Saturday, January 19, 2008

Social Security Trust Fund hits several breakpoints: beneficiaries need an actuary to explain them

Justin Fox has an important and educational column “The Curious Capitalist” titled “The Boomers Hit 62” on p. 57 of the Jan. 14, 2008 issue of Time Magazine. The subtitle reads “Yes, they’ll drain Social Security by 2041. But the money problems will begin long before that.” He has a blog about this on CNN here: and the original article is here.

There are a couple of breakpoints here. In 1983, he writes, Congress mandated some additional payroll taxes, put some federal employees in the system, pushed up full retirement age to 67 for younger people, and allowed certain social security benefits to be taxed in some cases. This helped social security run a surplus.

As he explains, the surplus was invested in United States bonds, and now these “IOU’s” on future tax revenues come due. That all means that Social Security starts running a deficit in 2011 (I will be 68). It runs out of money in 2041 (I’ll be 98 and hopefully able to learn the truth about life in other places in the universe). He notes that Baby Boomers are likely to put in more in FICA taxes than they pull out, and than people born before 1937 effectively have wealth redistributed to them. This all had started, remember, as an FDR welfare program; it became a “retirement” program only later. But, in the grandest sense, Social Security is like a out-of-home sales pyramid, because the first to get in get the most out of it relative to what they put in; hence the term “Ponzi scheme”.

Over time, as people live longer, we expect them to work longer; employers have not always gone along with this, and seem to want the riskiest employees out the door in their 50s, unless then have unusual skills. One way to change that trend (as noted on my main “issues blog” Jan 17) is to stop depending on employers to provide health insurance (a practice started during and after WWII when they needed workers badly) and provide some portable way for people to save, tax-free, for health care (or buy premiums tax-free) over a lifetime, with insurance really for catastrophes.

Employers have created another controversy, but telling older employees that they should begin social security payments at 62, and by designing pension social security bridges and offsets around that idea; as recent media reports (particularly in USA Today) note, that is not necessarily a good idea and could lead to poverty in extreme old age for people who live long enough (especially women or surviving spouses).

Social security payments depend on lifelong work-eligible history (at least 40 quarters, which extend benefits to legal spouse and sometimes minor children), and poverty sometimes means that claimants have less work history to base claims on. This can lead to the indigent parent issue and the future prospect that some states could start enforcing filial responsibility laws on adult children as demographic and fiscal pressures increase.

Picture: Old Masonic Building near African-American Civil War Memorial, U St NW, Washington DC

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