Saturday, August 21, 2010

Are social security benefits really like private annuities? Don't ask the right wing.

In connection with proposals concerning possible means testing, I’ve written on this blog that social security is still primarily an annuity based on a worker’s (number holder’s) own FICA contributions over the years (a minimum of forty quarters) or sometimes a (legal) spouse’s.

The amount of contribution is related to the worker's contributions through the FICA tax. It is true that up to a point, when viewed as a "tax" FICA seems regressive since it caps at a particular income, since benefits will not be paid above that income. But conceptually the amounts of FICA tax (proportional to income up to a point) resemble annuity premiums, whose amount eventually determines the benefit. Like social security, many private annuities are paid for life, so the premiums and incomes are determined from actuarial math and probability tables.

The “right wing” has been characterizing social security as a tax that “socializes” eldercare and removes the burden from adult children, who should arguably share the family responsibility.

It is true that at the current level of promised benefits, revenues from FICA taxes will gradually become inadequate and eventually benefits could not be delivered as promised. That’s true for several reasons. One of these is that people live much longer, and longer than was expected when the rates were set. Another may seem to be low birth rates (according to the Right), but the fertility rate in the United States, while maybe higher among some minorities and some immigrants, still is approximately at replacement level. A more relevant point is that employers, despite age discrimination laws, are more inclined to lay off highly paid older workers than is good for the economy.

All of this means that public policy must address increasing revenues, especially through increasing the taxable wage base. It must also encourage people to work longer (with some measures aimed at employers) and gradually raise retirement ages.

It’s also true that the first social security recipients in the 1930s had never paid anything in, so there is always a lagging accounting deficit that would have to be paid back somehow if social security were privatized.

I still believe that younger workers ought to have control of their own benefits and “own them”, but with regulation. If social security were “privatized” the only allowable investments should be those that do not lose principal.

I also see no point in continuing the “Annual Earnings Test” for early retirees. The payment is actuarially lower anyway if started early. That rule in the Social Security program should be dropped. As I've noted, private defined benefits pensions often base social security offsets and bridges on the assumption that social security will start as soon as possible, right now at age 62.

Private insurance companies that issue annuities have to face similar issues, and consider longer life spans in setting premiums. Likewise, defined benefit pensions could be undermined by rapidly increasing life spans, and companies and unions that consider them will have to consider new actuarial formulas. None of this means that pensions, social security, or annuities are like “welfare” undermining “families.”

Medicare is also partially funded by a Medicare payroll tax, which is much lower than FICA. But the analogy with health savings accounts (favored by the right) is somewhat facetious. People who need less medical care in their life time will draw less. This really is more like shared risk, as insurance is usually perceived. Cost savings, records automation, and elimination of redundant unnecessary tests and treatments remains an important component of Medicare control.

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