Today’s episode of the Financial Impact Factor was pre-recorded. On today’s show, Paul Petillo discusses the need for Social Security, the topic of the target target date funds miss and the financial implications of Alzheimer’s disease.
The podcast can be found here courtesy of BlueCollarDollar.com
Bring up Social Security to just about any American and you will get one reaction or the other. And it doesn’t really matter whether you are young or old. You feel something is bound to happen to the program and although you may have no idea how it works, you believe that the way it currently does can’t go on. Now opinions differ on the health of the program and the long-term sustainability of it but few argue that there aren’t problems looming in the future. Is there?
The first reaction most feel is that the program can’t continue on the way it has for decades to come. Bankruptcy, running out of funds, too many Baby Boomers, all get the blame for the demise of this important program. Whomever lit the match to this topic (someone on Wall Street I suspect with a keen eye on the potential windfall privatization would provide his/her business) has got to be pleased. A simple tinder of an idea has caught the public’s attention and now we have a full-on brush fire.
So here’s the rub: I’m not going to argue with those who have their mind’s set on the end of the Social Security program as we know it. Let them think that it will not be around.
Let them believe that what is essentially a program to provide insurance that poverty won’t grip those less fortunate, the disabled, the children who have lost parents or spouses who have lost loved ones, and those who did not have access to any additional cash to invest or save for retirement won’t be penniless is worth tossing to the curb. Lawmakers seem to think that their suggestion that by simply telling the average American to save and invest more, work harder and longer, and in the process, feed their fear of not being able to retire in a lifestyle that is not sustainable on a single dollar less than they are currently making, that they are moving the country into a more prosperous future. They are not.
The bottom line is that the program will continue to exist. And so will the talk of its end. Why that conversation persists is puzzling. Even as fewer people contribute into the plan, those few actually contribute almost more than eight times as much as the post-WWII generation did. As Merton C. Bernstein, the Walter D. Coles Professor Emeritus at Washington University in St. Louis School of Law recently suggested, it is because of production. Workers are not only producing more output than previous generations, the work they are doing is better compensated. And that increased compensation according to Bernstein has closed the gap sufficiently. Is that simple equation likely to improve in the coming generations? Without a doubt. Yet little consideration is focused on that economic anomaly.
That’s not to say that the program couldn’t use a few additional tweaks. But preparing for the worst is not worth considering. And recent attempts by the GOP would actually create more debt not less should they try and change the program. It’s a complicated and sort of odd way to think about it. The reality of what some of these proposed changes would bring about point to a flaw that cannot be overlooked: changing Social Security in the name of dealing with some future debt obligation we would leave our children would actually increase the debt limit we leave those kids.
Without getting into the vitriolic debate about the cost of government, the ridiculous ideas for reining in costs while two, possibly three wars are under way (and no talk of slowing spending down there) all while a recovery is under way, seems absurd. The bottom line still falls back on your ability to have enough to feel comfortable in retirement. If you exclude Social Security from your retirement calculations, then the onus of financing your retirement is on you. While I do not like the idea of a back-up plan (it suggests that the original plan has the potential to fail), Social Security not only acts as one, it is one that cannot be touched.
And surprisingly, despite all of the talk about its end, it will still be there for my grandchildren. Perhaps not as robust. But doing the same thing it does now: providing insurance against poverty.
Let’s not forget the women and children. First off, we need to discuss why this would even be a consideration. Social Security is back in the conversation and as the new House is sworn in, the program might be back in the limelight. Floyd Norris of the New York Times doesn’t see how it couldn’t get some much need attention. He begins by suggesting that it is “Is it really a Pension? It’s a Problem”.
The most confusing thing about the program is as he puts it: “But the reality is that Social Security is not a normal pension plan, even though it somewhat resembles one because the benefit level is related to the recipient’s income while he or she was working.” We think of it as a pension. We think too often that Social Security is part of a retirement plan.
And for too many of us, it does occupy a central role in how well we live once we can no longer work. Despite the rhetoric that we will need to work longer or not be able to access our benefits until some later date, the program really is most beneficial for those that cannot do so, even if they wanted to.
His worry is that folks like Warren Buffet receives a Social Security check and because he a much larger contribution (employees are taxed half of the 12.4%, the other portion is paid by your employer) that check is sizable enough to be questioned. High-income earners do pay more into the system. But we should leave the high-earners out of the equation in the near-term. These are folks who have the ability to retire when they desire to, to work longer and as a result continue to contribute. Ironically, they are sustaining a system that has other problems.
The real benefit, and one that is often lost in the argument is what the program gives women and children. In many instances, we ignore the older, closer-to-retirement, late-Boomer aged group of women that has had fewer opportunities to amass the kind of benefit their husbands will get. And living longer than them, Social Security takes into account that disparity.
The disability side of the program, the one that protects the children of workers who can no longer work keeps poverty from seeping into the ranks of those who have yet to earn a single dime. This is a sort of backloaded benefit that helps the economy by creating opportunities for those who may otherwise not had any.
The real tweak needs to come from incomes and with 14 million fewer of those, based loosely on today’s employment number, the answer is in the workforce. Sharing the wealth through wages is key. That contribution we all make is based on an earned income percentage and it stands to reason, raise wages and/or get people back to work will solve the problem even in the current Congressional make-up.
Businesses can get this job done now. But they refuse to do the right thing. Instead, they are hoping that a move towards less regulation which as we all know, doesn’t mean more jobs or higher wages. Just more income disparity. Companies are doing everything they can to keep their portion of the contribution at a minimum – as you said Mr. Norris, they pay half. Until corporate America embraces the idea that we need to have money to spend money – even in retirement, we’ll be stuck in this debate for some time.