Friday, September 16, 2011

Why Social Security Will Survive

Perry’s monstrous lies about Social Security

By John F. Wasik (Reuters)

Gov. Rick Perry, the GOP presidential candidate who calls Social Security a “monstrous lie” and a “Ponzi scheme” has implied that future retirees can’t rely upon receiving benefits from the system.

Not only is Perry shooting wildly from the hip on these statements — a strategy cynically designed to attract angry, younger independent voters — he’s spewing some layered falsehoods that need to be addressed.

Social Security can not only be preserved for future generations, its coming fiscal shortfalls can be fixed relatively simply. What Perry also neglects to mention is that it’s one of the most successful anti-poverty programs in U.S. history.

The before-and-after Social Security picture is dramatic. Before Social Security, almost half of elderly Americans had income below the poverty line, reports the Center on Budget and Policy Priorities. Roughly 12 percent of elderly citizens are considered poor today. The program lifted more than 11 million out of poverty — more than 60 percent of those were women.

Here’s some even more relevant Texas-sized context: Today, more people are slipping back into poverty because of permanent job losses, recessions, a housing meltdown, stock-market downturns, reduced employment benefits, higher medical costs and stagnant wage growth. The U.S. poverty rate last year increased for the third straight year — the highest it’s been since 1993. Some 46 million have annual incomes below the poverty line of $22,113.

As the U.S. is saddled with the highest poverty rate among industrialized countries, why are the anti-poverty features of Social Security being attacked?

Behind Perry’s venom about the system is a larger truth that he’s yet to illuminate: Making cash-strapped states responsible for replacing Social Security or privatizing it is unrealistic. There is nothing in the private sector — nor is anything likely to emerge — that could replace Social Security at the same low cost to taxpayers.

Simply trashing Social Security by calling it a Ponzi scheme ignores the fact that when you pay your FICA payroll tax, you’re getting an inflation-adjusted annuity, disability insurance, a small death benefit for your survivors plus Medicare benefits.

Try to find a package like this in the private sector. It doesn’t exist. You’d have to buy an inflation-protected annuity, disability and life policy separately — and they are no bargains.

Keep in mind, when private insurers offer these products they have to pay commissions and marketing costs, so they load policies with lots of hidden expenses. They can’t offer the same economies of scale that Social Security can, which isn’t burdened with the excessive marketing and administrative expenses.

On an inflation-adjusted annuity alone, you pay dearly to keep up with the cost of living. Compared to an immediate annuity (without inflation protection), your payment would be from 24 percent to 30 percent lower. For that reason, private inflation-protected annuities are relatively scarce and unpopular.

Private disability policies, which I recommend, are expensive outside of group plans (buy one through your employer if you can). For a 40-year-old wanting a $4,500 monthly benefit, the annual premium would be about $2,300.

Life insurance premiums vary greatly, depending upon your health, age and amount of coverage. The older and sicker you are, the higher the cost. If you have chronic conditions, risky occupation or a flawed medical history, good luck getting coverage. Social Security and Medicare don’t turn anyone away.

What about examining Perry’s inference that current workers are contributing money for today’s retirees?
That’s true, but it’s not a Ponzi scheme. It’s well known that there will be fewer workers in the future to fund the system, which will create a regular structural deficit by 2016. But that’s only the case if nothing happens and Congress completely ignores technical fixes or simply cuts benefits.

There’s more about the “if nothing is done” scenario: The Social Security Trust Fund — Congress borrows the cash and replaces it with Treasury securities from a pool of payroll taxes — will be exhausted in 2039, according to the Congressional Budget Office. Yet that doesn’t mean that Social Security will be bust; it will then begin to pay reduced benefits, again, if Congress doesn’t take action.

In what Washington Post economics blogger Ezra Klein calls “the boring truth” about Social Security, Congress can raise the amount of salary subject to Social Security tax to fill the funding hole.

Right now, the earnings cap is $106,800 and the tax is only 4.2 percent for employees, which may drop even more (temporarily) if Congress approves President Obama’s extended payroll tax break.

If you want to get personal on how Social Security will impact your life, run a benefits estimate of how much you’re entitled to at retirement age. For me, it’s about $2,000 a month. It’s not a lot of money and I know I couldn’t live on that where I live now.

Now think of what would happen to your future lifestyle if that modest supplement was scaled back — or you had to retire later. Would you have enough in your 401(k) and other savings to ensure a dignified retirement?

Behind Social Security is an appallingly simple truth: We can put more money into it by asking higher-salaried employees to pay more, and by including immigrants and public-sector employees. I know that doesn’t have much political sizzle to it, but this kind of math doesn’t lie.

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