Catastrophic Curves of Entitlement

The US Social Security system is a major joke and a major liability for our children and their children. It currently represents 40% of the mandatory spending programs (social security, medicare, medicaid, etc.) of the federal budget, and 21% of the total federal budget. For each dollar you pay in federal taxes, more than $0.21 goes straight to the Social Security system.

The system was NOT set up as a retirement system. It was created as a safety net for the aged and infirm who really needed help. Of course, today it has become an entitlement, and the government is now in the IRA business instead of the safety net business, which is the only business it should be in (in this regard).

Let’s talk about some nausea-inducing chart curves:

The X axis is years from 1935 through 2004. I’m sure I could dig up data for 2005-2008, but I’m also sure such an effort wouldn’t have any material impact on the net analysis. The Y axis indicates age. The big blue line indicates the expected average life span (Y axis) of an individual born in the year indicated (X axis). The big red line indicates the legal retirement age of an individual born in the year indicated. If you don’t want to do the math on the big red line, it starts at 65, then grows to 66, then grows to 67, and that’s it.

The Social Security system was signed into federal law in 1935. Like a septic system, it started failing the moment it started being used 🙂 . The guys who created this legislation were basically all born in the 1800s. Think about that. There’s no way they could have foreseen the advancements of the 20th century. If you are so inclined (I do not have the time) you can actually read all of the congressional debate on, and analysis of, the Act from the 1930s here.

These legislators set the age to receive benefits – their definition of “old age” – above the average life expectancy for the time, as the graph clearly shows. 5% above, in fact. My guess is that these guys saw life expectancy improving, but at a very modest pace – perhaps something along the trend of the lower dotted blue line. Of course, the upper dotted blue line shows the actual general trend of life expectancy, which isn’t even close.

The yellow shaded area, between the big red and big blue lines is The Nightmare Zone. This is screwing the budget, and our children, and their children. These two lines are deviating at an entirely unsustainable rate.

The lower dotted red line projects forward (historically, if that makes sense) the very modest changes the government has undertaken to increase the age of benefit eligibility over the years. It seems clear that the government did not intend for the age to be stuck in one place forever. I don’t know the numbers, but I have to assume that even implementing this sort of an ultra-modest change would be fiscally beneficial, if not a per se solution. Now imagine what would happen if we used the index they used in 1935 of benefit eligibility at roughly 105% of the average lifespan? This is the upper dotted red line.

How do we fix this? That’s the N Trillion Dollar Question, no? The good news is that this is fixable. The bad news is that fixing it means scrapping the system as we understand it now, and choosing a generation that’s gonna have to “take it up the ass” as it were.

I volunteer my generation. Someone has to do it, it might as well be us. Anyone born on or after January 1 1965, is out of the current system. Those of us in our late 30s and early 40s have time to save for retirement, even if we haven’t already (or maybe even have a bunch more kids so they can take care of us!). We’ve all heard, and I imagine have gotten, the message of retirement savings that has been beaten incessantly into our heads via every mutual fund company that can buy television advertising. We’re well-educated (read: “well-scared”) on the general topic of retirement. We don’t as a group generally believe the system will be intact in 25 to 35 years anyway – so let’s stop playing ‘pretend’ and actually work to solve the problem.

Reform the whole system. Drastically increase the age of eligibility and structure an index for it based on projected life expectancy. I’ll propose the straw man of that upper dotted red line. Means-test for eligibility. Well-off folks don’t need social security. Anyone born prior to 01/01/1965 is in the current system (though wouldn’t it be nice of them to agree to means-testing and maybe even some upping of the age of eligibility – such as the lower dotted red line). Eventually we’ll be able to lower the OASI tax deduction rate.

So what do you think, folks? Can we get some grass roots action behind this – or something like this?

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3 comments

  1. Chris

    Shawn –

    Great post. Those are some scary statistics. What is interesting to me is how Social Security went from being a “huge problem” in 1996 when Paul Krugman wrote:

    “Where is the crisis? Just over the horizon, that’s where … In 2010 … theboomers will begin to retire. Every year thereafter, for the next quarter-century, several million 65-year-olds will leave the rolls of taxpayers and begin claiming their benefits. The budgetary effects of this demographic tidal wave are straightforward to compute, but so huge as almost to defy comprehension” (http://www.pkarchive.org/economy/DemoDestiny.html)

    to being not a big problem at all when the idea of private savings accounts was being considered. As the same Mr. Krugman wrote:

    “The Social Security system won’t be in trouble: it will, in fact, still have a growing trust fund, because of the interest that the trust earns on its accumulated surplus. The only way Social Security gets in trouble is if Congress votes not to honor U.S. government bonds held by Social Security. That’s not going to happen.” (http://krugman.blogs.nytimes.com/2008/03/28/about-the-social-security-trust-fund/)

    Your solution is a good one, and I’m willing to forgo my Social Security benefits – especially since I don’t think I’ll ever get them. What I find scary however, is the solution being proposed Mr. Obama. As FDR described it, Social Security was to be ” a base upon which each one of our citizens may build his individual security through his own individual efforts.” The program was designed so that a person received in benefits approximately what she put in through payroll taxes. Under Obama, the Social Security program will become a vehicle for wealth redistribution. And this could have a big impact on the behavior of entrepreneurs. Take a look at the analysis put together by Lawrence Lindsey (http://online.wsj.com/article/SB121391705573990175.html?mod=special_page_campaign2008_mostpop

    Keep up the great analysis!

  2. Jamie O'Keefe

    First off, Social Security isn’t an retirement system. Pensions (declining as corporations don’t want the liability) and investing were the other two parts. Social security is an entitlement and social safety net in one.

    Now if you look at this other perotchart:

    http://perotcharts.com/category/challenges-charts/page/26/

    You will see that even Perot thinks that Social Security will grow from 5% of GDP to 7% of GDP by 2032. Sheesh, cut back on our military invasions and military spending and we can pay for it. Of course Social security taxes are capped so the wealthier you get, the less you pay as a % of income beyond a limit. Abolish the cap and i doubt there will ever be a problem with social security.

    For more info on it, see:

    http://krugman.blogs.nytimes.com/2008/03/28/about-the-social-security-trust-fund/

    Now on medicare/medicaid, you might be correct. But they are growing because all health care costs are growing. Plus, medicare/medicaid tend to support people who are older or disabled, and so use more medical services. Do you really want old people and the disabled dying and/or on the street because they cannot afford health care?

    I will point out that HMOs and private health insurance companies have administrative costs and profits that are significantly more than the 1-2% cost for administration for medicare/medicaid. If you can find one, tell me and I’ll sign up.

    The solution to medicare/medicaid is to give it to everyone in the US and get rid of the HMOs and private health insurers. Who needs them! They just cost more and deny you coverage. Yes, folks the solution is socialized medicine and it comes to us highly recommended from those bastions conservative government like Germany, France and Canada.

    Now can we talk about Global Warming and the serious liability we are imposing on our children and other species?

  3. Dan

    My friend, i think this rates as one of your most astute and insightful posts on the blog to date. Spam-worthy. I can’t think of a thing I disagree with, except maybe the idea that it’s worth punting the pains of SS onto my generation as opposed to yours. None of us have the vested interest in it yet, and the few who even know what it is don’t expect to receive a dime from it anyways. The only issue therein is that you prolong the misery til then.

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