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Friday, February 25, 2005
 Getting a grip on Social Security: The flaw in the system

Topic: Facts and Figures
The Social Security issue fascinates me because it encompasses so many issues: macroeconomics, the media, presidential deception, public beliefs, fundamental economic ideology, and more.

Overall I think that President Bush's attempt to promote private accounts for Social Security has been great because it has caused many people, including myself, to learn a lot more about this system, and the more I learn the more I see how good a system it really is.

There is a core fundamental issue that has created the so-called "crisis" in the Social Security system, and I just figured out exactly what it is and how it works. As I have mentioned in my two articles on Social Security:

Social Security: Bush's Lies vs. Reality

The Truth About Social Security

General income disparity and wage income disparity have increased dramatically since 1980 in America. This is a major factor in how the "crisis" has come into being. The exact way in which wage disparity has led to "the crisis" (which isn't really a crisis at all as we will see) is this:

  • The Social Security tax, or really the OASDI tax, is levied on wages up to a certain point. That point is currently $90,000. Wages above that point are not taxed by OASDI.
  • Social Security benefits are adjusted yearly according to WAGE INDEXING. Wage Indexing is based on AVERAGE WAGES.
  • Over the past 25 years, average wages have increased and are projected to continue to increase, well above the rate of inflation.
  • Over the past 35 years, MEDIAN wages have remained relatively flat, which is to say roughly equal to the rate of inflation.

The result of this is that the scheduled benefits to be paid out to average workers in 2050 are 40% higher than the benefits paid out to current retirees in real terms.

Basically, even though the income of the average worker (median income) in America has barely increased in real terms since 1973, the average income of the country has gone up significantly because the wages of the top 10% have pulled it up. Since the adjustments to benefits are made based on average wages, that means that the benefits being paid out to beneficiaries have been going up at a rate higher than the incomes being taxed to pay into the system.

Wage Difference

The above graph shows the percentage by which the average wage is higher than the median wage, over time. As you can see, there has been a 10% increase in the difference between the average and median wage since 1974.

This is a problem because of the wage cap. The high incomes at the top end of the pay scale have pulled the level of scheduled benefits up, but those high incomes are not taxed by the Social Security system, so we have benefits going out that are adjusted by a different factor than what is used to bring payments in. In short, the middle class and poor are being called on to meet the spending requirements set by the wealthy.

I have not yet heard anyone explicitly address this issue. I did not understand it completely until just now. I understood that wage disparity and the wage cap were problems, but I wasn't sure exactly in what way it was causing the problem.

Now that the problem has been defined, solutions become quite easy.

Of course I will continue to contend that wage disparity is the real problem in the first place, but I'll assume that fixing wage disparity is beyond the scope of fixing Social Security. Therefore, there are various ways to fix this specific problem, which would also fix the Social Security problem as it exists today in general. The following are independent steps that could be taken to solve the problem:

  • Base the benefit adjustment schedule on inflation indexing instead of wage indexing
  • Base the wage index on median wages instead of average wages
  • Remove the wage cap completely

Doing any one of these things should alleviate the problem, while Bush's privatization plan actually makes the problem worse.

The problem actually exists in the way that benefits have been calculated since the 1970s, but it has become more noticable with time because of the massive increases in wage disparity. This problem would actually exist with or without the baby boom generation. Wage discrepancy, and a calculation that doesn't take wage discrepancy into consideration, is the source of the problem. The reason that it wasn't an issue in the past is because there was lower wage discrepancy in the 1940s-1970s.

In fact, I now argue that the middle-class and poor have been significantly over taxed since 1983, when the payroll tax was overhauled, due to this calculation error, which is exactly what this is, an error. Regardless of whatever else is done, this error HAS to be corrected. It's like a bug in a computer program; it is a flaw pure and simple. We have, as far as I am concerned, been overpaying beneficiaries for the past 10-20 years and are currently scheduled to continue doing so. The amount of overpayment has probably been small thus far, I would guess a matter of less than $100 per check, but with so many checks it all adds up.

The working-class, with 30+ years of stagnant wages, cannot continue to pay a tax based on the rise in wages for the top 10% of wage receivers. Of course, the best solution here would be for the working-class to fight for increased wages in the first place and for wage disparity to be reduced, but we can't wait that long to fix this problem, which is actually the product of a flawed algorithm.

What could be the very best solution overall would be to eliminate the wage cap and change over to using median wage indexing. This should both make the system indefinately solvent, and actually provide enough of a boon to allow the OASDI tax to be reduced by 1% to 2%. There is your "privatization", just reduce the tax and let people keep more of their money in the first place.

Please write to your Senator, or to all Senators, and urge that this issue be acknowledged and addressed:
US Senators


Posted by rationalrevolution.net at 11:57 AM EST | Post Comment | View Comments (6) | Permalink
Updated: Wednesday, March 9, 2005 9:32 AM EST

Wednesday, March 23, 2005 - 4:37 PM EST

Name: Jonathan Doolin
Home Page: http://www.spoonfedrelativity.com

I'm happy to see a little more clarity presented on this issue.

Thanks.

Friday, April 29, 2005 - 8:04 AM EDT

Name: rationalrevolution.net
Home Page: http://www.rationalrevolution.net

Thanks, unfortunately no one else in the media seems to be catching on to these facts.

Monday, August 15, 2005 - 9:08 AM EDT

Name: Mike Jaquish

Why is it necessary to destroy the wealth of the poor and near poor to posture as their savior, robbing the "rich" to save the "poor?"

Only because it serves the socialist vision of enslaving the masses to government, and provides canards and falsehoods to buy their votes.

Truth:
Even at poverty level, an American worker generates enough cash wealth to improve his/her circumstances and offer building blocks to heirs.
The easy arithmetic, of 12.4% of earnings, invested over a lifetime of work, not in the stock market, but AT CURRENT HISTORICAL CD RATES GUARANTEED BY THE U.S. GOVERNMENT, demonstrates the financial power of the poor.
Social Security ranks with pawnshops, check cashing stores, and loan sharks as another very poor economic value for wage earners.

Mike J

Monday, August 15, 2005 - 7:55 PM EDT

Name: rationalrevolution.net
Home Page: http://www.rationalrevolution.net

Actually the Social Security system itself is fundamentally fine. The fact is, like it or not, that without a required tax used to set earnings aside, many people, especially the poor, would not voluntarily save any money, or anywhere close to enough money, to survive past their ability to perform labor.

America currently has the lowest savings rate of any industrialized country, has among the highest incomes, and has the lowest taxes. People in America can certianly afford to save many times more than Americans do, but they don't. The savings rate in China is 40% of income! And the Chinese have incomes FAR less than we do.

I'm not sure hat anyone is "destroying" the wealth of the poor, but they are certainly underpaid for their work in general. The laborers who create wealth certainly see too little of it, most of the wealth going to financial institutions that siphon off large chunks of the value created by labor without adding any value themselves. That's the root cause of economic and social problems around the world of course, and America is no exception.

Social Security is actually one of the few working system that has a good benefit, largely because there is so little government involvement in it. Its a government run program, but there is little activity, so its pretty basic.

What makes it work is the fact that it is an INSURANCE program, and this is why keeping it as one huge monopoly program is an advantage, because it shares risk across the broadest possible pool.

A person with a poverty level income all their life will get back what they paid into Social Security within 5 years of their first benefit if they retire at age 65. Everything past 5 years will be a gain above what they paid into the system, and that payment goes on indefinitely until they die.

I don't think that people who live in poverty their whole lives, most of which have IQs below 80, are going to make better investment decisions than that on their own and be able to safely manage their money into their elderly years, that's just reality.

The "what they could do with their own money" scenario assumes that if Social Security were eliminate than everyone would invest that some amount of income into some other stable and secure investment. The reality is that even today the majority of people know little about investment, and shocking as reality may be to some, yes half the people in the world have less than average intelligence.

What are you going to do with millions of workers who don't save their money, don't know what to do with their money, etc, whatever, and then they get in a debilitating accident or they retire and they can't pay their electricity bills, they can't afford food, now you have millions of homeless elderly and disabled people, what will care for them, will we let them rot in the streets, what now, etc?

Umm... think that won't happen? That's what already did happen in the 1900s-1940s prior to Social Security.

Everyone gets out of Social Security what they paid into it within 7 years of when they start drawing it if they retire at 65. Its not a rip-off, it works fine. Its a stable and secure PART of the retirement is disability system.

Everyone is free, and even encouraged, to save on their own for their retirement in private accounts.

Even men like Henry Ford and other major industrialists supported the idea of a national mandatory savings system. You see, the rich don't want waves of poor people mobbing the street any more than poor people want to be out on the street.

The fact is that Social Security has been the single largest stabilizing force on the American economy at a macro-economic level in the history of the country.

Tuesday, August 16, 2005 - 12:02 AM EDT

Name: Mike Jaquish

SORRY FOR THE CAPS, BUT I WANTED MY RESPONSES IN THE BODY OF YOURS, AND WANTED THEM TO CONTRAST.


Actually the Social Security system itself is fundamentally fine. The fact is, like it or not, that without a required tax used to set earnings aside, many people, especially the poor, would not voluntarily save any money, or anywhere close to enough money, to survive past their ability to perform labor.

FUNDAMENTALLY, SOCIAL SECURITY DESTROYS INITIATIVE, INDEPENDENCE, SELF-SUFFICIENCY, AND PREYS ON THE FINANCIALLY UNSOPHISTICATED, AS WELL AS THOSE WHO MIND THEIR OWN BUSINESS.
SURE, THE EXISTING SAVINGS PROBLEM SHOULD BE FIXED. THAT DOESN'T REQUIRE DRAGGING ALL WAGE EARNERS INTO A PONZI SCHEME.
SO IT SEEMS REASONABLE TO HAVE A GOVERNMENT MANDATE THAT ALL MUST BE FORCED TO SAVE.
THOSE WHO DETERMINE THAT SELF-INSURANCE IS THEIR DESIRE, SHOULD BE ABLE TO OPT OUT AFTER SATISFYING BASIC REQUIREMENTS.

America currently has the lowest savings rate of any industrialized country, has among the highest incomes, and has the lowest taxes. People in America can certianly afford to save many times more than Americans do, but they don't. The savings rate in China is 40% of income! And the Chinese have incomes FAR less than we do.

SEE ANSWER TO FIRST STATEMENT.


I'm not sure hat anyone is "destroying" the wealth of the poor, but they are certainly underpaid for their work in general. The laborers who create wealth certainly see too little of it, most of the wealth going to financial institutions that siphon off large chunks of the value created by labor without adding any value themselves. That's the root cause of economic and social problems around the world of course, and America is no exception.

WORKERS HAVE THEIR WEALTH CONFISCATED BEFORE THEY SEE IT THROUGH THE ABERRATION OF PAYROLL WITHHOLDING.

HOW MUCH ESTATE MAY A WORKER LEAVE TO FAMILY, FRIENDS, INSTITUTIONS, OR OTHERS UNDER SOCIAL SECURITY?
NOTHING. THE SYSTEM EATS IT.
A WORKER WHO EARNS $37,000/YEAR AVERAGE OVER A 40 YEAR CAREER GIVES UP 12.4% OF THAT AMOUNT, $4588 TO SOCIAL SECURITY.
OVER 40 YEARS, ASSUMING NO ADDITIONAL FUNDS FROM THE SAVER, THAT $4588/YEAR TURNS INTO A TOTAL PRINCIPAL SEIZURE OF $183,520.
IF INVESTED AT A MODEST 4%, BELOW THE CURRENT HISTORICLY LOW TEN-YEAR BOND RATE THAT WE WILLINGLY OFFER TO THE CHINESE, THAT PRINCIPAL WOULD IN 40 YEARS BECOME $475,000.
CAN THAT WAGE EARNER ACCESS THAT $475,000? NO, AS IT HAS BEEN SEIZED BY THE GOVERNMENT.
CAN A WORKER WHO DIES AT 65 LEAVE THAT $475,000 TO A BENEFICIARY? A CHILD'S OR GRANDCHILD'S COLLEGE FUND?
NO, IT HAS BEEN SEIZED BY THE GOVERNMENT, WHICH THEN MAY ISSUE A $255 DEATH BENEFIT. YEE-HAH!!!
THAT IS MASSIVE DESTRUCTION OF WEALTH.
ASSUMNG A $15,000 INCOME FOR 40 YEARS YIELDS A $74,400 SEIZURE. INVESTED AT 4% YIELDS A NEST EGG OF $190,000 IN 40 YEARS.
CAN THAT WAGE EARNER ACCESS THAT $190,000? NO, AS IT HAS BEEN SEIZED BY THE GOVERNMENT.
CAN A WORKER WHO DIES AT 65 LEAVE THAT $190,000 TO A BENEFICIARY?
NO, IT HAS BEEN SEIZED BY THE GOVERNMENT, WHICH THEN MAY ISSUE A $255 DEATH BENEFIT.

THE POOR AND NEAR POOR GENERATE GREAT WEALTH, AND HAVE IT SEIZED AND DESTROYED. THEN THEY ARE TOLD THEY ARE POOR BECAUSE THE "RICH" DON'T WANT TO PART WITH THEIR WEALTH.

Social Security is actually one of the few working system that has a good benefit, largely because there is so little government involvement in it. Its a government run program, but there is little activity, so its pretty basic.

What makes it work is the fact that it is an INSURANCE program, and this is why keeping it as one huge monopoly program is an advantage, because it shares risk across the broadest possible pool.

A person with a poverty level income all their life will get back what they paid into Social Security within 5 years of their first benefit if they retire at age 65. Everything past 5 years will be a gain above what they paid into the system, and that payment goes on indefinitely until they die.

I don't think that people who live in poverty their whole lives, most of which have IQs below 80, are going to make better investment decisions than that on their own and be able to safely manage their money into their elderly years, that's just reality.

The "what they could do with their own money" scenario assumes that if Social Security were eliminate than everyone would invest that some amount of income into some other stable and secure investment. The reality is that even today the majority of people know little about investment, and shocking as reality may be to some, yes half the people in the world have less than average intelligence.

What are you going to do with millions of workers who don't save their money, don't know what to do with their money, etc, whatever, and then they get in a debilitating accident or they retire and they can't pay their electricity bills, they can't afford food, now you have millions of homeless elderly and disabled people, what will care for them, will we let them rot in the streets, what now, etc?

YOU HAVE BOUGHT INTO, AND PROMOTE, ONE OF THE FUNDAMENTAL ORWELLIAN DOUBLESPEAK LABELS FOR SOCIAL SECURITY.
IT IS NOT "INSURANCE," DESPITE THAT OFT-USED CANARD.
INSURANCE SPREADS RISK, AND REWARDS THOSE WHO HAVE LEAST RISK WHILE PENALIZING THOSE WHO HAVE THE HIGHEST RISK.
I GET LIFE INSURANCE AT A BETTER RATE THAN A SMOKER. AS IT SHOULD BE.
I INSURE MY BUSINESS AT A LOWER RATE SINCE I PROVED MY ABILITY TO CONTROL LIABILITY.
AS IT SHOLD BE.
I WRECKED MY CAR AND MY INSURANCE WENT UP. AS IT SHOULD BE.
BUT I CAN DETERMINE MUCH OF MY COVERAGE, ONCE I MEET GOVERNMENT MANDATED MINIMUMS.
I CAN DETERMINE THE PAYMENT SCHEDULE, TO SOME EXTENT.
I CAN OPT FOR MORE OR LESS DEDUCTIBLE.
I CAN DROP MOST INSURANCES I DON'T WANT, OR NO LONGER NEED.
ETC.

NONE OF THIS IS TRUE WITH SOCIAL SECURITY, SINCE IT IS NOT AN INSURANCE SCHEME. IT PERVERTS THE REWARD ONE SHOULD RECEIVE FOR REDUCING RISK.
IT IS A POWER GRAB PONZI SCHEME. IT IS A WELFARE PLAN.

Umm... think that won't happen? That's what already did happen in the 1900s-1940s prior to Social Security.

Everyone gets out of Social Security what they paid into it within 7 years of when they start drawing it if they retire at 65. Its not a rip-off, it works fine. Its a stable and secure PART of the retirement is disability system.
Everyone is free, and even encouraged, to save on their own for their retirement in private accounts.

IT IS A RIPOFF, AS EVIDENCED ABOVE.
IGNORING THE TIME VALUE OF MONEY IS COMPLETELY IRRESPONSIBLE. IT IS A BLATANT VIOLATION OF ANY FIDUCIARY DUTY ANY AGENT COULD HAVE FOR A CLIENT.

Even men like Henry Ford and other major industrialists supported the idea of a national mandatory savings system. You see, the rich don't want waves of poor people mobbing the street any more than poor people want to be out on the street.

The fact is that Social Security has been the single largest stabilizing force on the American economy at a macro-economic level in the history of the country.


UH, THAT'S JUST ..........
BUT SOCIAL SECURITY IS A POWER-GRAB, VOTE-BUYING SCHEME, AND REALIZING THAT, ONE WOULD EXPECT TRUTH TO FLY OUT THE WINDOW.

MIKE J

Saturday, February 4, 2006 - 8:52 PM EST

Name: Larry

Your idea ignores the enronning of SS that went on and is ongoing,with no process to pay it back.
Subjecting all wages to fica is a good start though.
Chile made privatization work, so can we:
http://www.cato.org/pubs/journal/cj15n2-3-1.html

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