fact finding on social security 2

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About the AuthorMorningstar 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.

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Fact Finding on Social Security

Retirement columnist Mark Miller responds to reader feedback about

his recent Social Security myths commentary.

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 revenue-

raising 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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person's benefit somewhat.

What Would FDR Do?

Flip Carrollsuggested that President Frankl in 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 political-

science 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 ofThe 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 unfair ly 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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"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 NobelPrize-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 toask 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 lower-

and middle-class households, no one is subjected to a means testto 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 quali fy for Medicaid to pay for their

care.

Aging Boomers"Good piece, but I can't believe [you] left out the number-one myth," writesJustin

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 earl ier 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 toSocial 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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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 relativedoes the same maybe we can get this ignorant, cruel and insensitive

remark removed.

Mainstreet100

Sep 14 2012, 7:28 AM

Flag

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.

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 almosttotally 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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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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fact finding on social security 2

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