Addressing the Social Security Mess

April 1, 2005

No, this isn't an April Fool joke, there are some things which I believe can be done to eliminate the purported “crisis” in Social Security. This is not a single approach solution, but it is a collection of actions which will each help the long term future without bankrupting the present or short term future.

interest rate - the Social Security Trust Fund (SSTF) has been growing slowly because it is getting a low interest rate. Congress has been “borrowing” from the fund for decades, and paying a very low interest rate compared to commercial loan rates. If the interest rate had been higher all along the fund wouldn't be in this position, although it would still have the government owing the trust fund money which the government doesn't have. The SSTF should be getting a better rate from Congress.

Entry level payment diversion – this is a idea borrowed the privatization proposal, with some of the benefits and few of the drawbacks. Allow a worker to put up to two percent of their gross into a Roth IRA instead of social security, as long as the saver matches the two percent with another two percent of after-tax money, and only until the age of thirty. The idea is that workers will have a chance to save while they're young, when compound interest and long term growth have a chance to build the value of the savings, while their middle age earnings will still go into Social Security to fund the near term retirement needs. Middle age is typically a higher income part of a career, and will therefore still provide funding while giving early savings a chance to grow. I have a hope that people would get in the habit of saving, which would be nice but it isn't essential to making the idea work.

Give interest on long term saving the same tax treatment as dividends – dividends are typically the income of the middle class. The low income saver invests in small denomination savings bonds and CDs, and the income from those should be taxed like dividends. That will give people of modest means the ability an equal reward for long term investment.

Raise the full benefit age for retirement – but keep the starting point the same. Make the full benefit age eight years lower than the median life expectancy and scale the benefits to reflect that. But by keeping the minimum retirement age at 62, it encourages people to consider doing their own saving and taking a reduced Social Security. That reduces the payments and spreads the cost. Yes that means the age moves, yes it won't be the same for men and women. Women live longer, deal with it.

Fund the welfare part of Social Security – instead of taking the non-existent surplus to fund non-retirement costs. As a retirement system Social Security is doing quite well. However, the drain from disability payments, aid to dependent children, survivor's benefits and similar programs is giving money to people who have never put money into the system, or who have put in far less than they receive. This is not a bad thing, America is a rich nation and should not have to divert money paid for retirement into other uses. In the insurance industry that's called commingling funds or misappropriation depending on how it's done, and people go to jail for doing it. The cost of non-retirement benefits should be paid annually from general funds.

Raise the minimum wage – No, I don't think I've lost my mind, let me show you the results. By increasing the wages of the lowest-paid workers their contribution to Social Security is increased, which provides a strong kick in the cash flow when we need it most. The optimist view then includes more money flowing in the economy, higher wages for other workers, and even more money going into the SSTF. The pragmatist in me says that this will raise the income of many workers to the point where they will require less outlay in food stamps and other entitlement programs.

Depending on what numbers you plug into each of the steps I've suggested, it appears that the shortfall in the SSTF is either reduced or eliminated. The raise in the minimum wage should be popular with state governments, there should be a reduction in Madicaid cost and a rise in income taxes (in those states which have an income tax). That seems to address a widespread problem at the state level. Taking all of the steps would probably also help the economy and encourage savings. I can only dream that congress would take these steps, but don't hesitate to mail a copy of this to your representative in Washington.