August 29, 2009

Can Social Security Be Fixed? Can Windfall Elimination Be Included?

As the old saying goes, there are few things in life that are guaranteed... death and taxes. Since 1935 though, Social Security (SSA) could have been added to this short list, but will it remain?

Over the years I have had numerous discussions with colleagues and clients on the impending problem of SSA. Every election year we hear that the politicians are going to address it, but political pressure always pushes it back for another time. No one wants to be the bad guy because it will interfere with their plans for their political future.

There are strong senior groups that say you cannot change the current system or benefits, yet if we are to insure that SSA will survive, we must stop waiting to address the problem and actually confront it. Remember, the baby boomers are coming...

So What Is The Problem?

Essentially, the system is running out of money, and there is no "trust fund" or "lock box" that has money waiting to fund it. All of the excess money over the years has been used to fund the retirees and for other government programs. The only thing in the "trust fund" are a bunch of IOU's from the government.

All of the deficits that the government has had would have higher had the SSA tax dollars not been included. Simple accounting... move money from the left pocket that is supposed to be saved to the right pocket that is spent.

The SSA 2009 annual report shows more contributions into the system ($590 billion) than distributions ($513 billion), BUT since the "trust fund" of $2.2 trillion is just IOU's from the government, the plan quite literally has zero money other than the government debt.

Now, let's look at a "real" pension plan. For example, the Georgia TRS (that we have discussed previously) had a current plan balance of $50.06 billion (FY 2008 ended June 30, 2008 - latest report available). In FY 2008, the plan took in $1.54 billion in contributions from employees and employers while it paid out $2.76 billion in benefits. Since the distributions only accounted for 5.5% of the total, it was a down year, and TRS raised contribution amounts for 2009-2010, the plan looks to be in extremely good shape (all figures from the FY 2008 Annual Report).

If the Georgia TRS plan funds were suddenly being used by the state to pay current expenditures (not allowed by the way), TRS would be in the same boat as SSA... but they are not. The TRS plan has an actual balance with actual investments - not just IOU's.

How To Solve the Problem?

First, there is no easy solution. The problem can be solved quickly, but the solution itself is not easy to come to grips with, so let's look at some possible solutions and decide what looks good.

  • Just raise the SSA taxes from $106,800 (2009 level) to a reasonable amount and index it to inflation.
    • This is good in theory as long as the raise is not too much. First, even Obama just pledged not to raise taxes on anyone making less than $250k, yet here we will be asking those making under $250k to be hit with the most regressive tax we have, and the small businesses (heart of the economy) will also bear the brunt of the tax (remember employers match the contribution).
    • This is part of the same group that will also be hit with tax increases to pay for whatever health care reform comes down. You can only squeeze so much before you hurt the consumer, the businesses, the economy, etc. Raising the limit will create more revenue, but do not take it too high or it will be a burden.
  • Just raise the full retirement age.
    • Another good option that should be included, and it should be raised to 70. People are living longer, this needs to be a consideration (not for those within 20 years of full retirement right now, but a simple phase up like before).
  • Best Solution - Combine Above
    • The best solution is to tweak items all the way around including benefits to lessen the blow on employees, employers, and retirees. This is a shared benefit that should be a shared burden.
How Do We Solve the Windfall Elimination Provision?

It seems as if my blog titled "Windfall Elimination Repeal - The Congressional PR Two Step" on July 26 struck a nerve. In my post I discussed H.R.235 - Social Security Fairness Act of 2009 and S.484 - Social Security Fairness Act of 2009, and how even with overwhelming bipartisan support, neither bill has a chance due to the price tag.

If Congress were to work on the WEP issue, how could they fix it? For most educators, it seems the issue is receiving the spousal benefits. This is definitely an issue. It does trim the price tag some, but if we are fixing the whole system, we should definitely lump this in as well.

By the way, there is always the "loophole" solution (work your last five years before retiring in education in a system that pays into SSA), but this means changing jobs just when you are in the final stages of your career. I see this as a "final option" because of the strain it obviously puts on the educator. This is especially tough if you have been in the same system for 25 years.

I do believe that it is wrong that my wife would not receive very much (if any) benefit from my contributions (and my employer's) to SSA because of her income from her pension. If we were both deceased, then they can keep the money, but at least let my wife enjoy some of the fruits of my labor if she survives me. Realistically though, I see Congress continuing to do little.

One solution that some colleagues and I have tossed around though is allowing the equivalent of one full SSA payout between married couples with one non-educator and one educator (that did not pay into SSA for 15+ years). The spousal benefit to the educator at the non-educator's death would be a continuation of the non-educator's benefit.

This scenario limits the spousal and SSA covered employee benefit while both are alive, then allows the educator the SSA income that they are used to if the SSA covered employee dies first. Having a spouse die is tough enough and having that death adversely affect your income should not become a burden.

Final Thoughts

This is a tough topic to cover in one post, but I tried to give some of the basic issues surrounding SSA and WEP repeal. The main issue on both fronts really is cost. We have a limited number of workers with limited incomes to tax, so we cannot just tax our way out of the issue. There really does need to be some changes to the system to continue to make it viable especially if it is to survive the Baby Boomer generation.

Additionally, I highly recommend reading the article by Allan Sloan called "The Next Great Bailout: Social Security." It is a very good read and covers many of the same issues with SSA from a bit of a different angle.

My view has always been that the contributions of one spouse takes away from the other as well, so why penalize the spouse? The system is designed to be a support system to those that paid into the system, and an educator's spouse did pay in. Why limit the income to the surviving spouse?

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