto regarding blue collar workers who have scant expendable income to set aside additional money in 401k accounts. Not mentioned here is the additional question as to why SSI is capped. This makes no sense for those who are top earners, and because of their incomes, are more likely to live longer and therefore use more social security outlays.
I recall that Bush 43 had at one point proposed investing a portion of one’s SS deductions into the market, and guaranteeing at least the same return if the market failed. That might be one way of providing a better rate of return to the work force (in addition to removing the cap on contributions).
Perhaps also a program that facilitates a (voluntary) minimum contribution to a 401k or other thrift plan program could be established. With a 401k that I’ve contributed to, the contribution was pre-taxed. That reduced the amount of tax taken out of my paycheck. If a person has an income that falls below taxable income, then perhaps he/she would see more EITC money at the end of the year.
When I first considered contributing to my 401k, my planner told me that if you only put aside $25 per paycheck (monthly) at the beginning of your working years, you would wind up with a decent set aside by retirement. I think that advice would be well taken with those people entering the workforce today.
Of course it does. I think the failures of this program are pretty obvious to everyone. The question is not whether social security is a bad program, but what can be done about it.
For libertarians and other free-market types, Social Security and public health care present a very real problem: What should society do with people who fall on very hard times?
Our social values (on both the left and right, I believe) tell us that we are not about to let a person starve to death in the streets. Nor are we going to let someone die of a disease for which there are ready, efficacious treatments. We’re just not.
Think about the implication of that for a fully private insurance system. If it’s truly insurance and voluntary, then some people will choose not to buy it. And then when the day comes when they need it, they will turn to the rest of us for help. What then? The person with no health insurance shows up in the emergency room with a broken femur. Are you going to turn him away? How about if he comes in with a cough and you see he has operable lung cancer? Are you going to let him die because he can’t pay? If an old person loses his job and has no savings for retirement, are you just going to let him starve to death or panhandle on the street for survival?
I believe most people understand that we will still try to help these people. And the knowledge of that means that the value of insurance goes down. Our charity becomes a moral hazard, and causes people to rely on the good will of strangers anyway.
So my fear is that a fully private retirement system will devolve into a system wherein people don’t save for retirement anyway, and in the end taxpayers wind up paying for a big welfare system for the aged who have no savings. I’m not sure that’s an improvement.
I’m not saying don’t means-test. Just that the most politically palatable reforms (if any reforms are deemed politically palatable enough to enact) might be a mishmash of adjustments that include raising the retirement age, too.
And that, if the retirement age were raised, SSDI would become the natural alternative for some people, and that any reforms raising the retirement age would want to take the extra burden imposed on SSDI into account as well.
The affected are people who find they are in poor health or otherwise unemployable at the old retirement age, who must live on savings till the new retirement age. When the retirement age is raised they are fifteen or thirty years from retirement, most likely healthy and employed, and don’t know they are going to lose that lottery or that the plans they have for non-physical career transition won’t succeed.
That’s why it’s politically appealing- benefit cuts apply to everyone (all voters) and retirement age rises are really only going to hurt people who don’t know it yet (almost no voters.)
Christie’s plan spreads the pain:
1) higher retirement age, gradually phased in (but note JoJo, you can retire before the RA, you just take a hit to benefits,
2) means testing to squeeze out higher income folks (unfortunately only small fraction of recipients)
3) reduce cost-of-living adjustment (effectively reducing annual benefits)
… and comes up ~40% short (somebody’s estimate – can’t vouch for veracity)
so, probably we also need to spread the pain a bit wider:
4) increase in payroll taxes.
This seems to me to be ‘The’ solution. Only if you spread the pain do you get public buyin. Additionally government is going to want to strive to insure taxpayers put aside as much savings in 401K’s as possible to complement SS payout – so that there is less pressure on the government to maintain benefits, giving the gov more degrees of freedom in crafting solutions. Consequently, expect a tax-friendly approach to those savings…
Anything I missed? (If we can spur economic growth, become leading exporter of hydrocarbons, then maybe the shortfall shrinks. Don’t see inflation being used to ‘effectively’ reduce benefits because cost-of-living adjustments compensate for cheap money).
PS. Scary thought: what if conservative assumptions in life-expectancy growth is being used to forecast future payouts? Is anyone paying attention to the current slope of the life-expectancy curve provided earlier? And what if the growth rate for the economy projected out into the future reflects rosier times?
None of these solutions, though possibly palpable politically, address the foundational lie that we can provide old age welfare to everyone. We cannot, no matter how were phrase it.
Great discussion! More truth has been spoken about Social Security on this one thread than in the halls of Congress for 40 years.
It seems we have 2 real issues; the financial (and economic) realities of Social Security, and what is politically possible.
The realities: Social Security, however well intended, is an intergenerational Ponzi scheme that rests on a (highly dubious) governmental promise that we can no longer afford. In addition, it substitutes government welfare for private investment. Social Security taxes are exactly that; TAXES. It’s not an investment that goes into an account marked “John Q. Public”. The taxes back Treasury bonds filling a “trust fund” that consists of nothing but IOUs, the theoretical value of which is being drained as we type.
The politics: While it is now possible to talk about Social Security, there are large, politically powerful constituencies ready to vilify anyone that speaks the truth about SS. Any reform plan has to be preceded by a long period of persuasion, something like, oh, I don’t know, a Presidential campaign.
As Paul Ryan might say, we only earn the right to do something on SS if we campaign on it and get the American people’s assent. They don’t have to love it, but if you say long & loud that you are going to do X, Y & Z to fix Social Security, and they vote for you anyway; no one can accuse you of a bait-and-switch.
Continued…
The solution I put forth may not be simple, it may be costly, it may be politically unpalatable, it might squeeze a lot of people financially for a couple of generations, but if it is not adopted in some form in 40 years our grandchildren will be having this same debate on Ricochet, only the shortfall will be many times more severe.
If it is adopted in 40 years this problem will be solved.
We don’t need to regulate the market for private accounts any more than we do now for private pension accounts. If that assertion turns out to be false, then by all means regulate them with the lightest touch necessary.
We don’t need to guarantee a sufficient income for every person in his old age. Either he saves for it or he relies on his family for it (remember that?). If someone simply refuses to save for himself, he is on his own. If he has had bad luck (disease, injury, etc.) charity should take care of him. The moral hazard of an implicit promise that we will take care of the lazy and shiftless will defeat any program. If there is to be a safety net, it must be at a bare subsistence level.
Our “leaders” do not anticipate and prevent crises. They deal with them post facto, as though no one could have anticipated such a problem. They already have an out, thanks to the supreme court (sic). They don’t have to pay! So, at some point, they will simply “means-test” benefits as an “emergency” measure. An arbitrary amount will be chosen. Those earning more than that amount (maybe they can even finagle it to adjust for net worth, with more imagination and torture of language) will be labeled “the rich” and no benefits paid to the evil ones. Crisis solved. Why pay a political price to prevent a problem when a perfectly good “out” already exists?
This discussion, with its many arguments, suggested solutions, objections to those solutions, permutations of same, reminds me of another ongoing discussion that I’ve been observing for the last three years.
That’s when I moved to North Carolina. Every Sunday for three years the newspaper has had an editorial, a guest column, a letter to the editor (or several), or a news story, about the salaries of public school teachers. Not about computer programmers, not about dentists, not about any other workers. Only teachers. And why? Because their pay is determined by a political mechanism instead of a market mechanism. So, instead of teachers getting what the market will bear, they argue every week that they should be paid more than they are.
The mechanism for providing income for retired persons can not be “solved” by a political mechanism. Instead, we must argue: “I can’t work till I’m 66. My job is too physically taxing.” “I paid in a lot. I should get back a lot.” “You already earn too much. We’re not paying for you.” And on and on.
How is any of this a conservative approach to the problem?
Agreed.
It’s only conservative to the extent it acknowledges political reality. If dismantling the whole shebang proves politically unfeasible (and there’s hardly a shortage of evidence for political unfeasibility), then what’s our next-best option?
The point isn’t a political solution to what shouldn’t be a political problem, but reducing the damage of a political “solution” that we in all likelihood can’t get rid of.
Reasonable people can disagree on what is politically unfeasible, of course. (It would be nice if scrapping the whole system were feasible…)
Maybe we can’t get rid of it this year, but with $18 trillion of debt, and maybe another $60 trillion of unfunded SS and Medicare liabilities, the day might come when a substantial majority will come to grips with the consequences of inaction.
When the people in charge of calculating the COLA are also the ones in charge of creating the inflation, I think one will find that somehow, the COLA just doesn’t keep up.
In a very real sense, this is already being done for retirees with private accounts by keeping interest so low. Someone trying to live off their savings now is seeing inflation eat away 2-3%/yr while interest adds effectively 0%. But unlike a law passed that steals money from retirees to give to the fed, by happening subtly through monetary policy people don’t see it. What you don’t see, you can’t complain about or punish the people who are doing it to you.
WC,” the government cuts you a check” where does that money come from?We have 20 trillion dollar deficit.Forget any interest, I have over$600,000 dollars out there. Even though I donate my benefits to charity I want that option.
You’re taking me way too seriously.
Of course, we’re out of money. We’re out of money if we do nothing about SS and we’re out of money if we follow my (wild-a–ed) plan. There’s nothing new here, except I’m acknowledging there’s no path to solvency, but we could cut people loose by paying them off and buying their votes. It’s a twofer.
Where does the money come from? Where does it come from now?? We borrow and print. That’s not going to change until it all collapses.
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Some kind of means-testing is going to be necessary. It may not be completely fair in the micro sense, but it is far more fair in the larger sense. Making sure the system is sustained while we gradually transform it. SS is welfare for the elderly in everything but name; why not own up to that fact and let people know that some level of sacrifice is going to be needed?
Private accounts are essential. As much as it pains me to say it, they will probably have to be mandatory. Private accounts will liberate investment capital and allow people to experience a great thing; property rights. That account will be yours, period. You can start making them mandatory and reducing benefits for current workers under the presumption that the difference will be made up by the investments you privately own (the longer you have before retirement, the more your benefits are discounted).
Sorry, had an interruption.
People my age and younger (I’ll be 49 shortly) are going to have to accept that we will be taking a haircut. The issue is much less technical than a matter of political will. We have to buy some time with a band-aid while we move the system toward rationality. I would love to go right to private accounts tomorrow, but it just won’t fly politically.
WC, there are about 60 million people on SS. Any kind of meaningful buyout is beyond our ability to borrow. As I said before SS taxes were about 80 billion less than the pay out or about 10% of our current annual deficit. 80 billion is very doable without the rest of the deficit. Maybe this is where all the angst should be directed. All of you who are complaining about baby boomers not doing anything to correct SS now have the change do do something about 700-800 billion deficits and 20 trillion debts. Step to the plate boys and girls.
I don’t understand what you’re suggesting. What are the post-boomers supposed to do about the 700-800 billion deficits and 20 trillion dollar debt without addressing these entitlement programs?
According to some estimates, SS payouts are one third to twice as much as recipients were taxed, with a 2% adjustment for inflation. In my “plan” (more like a college bull-session) the up-front cost to buy-out recipients would be high (depending on the generosity of the check), but then they’re off the rolls, with a smaller and smaller inflicted deficit each incremental change as the Baby Boomer bubble passes through.
So, fine, start with those age 75 and up (or whatever) to contain the cost and then adjust the age downward in a way that’s economically feasible.
And why does it have to be “borrowed” when we’re already so good at printing funny money?
I am suggesting that post boomers tackle the other 90% of the deficit before you throw SS recipient under the bus. Earlier BabyBoomers were blamed for not fixing SS. Now it is your turn to fix the other 90% not involved with SS. WC. You really don’t want more funny money. We are just paying off one credit card with another. How long would that work for you especially as interest rates start going up? Yes some people get back more than pay in yet others get nothing at all like my Father.Is there no return on investment ? Believe me inflation compounded has been more than 2%.By the way printing money is so last century. Now we just do it digitally.
Um … you should look into your numbers.
Per National Priorities and US Government Spending:
Of the total 3.8 trillion dollars of government spending,
That’s $2.719 trillion of spending that we can’t cut or we’d be unfair to old people, lose our credit rating, or risk our national security and be unfair to veterans. If we don’t cut any of those, we have $1.081T to work with.
So how much are we borrowing right now? Of that same 2015 spending, we’re borrowing $583B. So right now, without any changes to the system whatsoever, those four programs take up all but $498B of our tax revenue. The rest of the government is debt financed. And again, this is with most baby boomers still working and relatively healthy!*
There is no financial jiggery-pokery that will somehow let us not have massive cuts, massive tax increases, massive borrowing, or massive inflation, and likely we’ll have multiple of those. To those claiming that’s unfair to Baby Boomers, in your generation’s words:
* An earlier version of this post used a couple of wrong numbers, lumping unemployment with SS and food assistance with Medicare/Medicaid. The point remains though, that to have a balanced budget right now without touching those three sacred cows (old age welfare, healthcare, and the military), we’d have to cut all other government spending in half. That’s unemployment benefits, food stamps and other welfare programs, and all the executive departments.
And again, this is while most Baby Boomers are still paying taxes into the system, not getting checks back out, either for being old or for being sick. When they start retiring en masse, they will destroy the finances of the programs from both sides.