Social Security Solutions

We haven’t hear much about Social Security this election.  Facebook posts say, incorrectly, that it is not welfare.  Today the WSJ discusses winners and losers.

Sidebar One: We don’t understand why there is a 7.3 percent increase in the Social Security cap for 2017.  It is much larger than inflation.  End Sidebar One.

The winners and losers help us understand why it is broken and how best to fix it.

A one-earner couple retiring in 2020 with low wages—$22,500 in 2015 dollars—would have paid the equivalent of $129,000 in 2015 dollars in Social Security taxes. That couple can expect to receive lifetime benefits of $309,000 in 2015 dollars, more than twice what the worker paid in.

By contrast, a couple retiring in 2020 in which both spouses earn the same pay and who have always earned wages at the cap or higher ($118,500 in 2015 dollars) will have paid in some $1,358,000. But on average they’ll receive benefits worth $1,020,000, or about 75% of what they paid in.

Sidebar Two: Social Security cannot be manipulated as easily as most defined benefit pensions.  Social Security is based on 35 years of indexed earnings whereas pensions are typically based on high three years times a factor for the number of years worked. Earnings are almost never indexed.  Thus, folks close to retirement often try to find ways to increase their earnings in the last few years when income is already high due to inflation and progression.  It can make a big difference as your humble scribe knows.  End Sidebar Two.

The solution to Social Security is conceptually simple: means test payments.  There will be more money for the low wage earner.  The high wage earner will have more money to invest for retirement.  Because the high wage earner get an awful return, less than zero, both the low wage earner and the high wage earner will be better off.

The challenges are how to means test, it can’t just be taxable income, and where the means start getting tested.  It is too bad the presidential candidates have so little to offer.  Only Ron is worried about your future.

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