The Actuaries Take on Social Security
John McCain and Wonks Anonymous are not the only people thinking about Social Security these days. The American Academy of Actuaries has also weighed in on this topic. Wonks Anonymous was particularly attracted to the accurate and simple statement of what Social Security does and what the systems problem is:
Current benefits are supplied by payroll taxes from today's workers, all of whom pay a 6.2 percent Social Security payroll tax on income up to $102,000. Their employers match it, for a total tax of 12.4 percent. The tax applies only to earned income, not to passive income such as dividends and interest.
Benefits are projected to exceed the Social Security system's tax revenues in about nine years. The program's trustees have said the Social Security trust fund will be depleted by 2041 without changes.
Note that two different issues are raised by the second paragraph and two different time frames are given:
In nine years, at about the time that large numbers of my generation will be begin to retire, current payroll tax revenues will no longer be enough to pay for current benefits. This has been expected since the 1980's. In order to provide for this event, payroll taxes were doubled - a note to the Club for Growth, Reagan did raise taxes. This payroll tax hike happened while he was president. The Social Security system used the added revenue to accumulate US Government debt.
In nine years it will begin to cash in this debt to pay benefits. This has all been planned for over twenty years!
From an actuarial point of view the real problem happens in 2041. At that time the trust fund will run out of assets before it has run out of obligations. Several things have caused this: Life expectancy is longer than predicted. Economic growth, except during the Clinton administration, has been below average - as if through some mysterious mechanism presidents' intellectual achievements influenced their economic achievements. Finally the creative destruction of jobs unleashed by the Reagan revolution has prematurely removed many workers from the labor force and into early retirement.
Now this should give you a rather simple method to distinguish just what sort of a discussion of Social Security you have stumbled upon: If someone tells you that the system will be bankrupt in the next decade, they are trying to come up with a way for the government to weasel out of its debts to the working people who have been paying payroll taxes for the last 20 years.
If someone tells you that we need to make adjustments in benefits and taxes now, so that the system will be solvent in the next 25 years you are talking to a serious and rational individual.
The actuaries propose a solution which is not particularly attractive to Wonks Anonymous: They want to raise the retirement age to 70. They have their reasons. Actuaries are mainly very well paid, rather relaxed folks who tend to have nice working conditions and long life expectancies. Wonks Anonymous knows this because he has spent a lot of time running data for actuaries. He has never once seen an actuary break a sweat.
Most of us don't have such good fortune. Waiting to age 67 is going to be difficult enough. A significant number of us, particularly people employed in low paying, difficult jobs, will never make it to age 70. For these people the change in retirement age will be something more than an inconvenience.
Wonks Anonymous has an alternative proposal. Wonks Anonymous would remove the cap on earnings subject to the payroll tax. This is simpler that Obama's proposal to apply the payroll tax to earnings over $250 thousand dollars and will probably bring in significantly more revenue. This will serve to make the trust fund more secure and, hopefully, relieve us of these repeated Republican attempts to destroy Social Security.
It will also have the further advantage of allowing Wonks Anonymous to put his money where his mouth is. He will pay more payroll taxes if the cap is lifted.
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