A Gordian solution

Social Security is not something I've paid a lot of attention to, over the years - except when I was a private contractor and realized the true size of the payroll tax I'd simply grudgingly paid as an employee. Even then, my concern was for how I would come up with the extra 13% that I hadn't known existed. (I was very young; my contractor gig was very small; but the income was untaxed, so I had to learn more about the tax code than how to fill out the 1040EZ whether I liked it or not.)

Lately I've been trying to slog through the arguments about the solvency of Social Security, potential fixes, their short- and long-term effects... in brief, the logical arguments. I'm coming up dry. The reason, I think, is because at root this is an ideology issue, not an economic one. The fact is (how I hate that phrase - only slightly less than "the fact of the matter is"), Social Security's solvency could be ensured for the long, or at least the longer, haul by the simple expedients of raising the age at which people receive benefits and making some modest benefit cuts. As for the crisis/non-crisis question, I will say that the Democrats are being disingenuous: it was a crisis while Clinton was trying to deal with it; it was a crisis while Kerry was using it as a rallying cry during the 2004 campaign. What's changed?

But that aside. Historical notes: FDR signed the first Social Security bill into law in 1935, in the throes of the Depression. At the time, Civil War veterans (and their dependents in the event of their death) were eligible for pensions; some states had limited old-age pension plans; a few companies offered retirement plans for their workers. But overall it was still the responsibility of the individual or his family to provide a living in old age. "Old age" is not as much of a moving target as we like to think: in the 1930s, although life expectancy at birth was less than 60 years, a white male who made it to his 50th birthday had a life expectancy of another almost 22 years, which has only gone up 6 years since then. In other words, infant and childhood mortality, and probably the chance of being killed on the job, made it much more likely in the '30s than today that this white male would not reach the age of 50.

So, even at the inception of Social Security (to be more accurate, five years into the program when monthly checks started being distributed), beneficiaries were looking at a probable seven years or so of benefits. Today, based on the same post-50 life expectancy statistic, we're talking about some ten or eleven years of benefits rather than twelve or thirteen because the retirement age has been increased slightly. But of course any individual may receive benefits for a much shorter time or not at all, or for many many more years than the average.

It's a government annuity. You pay your premiums for your working life and you play the odds that you'll reach "payout age." There's nothing wrong with an annuity: in fact, if I were reworking Social Security I'd include an annuity as a portion of the program, because it has the great advantage of ensuring (or insuring) that your benefits will never run out.

But the question for me is twofold: 1. Does the government have a right to take some 13% of my compensation - about half from me, half from my employer - to buy me an annuity that I may not even need, either if I do a sufficient job providing for my own retirement or if I die too soon? 2. If an annuity is a good idea, as I just got finished saying it is, do I need one starting at age 67, or could I buy a cheaper product that starts paying out at, say, 87 - 20 years into retirement?

All right, threefold: 3. What about the fact that today's beneficiaries are dependent on the premium payments being made by workers right now?

You notice that I've glossed over the big question: does Social Security have a right to exist? As a Republican, it offends my non-redistributionist sensibilities that my money goes to the government to be used willy-nilly for the welfare of others. But as a human being first (something I share with all Republicans, whatever liberals may think), I recognize that a civilized society doesn't condemn unfortunate citizens to indigence in old age, even if their indigence is self-inflicted. But back to being a Republican: increasing the percentage of Americans who provide for their own retirement via tax-deferred vehicles already in place, like 401(k)s and IRAs - didja know that less than half of eligible Americans take advantage of these things?? - would be right in line with my philosophy.

Hence, Social Security reform: we're all used to the payroll tax now, so keeping it in place is, I concede grudgingly, the path of least resistance. How do we encourage more personal investment while paying significant service to the idea that individuals have a right to do what they like with their money? Forced savings, that's how... much as I hate to say it. Personal retirement accounts that - ahem - replace (not supplement) part of existing Social Security benefits, a defined payout schedule similar to that used for 401(k)s, plus (I think) a cheap annuity starting 20 years after retirement to cover the certainty that some people will outlive their accounts and won't be able to live on the reduced Social Security benefit they'll still be entitled to... and here's the secret core of my evil plan: a schedule to phase out the Social Security benefit altogether (that is, increase the percentage of the payroll deduction that goes to private accounts, and increase the annuity benefit, over the course of a working generation or so) so that people will own essentially all of their retirement.

It'll never be all all. The poor will be with us always. But the more earned income we can acknowledge as belonging to the worker, the happier I'll be.

Here's the thing. Back in our mid-twenties, my husband and I instituted a "$30,000 by 30" plan by which we scrimped and saved to put maximum percentages into our 401(k)s for several years so as to have a "nest egg" of thirty grand at the earliest age we could manage, giving it maximum time to grow. At a 10% interest rate (wildly optimistic but we were young and idealistic, and more to the point we believed in the annualized stock market return charts), even if we never invested another dime we'd have a million bucks at age 67. We did it this way because we knew that once we had kids it'd be a while before we would be able to invest so aggressively again - if ever. The maximums our companies allowed to invest were 12% and 15%, over and above the 6.5% or so already being taken out of our paychecks for FICA. If, instead, most of our FICA contribution had been earmarked for our own private accounts with the remainder going to the upkeep of the program and of the indigent, we would've been well on our way to a truly livable nest egg, instead of dreaming of 10% returns, by the time I dropped out of the workforce to have babies; we might already have had that $30,000, because we'd been working for several years before putting the Plan in place - so our aggressive 401(k) savings would have been, in essence, gravy. Or insurance. With no need for future workers to supplement us.

It hardly seems necessary to add the disclaimer that I am not an economist, but I am not an economist; I'm just a Republican, and I want people's paychecks to belong to them in the greatest proportion possible while providing for truly essential government functions such as "the common defense," to quote a much wiser head than mine. From my perspective, where a need can be reasonably and effectively met without recourse to taxation, it oughta be; and thus far it appears to me that Social Security fits that bill in large part.

I welcome contrary opinions (including my husband's; he just wants the "trust fund" to be run the way an insurance company really would run its annuity fund, that is to say, more aggressively than it is at present).