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Saturday, November 17, 2007

Social Security: if I were king...

If I were King of America, and could decree my favorite plan to fix Social Security, I'd go by the following rules:

1. No tax increases. SS taxes are already too high.

2. No "raising the cap". The "middling wealthy" already are taxed stiffly in the low $100K range, with a marginal tax burden over 40%, even without accounting for state taxes. A professional couple making $120K each is paying $24K/year in SS taxes already, on top of income taxes. (Note for pedants: I am including the SS "employer share", since it is part of one's compensation package. The fact that half of SS is not listed on paycheck stubs doesn't mean it isn't part of one's pay.)

Personally, I'd prefer that separate SS taxes be abolished and have SS funded out of general tax revenues.

My reform would start with the following:

1. Abolish the notion of "retirement ages", after a "zero" year in the early 60s. Instead, let people's SS starting basis increase with each year they defer collecting SS, so that if they start collecting at, say, 73, they get much more than if they start collecting at 63. If someone wants to work until they're 75, let 'em, and reward them with a bigger SS payout - instead of insisting on having them take both SS payment and wage income (oddly, they'd both pay SS taxes and collect SS at the same time, which is silly). If they choose to take SS while still working, that's OK, but they will have a lower payment and will pay more taxes on it because of their work income.

This would provide an "out" for people who haven't saved enough money for retirement: they could keep working and defer their SS, and have a larger amount per month when they do take it, instead of looking forward to 20 years in a single-wide somewhere.

The advantage for the government would be "actuarial": some people will lose the mortality stakes and won't collect SS. There is a bit of a risk here; if lots of people choose to defer collecting SS and live longer than expected, the government could end up being on the wrong side of the bet.

2. SS's index should be based on inflation, not wage growth, as discussed in this article.

"Stretch goals"

I'd probably have to be God Emperor and not simply King to get these done, but I'd prefer them:

1. Make SS more means-tested. You have to spend your own retirement money first before collecting SS. It is effectively means-tested now since it's taxed. And I'm not in love with the "solidarity" idea that Warren Buffett should collect SS because "he paid into it".

I'd rather see it be a safety net for people who genuinely need it.

2. Introduce personal accounts and move away from "pay as you go". This is the only way to get the government out a looming demographic trap.

Yet another aspect of SS that isn't often talked about: what if life-extension techs actually work and people live to be 150, or even unlimited? The idea that people will be collecting a government pension for fifty years or more is unthinkable, but could easily happen. You shouldn't be able to collect a pension for longer than you work, but if people work from 25 to 62 and live to be 100, they will do so. And the most rapidly growing demographic group in America is centenarians.

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