Sunday, February 1, 2015

Make Social Security Optional?

Social Security has been with us for nearly a Century, and has been nearly bankrupt the entire time.  Somehow it keeps on going.  Why is this?

The GOP is at it again - scaring us into thinking that Social Security is "going bankrupt" and before long, it will bankrupt the country.  From the early days when the program was passed under FDR in 1935, Republicans absolutely hated Social Security because it is an aspect of Socialism (a society taking care of its people) and because it has worked for so long and is so popular with the voters.

Even teabaggers, who decry all government spending, will say, "Don't touch my Social Security!"  So the GOP has a hard time selling cuts to the program, when their very voter base (old people) are dependent on it.

So rather than say, "We're going to cut your Social Security" they say they are "Saving Social Security!" by cutting it.

Needless to say, the program is not in "jeopardy" at all.   The GOP likes to bat about numbers like, "the program will be broke by 2040!" which is not entirely true.   By 2040 (or 2033, or whatever number you want to pull out of your ass) the program at current projected rates will not have sufficient money to fully fund all benefits.   This assumes, of course, that we stubbornly and irrationally refuse in the interim to raise the cutoff level or raise the retirement ages or otherwise adjust the program.  The GOP, of course, proposes to do none of these minor adjustments, but rather cancel or privatize the entire program.

It is akin to your friend driving the car off a cliff.   You see the cliff coming and say, "gee, if you turn the wheel slightly in one direction, the car will turn around and you will avoid the cliff!"   But instead, your friend says, "I have a better idea, let's blow up the car and everyone in it, that way it won't go off the cliff!"

This is how the GOP thinks.


Your opinion about Social Security will change as you age.  Young people think it is the biggest con-job in the world.  Middle-aged people grouse about the cost and worry whether it will be there for them.  Old people say, "Don't touch my Social Security!"

In some online discussions, some youngsters raise the idea of making Social Security voluntary or perhaps privatizing it.   And this illustrates how Social Security is viewed by different age groups.  Your opinion about Social Security will change as you age.  Young people think it is the biggest con-job in the world.  Middle-aged people grouse about the cost and worry whether it will be there for them.  Old people say, "Don't touch my Social Security!"  

For young people, Social Security and Medicare seem like unnecessary dents in their paltry paychecks - about 8-9% of their income, lost forever!   They'll never see a dime of that money, ever again!   Well, that is what the GOP has been programming people to believe, ever since I was born.   "Don't get your hopes up on Social Security!" they tell us, "because by the time you retire, we'll put a needs test on it, or the program will be bankrupt!"

Those Republicans are such cheery people - and they way they keep threatening us is so appealing, no?   Sort of like that psycho Uncle you had, who always makes threatening comments about his weapons collection, and muttering, "Someday, you'll all pay!  And dearly, too!"

Maybe we shouldn't let him out of the basement.

Middle-aged people have more reason to grouse about Social Security - their paychecks are larger than some slacker 20-something, and they pay the lion's share of dough into the system.   Self-employed people like myself pay a whopping 18% Social Security and Medicare "Self Employment" tax (temporarily reduced in recent years by Obama, due to the recession).  So we are all-too-aware of what the program costs.   However, being closer to retirement, maybe the resentment about the program lessens.

For older Americans, nearing or in retirement, well, Social Security is the greatest thing since sliced bread and moreover they paid into the system and the government owes them!   And to some extent, this is true - they paid in, an the amount they get back is about equal to what they paid in, plus a modest interest rate.  So the attitude about the program changes dramatically depending upon your age.   And indeed, there are some oldsters out there trying to live on Social Security alone and if you took this away, they would literally starve to death.

So today's Ayn Rand-reading libertarian 20-something who wants Social Security "abolished" or privatized or made optional, will be tomorrow's defender of the program, sure as you are shitting.  And if you think your opinion won't change over time, well, think again.   Because the program will be there for you when you get old, unless you do something really stupid and vote for people who want to abolish it, right before you reach retirement age (and after you have paid into it!).   Tell me again why anyone in their right mind would vote for that?

The question of whether Social Security should be privatized or made optional is an interesting one.  And in a way, Social Security is already optional.   In order to qualify for benefits from the program, you have to first pay into the program except in some very limited circumstances.

You have to work at least 40 quarters (10 years) and pay Social Security taxes, in order to qualify for even the minimum benefit.   Those who work less than this, or don't pay in, don't collect.   And friends of mine have done just this - not paid in - and now are facing retirement without Social Security and regretting the decision.

How do you do this?   Here are their stories.

David is self-employed as a home inspector.   He inspects houses prior to sale and advises prospective homeowners as to possible repairs to expect if they buy the house.   It is not a great paying business, but he does OK at it.  He also has a sideline business of buying dilapidated older homes, fixing them up and selling them, which earns some nice checks in some years.

His accountant (who later was jailed) suggests that David form a subchapter-S Corporation, which would help shield him from liability.   It also could be used in a scheme to avoid paying Social Security and Medicare taxes.

Simply stated, David could take out profits from his business as ordinary income and pay the self-employment tax of 18%.   Or he could take out the profits as dividend income and pay only regular income tax - and no social security taxes.  The profits on the sale of  the houses he fixes up are taxed as capital gains - even though much of the money made from the sale of these houses is from the "sweat equity" (labor) that he used in repairing the homes.

Labor is labor, but as you can see, it can be taxed three different ways.   And of course, if David rents out some of his houses he can convert ordinary income into capital gains.

There are of course, rules on this, and you'll raise the ire of the IRS if you try to claim all of your income from your Subchapter-S corporation as "dividends" and thus avoid paying Social Security and Medicare taxes.   David's accountant suggested this.   David's accountant is in jail now, on other matters.  He was a bit overly-aggressive, it seems.

By the way, that is the problem with Accountants and Investment Advisers and Lawyers.   Accountants will advise you to invest using the tax code, when they know nothing about investments - and very little about the law.  Investment advisers will advise you to invest, often based on the tax code, but at the same time decrying, "We don't give tax advice".   The lawyer might be able to bail you out of trouble when you get into it, but can't advise you on investments and is probably a lousy accountant.  But that is a subject for another posting.

David lives pretty high on the hog.  They build a custom home, and buy all the nice toys that upper-middle-class people like to have, such as a toy tractor, a boat, a vacation home, new cars ever few years, hobby cars, and the like.

But when David turns 57, he realizes that he hasn't saved as much as he would like for retirement.   Business takes a downturn and retirement is looming ahead of him.   Having at least some sort of Social Security benfits even if it is the minimum benefit would be nice.

So he starts reporting his income as ordinary income and paying his self-employment taxes.  However, he realizes now, that he will have to work longer than he had hoped to, in order to collect any Social Security at all.   In fact, he has to hope he can work for a full ten years at some sort of job, in order to collect.

David's situation illustrates the problem with making Social Security "voluntary".   For David, by skirting the law, he was able to make Social Security "voluntary" for himself.   But, he failed to take that 18% and invest it into savings.   There was always some bill to pay today or some new toy he had to have now - or he needed the money to pay to fix up one of his fixer-upper houses.   There would be time to save money tomorrow he thought.   But what he failed to realize is that by not paying into the system, he would forgo his "safety net" in retirement.

And sadly, that is what would happen to a lot of Davids if Social Security were "optional".   Without exception, every young person in the country would "opt out" of the plan, thinking that "getting old" was a "long way off" and that they needed the money for today.   And besides, they would invest this money and come out ahead!   But a huge share would, of course, not invest anything and retire destitute.

How can I say this with certainty?   An entire generation is retiring, in the next 10 years, on IRA or 401(k) savings, and a huge portion of them have saved little or nothing.   It is going to get ugly.

Wendell played guitar in a bar band.   Wendell liked to party, and after dropping out of college, bummed around getting gigs with various bands, playing in college bars and whatnot.  At the end of the night, they would divide up the tip money, plus whatever the bar paid them (if anything) and he would go back to the VW bus he was living in.

He liked this lifestyle - partying hard and playing rock 'n roll - but he should have realized that eventually the party would have to end.

Sometimes he got odd jobs working under the table and was paid in cash.   He never paid taxes, and indeed, had not filed a tax return for 30 years.

At age 55, he was broke.   His girlfriend had left him when she realized that Wendell was never going to "hit it big" as a rock 'n roll star and moreover, would never settle down and get a regular job.   Wendell moved back in with his parents.

And he realized that pretty soon, he was going to be old enough to retire - or be retired - and he had nothing to show for a lifetime's work.   No savings, no possessions, no furniture, not even a car!

Worse yet, he would not even qualify for Social Security.   At age 55, he is now trying to get an above-the-table job or jobs for the next ten years, so he can qualify for some sort of Social Security.   But the minimum benefit is not going to keep him in bongwater for long.   He'll have to have some sort of supplemental job, well into retirement.

His situation illustrates what would happen to a lot of irresponsible people in this country (which is most people in this country) if they were given a choice about paying into the system.   They would chose not to contribute and then later on be a burden to us all - collecting Social Security SSI (sort of welfare for the elderly) which is paid for by general taxes.

We, as a society, are not going to let Wendell starve, so we have to pay to support him.   And note, Libertarians, I said, "as a society" - Libertarian nightmares are not "a society" but anarchy.   Letting people starve to death is not an option on the table.

Suzie is a multi-millionaire "trust fund" baby.  Although she has held many jobs, she doesn't have to work and after she got married, both she and her husband quit their jobs.   Suzie doesn't collect benefits.  Suzie doesn't need the benefits.  Suzie never paid into the system.

So why are the Suzies of the world the first ones to want to abolish Social Security?   After all, their dividend and capital gains income from their inheritance was never taxed for Social Security.  They are not losing a penny in this deal.   But for some reason, the very rich - the Mitt Romneys of the world, who pay no Social Security Taxes are the first to want to abolish the program!

* * *

So the Examples of David and Wendell illustrate that it is possible (although not entirely legal) to opt out of Social Security by working under the table or declaring your income as "dividends" or whatnot.   The problem with this strategy, is in both cases I am aware of, both people deeply regret doing this and moreover failed to put that missing money into savings - but rather spent it.

Why is Social Security so desirable for the elderly?   Well, one problem about getting old is not knowing how long you will live.  And thus, worrying about running out of money is a big concern.   In the past, many folks had pensions.   Today, we have IRAs and 401(k) plans.   And we have Social Security as a backstop to this.   It is our safety net, and we don't - or shouldn't - have to worry about it "running out" of money.

So how do we "fix" Social Security?   Well, again, there are two - and only two - ways.  As I have noted before there is no Al Gore Lockbox, or some Newt Gingrinch Privitization Fantasy.   You can either put more money into the program or take less money out.

Putting more money in either means raising the social security tax rates, which would be unpopular.  Of course, President Obama lowered them from the 9% we were paying, and this temporary tax break should be allowed to expire.

The other way is to raise the cutoff.  Social Security taxes are not levied on any income above a certain level (about $117,000 right now) and thus are a regressive tax.  Raising this cutoff level to say, $150,000 will easily fund the program for decades to come.   Eliminating the cap entirely would fund it forever, and allow the actual rate to be reduced.

Guess who is against raising or eliminating the cap?   You guessed it - people making more than $117,000 a year.   But due to inflation alone, this cap needs to be raised, and has been raised in the past - and it should be tied to inflation so that it doesn't need to be continually raised and adjusted again and again.  And folks who earn a lot of money - like Doctors and Lawyers, would like to see the cap stay low.  Earned (wage) income is taxed for Social Security.

But the Suzies of the world are a different story.  Unearned income (what we call dividends and capital gains) are not taxed for Social Security.  Raising the cutoff, raising the retirement age - anything at all relating to Social Security - affects them not one iota.   They don't pay in - they don't take out.  Yet theirs are some of the loudest voices in the "let's abolish (or privatize) Social Security" debate.   And maybe you should think twice about taking the opinions of someone who has no interest in the game, other than to see all that money diverted to the stock market where they could play with it.

A second option - and one that already has been employed - is to raise the retirement age.  It used to be 65.  Now it is 67.   Some are calling for it to be 70.  The "early" retirement age is presently 62, which seems very young to some folks.   Since people live longer, you often end up collecting more if you collect early - but then again, if you live with the monthly payment mindset, this can backfire.

At present, if you delay taking benefits, you end up collecting more - up until age 70.  And if we raise the standard retirement age to 70, then obviously we would have to raise the delayed benefit age to 73 or 75 - or eliminate it.   However, encouraging Seniors to delay accepting benefits may profit Uncle Sam, so maybe we should encourage this sort of thing.

So what will happen to Social Security?  The GOP will make lots of threatening noises - which will likely cost them the 2016 election - and the cap will be raised and the retirement age will be raised and that will be the end of it - until a few years down the road, when some political party will decide that it is a slow news day and that beating up immigrants isn't getting enough attention, so why not say Social Security is in "crises" again?

A crises that has existed for nearly a Century.   We call that the status quo, not a crises...