Some people claim that our Social Security system isn't broke. Technically, they're right. The Old Age and Survivors Trust Fund (OASI) currently holds $2.5 trillion in special government Treasuries that can be redeemed at any time – in theory of course.
But here's the catch. What happens when the OASI needs those trillions of dollars to pay out benefits? Essentially, the government has to find the money to pay the face value of those Treasuries. So from that standpoint, Social Security is broke. The Treasury IOUs are not backed by any cash surplus, only by faith that the US government will somehow come up with the cash... probably by indebting itself further or by raising taxes.
Social Security was created by the Federal Insurance Contribution Act (FICA) and sold as a government-managed insurance program. We pay "premiums" to the OASI during our working years (actually the government just snatches money from our paychecks), which are supposed to be invested and provide retirement income for the rest of our lives. Our retirement is supposed to come from the income on those investments.
After taxing baby boomers for decades, the OASI is huge. But now that millions of those baby boomers are retiring, it's time for our government to tap into that fund to keep its promises.
The problem is that our government claims it can't – or won't – honor its commitment... no surprise there. In a nutshell, it recklessly spent the money it grabbed from our paychecks... money it was supposedly holding as a custodian. Rather than be honest or have the courage to raise other taxes to support its spending, the politicians stole money from our retirement insurance premiums to pay the bills for all sorts of other programs. If folks in private industry raided their employees' pension funds and spent that money, they would be in jail. Well, if the shoe fits…
Here are the three items in President Obama's recent budget proposal that are designed to address the issue:
- Chained Consumer Price Index (CPI);
- Raising the income cap on the Social Security tax;
- Additional contribution caps for IRAs and 401(k)s, and targeting those savers who have accumulated $3 million or more.
While each proposal seems different, Gary D. Halbert recently penned an article alluding to the fact that all three are related. He wrote:
"Liberal Democrats oppose the switch to chained CPI and demagogue it as a 'war on seniors,' while Republicans feel it's a way to save Social Security as we know it. Democrats prefer eliminating the cap on salary subject to Social Security taxation (read: increase taxes) to using chained CPI, which they view as a cut in benefits. It seems that only in a politician's mind can a slower rate of increasing benefits be called a 'cut.'"
So, expect your Congressional representatives to say something like, "These were the choices, and I fought hard to protect you." In the end, they will reach a theoretical compromise and the public will get fleeced once again.
Well, how about "NONE OF THE ABOVE?" All three of these proposed solutions would do more harm than good.
Let's cut to the core issue of the CPI. It's supposed to track prices of a consistent basket of goods that parallels the cost of living. In theory, when the CPI goes up, your cost of living adjustment should increase at about the same rate. But when the government attached benefit rates to the Index, it started to play games with the numbers.
The official CPI is a joke. It is continually manipulated and just doesn't match reality for most people. That's because keeping the CPI lower than the true rate of inflation benefits the government in many ways.
- It decreases benefit payments to government retirees and Social Security recipients.
- It reduces the cost of Treasury Inflation Protected Securities (TIPS), which are tied to the Index.
- It is a de facto increase to the income tax, since tax brackets are adjusted for inflation.
And of course, the politicos love it too. They do not have to face voters and cop to cutting benefits or raising taxes. Perhaps that explains why the credibility rating of politicians ranks below that of used car salesmen.
When the Bureau of Labor and Statistics started fiddling with the numbers, the phrase "constant level of satisfaction" entered the picture. Alan Greenspan, in an attempt to justify the new substitution-based inflation formula, was credited with saying, "If the price of steak got too expensive, consumers may switch to hamburger." No kidding. He is such an intellectual.
A chained CPI would just be another boost to the numbers manipulation game. CNN released some disturbing statistics on the damage a chained CPI would cause:
"Someone who started collecting the average Social Security benefit for a retired worker in 1999 would receive $12,972 in 2012. But let's say the Social Security Administration had already been using chained CPI – that person would get only $12,336 this year, according to the National Academy of Social Insurance. That's nearly 5% less.
"The difference gets bigger over time. According to the National Women's Law Center, a retiree who was collecting $17,520 last year would see 6.5% less, or $1,139, by age 85, if chained CPI were in effect. A decade after, their payments would be 9.2% smaller, or $1,612."
The CPI should be renamed the "Consumer Payment Index." It has little to do with a constant basket of goods. If it measures the cost of living at all, it's only the cost of mere survival. What happens when the price of hamburger gets too high? Do we switch to chicken? Where does it end, dog food? We need to call the CPI what it is – an index concocted by the government to hoodwink voters because none of our elected officials have the courage to tackle the problems honestly.
The chained CPI will probably continue to make a lot of headlines. One political party will accuse the other of wanting to mess with the formula even further and reduce Social Security benefits; and one will accuse the other side of pushing for a tax increase.
Here is what will likely happen. We will be hammered by the politicians trying to strike fear into our hearts. At the last minute, the "Mighty Mouse" politicos will come in to save the day and "rescue" us from the Chained CPI. The real motive is to make the other choices sound like a fair compromise.
Raising the Income Cap on the Social Security Tax
The next proposal is to raise the cap on income subject to the Social Security tax. This will be sold as a way to reduce the deficit and save an underfunded program.
Can anyone remember a tax increase sold to the public as a way to reduce the deficit that actually did just that? Regardless of the party in power, the deficit just keeps growing.
This would be a simple 6.2% tax increase on income over $113,700 for both employees and their employers. For folks who are self-employed, the tax rate is 12.4%. High-income baby boomers already fear being "retired early" by employers looking to replace them with less expensive, younger workers. This would add another incentive for employers to cut out their highest wage earners.
It's the same old crap. One political party will scream that this is a tax increase, while the other will say the rich don't pay their fair share. They will argue over the amount, then claim to come to a bipartisan compromise.
Additional Contribution Caps on Tax-Preferred Retirement Accounts
Obama's budget would "limit an individual's total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year." According to Matthew Hiemer's back-of-the-envelope calculation in a MarketWatch post, this would affect around 100,000 American households.
This looks like pure politics to me. These 100,000 families won't get much sympathy from regular folks. Any politician who opposes this proposal risks being labeled an elitist, and those who support it will crown themselves the champions of the poor… just as an election is coming up.
This is just another unwarranted attack on the rich who were successful enough to build up more than $3 million in their retirement accounts.
Money in a traditional IRA or 401(k) is nothing more than tax deferred. When it's withdrawn, the government still gets its ever-increasing share. And there are mandatory withdrawals once a person reaches 70 ½ years old, so that money will be taxed eventually. The government sounds like a petulant child, screaming, "I want it now!"
What Should We Expect Next?
Over the course of the summer, political emotions will rise as both political parties take their stands. Then, at the last minute when all the hype has been milked, they will strike a convoluted compromise. Both parties will tell their constituents it was the best they could get, and ask for contributions so they can fix the mess after the next election.
"NONE OF THE ABOVE" won't be seriously considered, and more wealth will be stolen from hard-working Americans, many of whom would never consider themselves wealthy to begin with.
In an attempt to limit any political hate mail, I offer this. I don't want to hear a word about "fairness" until all elected federal officials scrap their retirement programs and put themselves under Social Security like the rest of us. Opensecrets.org reports that the average net worth of a Senator is $13.9 million and that of a member of the House is $6.5 million. Why should we pay for their fancy retirement and healthcare programs?
What Should You Do Now?
You’re probably thinking you want to contact your elected officials and let them know how you feel about this. I sure have, but I’ll leave that up to you; politics is not my area of expertise. However, managing my retirement finances and sharing my knowledge and strategies with my fellow seniors are exactly what I do. I’m one of you, a retiree who wanted answers.
I spent the bulk of my career teaching adults, and I know that complicated information can be taught in simple, easy-to –follow ways. You may feel differently, but all the geek talk we’re bombarded with just frustrates me. That’s why in articles like this one and in my Money Forever service we explain matters in plain English, so you won’t need to go out and get a Ph.D. in economics or finance to follow along.
I'm sure we have all told our children and grandchildren that an education is one thing that can never be taken away. In our case, a financial education can keep us independent and in the game, and in this case, protect us from the shenanigans of politicians.
I’d like for you to consider taking a look at Money Forever, it’s written by a senior (me!) for seniors. The current subscription rate is affordable – less than half that of a typical morning newspaper. The best part is you can take advantage of our 90-day, no-risk offer. If for some reason you find it’s just not for you, you can cancel for any reason (no questions asked) within the first 90 days to get all your money back and never be billed again. Period. But as you might expect, our cancellation rates are very low, and we aim to keep it that way.