Fact Finding on Social Security

http://news.morningstar.com/articlenet/article.aspx?id=567437&part=2

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Fact Finding on Social Security

Retirement columnist Mark Miller responds to reader feedback about his recent Social Security myths commentary.
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By Mark Miller | 09-14-12 | 06:00 AM | Email Article

Taxing Payroll Several sharp-eyed readers caught my error in describing one of the revenueraising ideas that has been floated--namely, subjecting worker 401(k) contributions to payroll tax. Retirement accounts already are subject to Social Security taxes; advocates actually have proposed ending exemptions for other salary-reduction plans, such as flexible spending accounts for health care or transportation. The change would treat these other salary-reduction plans like 401(k)s, meaning they would be exempt from income taxes but subject to Social Security taxes. Since the amounts of the contributions to those salary-reduction plans would be counted as covered income for Social Security, it would also increase that

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About the Author Morningstar columnist Mark Miller writes about trends in retirement, aging, and the economy. He is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living, and writes a syndicated column for Reuters. Mark blogs at RetirementRevised.com Twitter: @retirerevised. Contact Author | Meet other investing specialists

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Fact Finding on Social Security

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person's benefit somewhat. What Would FDR Do? Flip Carroll suggested that President Franklin Roosevelt really wanted Social Security to be structured as a personal investment account, rather than pooled social insurance. "I do not have the primary source, but I have been told by a number of politicalscience and economic experts that Roosevelt originally intended Social Security to act like an investment account. Essentially, everyone was required to contribute money over his/her working lifetime. After 'retirement age,' let's call it, he/she received an annuity for life." But Social Security historians haven't found any evidence that Roosevelt wanted private accounts. Nancy Altman, author of The Battle for Social Security: From FDR's Vision To Bush's Gamble, notes that FDR did originally propose an annuity as an add-on or supplement to the core program, but the idea was rejected by Congress because opponents feared it would compete unfairly with private insurance. Adds Laursen: "The evidence I've seen indicates pretty strongly that FDR wanted Social Security to behave as much as possible like a private insurance program--he never advocated giving everyone a separate account.

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Fact Finding on Social Security

http://news.morningstar.com/articlenet/article.aspx?id=567437&part=2

"More generally, it's very hard to talk about what FDR originally intended because he kept talking, writing, and legislating on it for the rest of his tenure as president. For instance, four years after signing the Social Security Act of 1935, he signed the 1939 Amendments, which changed the program substantially. Among other things, the amendments created survivors insurance for widows and orphans--which obviously aren't features found in annuities or investment products." Finally, Laursen notes that, "Social Security is the one thing you can rely on even if you lose all your other resources. No other investment product can claim that. And, it's inflation-protected, which you'd have to pay a fortune to obtain with any other investment product." Janitors and Lawyers Some readers disliked my suggestion that no one should have to slave away cleaning bathrooms into their 70s. The issue here is longevity; I argued that longer life spans aren't good cause for a higher retirement age. Some were especially incensed that I quoted Paul Krugman, the liberal Nobel Prize-winning economist. "As for Krugman's usual far-left blather about janitors and lawyers, it remains a fact that janitors are also living longer, so a higher retirement age is no more unfair than before, or than any other annuity," writes Darwinian. "Why doesn't Krugman whine that Social Security is unfair to men, since women also live longer?" But the point is, longevity gains are not distributed evenly among the population. The largest gains have gone to higher-income people who are better equipped to work longer since their jobs do not involve physical labor. Does it make sense to ask low-wage workers who do tough manual jobs to keep working into their 70s? This point also bears repeating: The longevity argument masks the fact that a higher retirement age results in a substantial across-the-board benefit cut--no matter when you retire--because it raises the bar on how long you need to wait to receive a full benefit. The Meaning of Means Testing There was plenty of confusion about the idea of means testing Social Security. "Why do people group Social Security and Medicare with Medicaid?" writes WillieB. "With Social Security and Medicare, individuals such as myself and their employers

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pay into it . . . with Medicaid it is purely welfare, to receive it you are not required to pay a dime. It's apples and oranges." You're right, WillieB. Social Security and Medicare are earned benefit programs that serve all income brackets. Although benefits are most meaningful to lowerand middle-class households, no one is subjected to a means test to prove they qualify. If you've paid sufficiently into the system, you get benefits. By contrast, Medicaid is a means-tested health-care program for poor people. Guyjohn argued that Social Security does employ means testing: "Social Security 'bend points' (in the benefits formula) are the equivalent of means testing," he writes. The phrase "bend points" refers to a Social Security formula that measures the income you earn during your working years, and translates that to a benefit. More specifically: "Bend points are the portions of your average income (Average Indexed Monthly Earnings--AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series," writes financial planner Jim Blankenship. "They're called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the [Primary Insurance Amount.]" AIME looks at your earnings history. A means-tested program, such as Medicaid, looks at your current means at the time you are seeking a benefit . For example, fairly affluent people who need nursing-home care have been known to cast off their assets down to poverty levels in order to qualify for Medicaid to pay for their care. Aging Boomers "Good piece, but I can't believe [you] left out the number-one myth," writes Justin Simmons, "that the Social Security deficit is the result of the baby boomers getting ready to retire, increasing payouts. People forget the system was brought into full 75-year actuarial balance by the Greenspan Commission, appointed by President Reagan and House Speaker Tip O'Neill in the early 1980's. Since the last baby boomer was born [in the early '60s], it is impossible that this demographic could be contributing to the shortfall since the 1984 rebalancing." Good point, Justin. Although politicians routinely state that Social Security's problems result from our growing elderly population--or longevity gains--the age issue really is about birth rates. After the baby boom ended in 1965, U.S. birth

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rates fell to the lowest ever in our history--1.74 births per woman, on average, in 1976, before stabilizing later at 2. So the real issue here is the change in the ratio of workers to retirees. The SSA's Goss described it to me this way earlier this year in an interview for Reuters: "Imagine that in an earlier generation each of us had three children. So when we get old and retire, we each have three kids in the work force contributing toward taking care of us--chipping in to buy us a house or pay our rent, or paying in to Social Security. But back in that 1965-to-1976 period, we shifted to having only two children. If only two kids are sharing that burden, that's got to be either half again more they will put on the table, or one third less that we're going to get--it's just straight-up arithmetic. Or we have to find a way to extend the time period over which we can work." Mark Miller is a Morningstar columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. The views expressed in this article do not necessarily reflect the views of Morningstar.com.
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Fact Finding on Social Security

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SteveM Sep 14 2012, 6:15 AM Flag

Mark, you are either a very brave man or a glutton for punishment to wade into these waters again :-)

kayaker Sep 14 2012, 7:13 AM Flag

I just flagged Mainstreet100 as inflammatory - if everyone who has gone through Medicaid and a nursing home process with a relative does the same maybe we can get this ignorant, cruel and insensitive remark removed. While some right wing philosophy may have intellectual basis most of it is propoganda fed to parts of the lower class that mysteriously supports them in the face of what is not best for themselves, at least financially. I often wonder why? I guess they hate minorities and are religiously brainwashed about women rights so much that it overcomes the fact that they will never be the person to benefit from the economic agenda espoused by the rich. They actually believe that the freeloaders in our society pay no taxes and that robs them when they often are un or underemployed and pay little tax themselves while relying on the benefits they decry. Watch out right wing if they ever wake up.

Mainstreet100 Sep 14 2012, 7:28 AM Flag

capecod Sep 14 2012, 7:36 AM Flag

There is no way to overcome the loud, adrenalin-soaked, hair-on-fire (and sometimes purposeful) misunderstandings about social security, the national debt, and taxes that have been sparked and fanned by a decade of the radical politicization of everything in our society. Facts no longer matter.

yrag46 Sep 14 2012, 7:40 AM Flag

Mainstreet100..... To the point and well put.

Mainstreet100 Sep 14 2012, 7:41 AM Flag

Kayaker I think you misunderstand my post. I am sure that process is soul draining and was not directed to those that have to do it. It was directed to the hypocrisy of those that take advantage of it who do not have to while espousing philosophies ignoring the poor.

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academic Sep 14 2012, 8:41 AM Flag

Mr. Miller describes some details of the mechanics of the SS Trust Fund to argue that it is an "asset", but none of these details address the key issue: the existence of this fund does not change the net financial position of the US federal government at all. At best, you could try to argue that the trust fund is an accounting mechanism to determine how much taxpayers "owe" Social Security. But even that is not correct. The Supreme Court has ruled (e.g. Flemming vs. Nestor, 1960) that Social Security is not a contractual obligation to SS taxpayers. Rather, it is a spending program that Congress can revise at any time as it sees fit. So according to the law, Social Security does not "owe" future beneficiaries anything. Congress could, if it wished, reduce benefits at will and never redeem a dime of the "trust fund." In the setting of these benefits, the trust fund will play at best a minor role. Yes, its existence will provide some ammunition to argue in favor of maintaining benefits when SS taxes fall short of benefits. But it's just a fact that Congress bases its decisions almost totally on demand from constituents for higher current benefits and lower current taxes, not rational long-range financial planning. The only relevance of the "Trust Fund" is that it plays a small role in the purely political decision of how to adjust benefits in the future. Other than that, it is meaningless and irrelevant.

polkster0 Sep 14 2012, 8:44 AM Flag

Mark, how then do you explain President Obama's statements during the debates over raising the "debt ceiling" last summer? On several occasions Obama said that if we didn't raise the debt ceiling by the required date, "we might not be able to send out Social Security checks". If there are actual assets in a Social Security trust fund, why would the president of the US say something like that? Does he know something you don't?

capecod Sep 14 2012, 8:51 AM Flag

Yes pollster.....as Treasury cash balances approached zero because it needed to continue making contractual payments but could not borrow, its lack of cash would ultimately have made it impossible to redeem the Treasury debt in SS to supplement or make cash payments to SS beneficiaries. See, it really isn't the conspiracy theory of everything if you actually bother to think it through....of

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Fact Finding on Social Security

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course, if that's too much of a challenge....

colorado43 Sep 14 2012, 10:27 AM Flag

Mark, What has been the fund's real investment return to recipients on their contributions?Like every other investment, the real return is calculated by adjusting for inflation. How will today's low Treasury yields influence the real return?
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