Thursday, October 11, 2007

Thinking about Social Security

Obviously some sort of adjustment to Social Security is necessary to ensure its long term survival. There are three options: raise the retirement age, lower the benefits, or raise taxes. (No, privately invested accounts won't solve the problem.) Most people have an aversion to all three, but to me the clear winner would be to raise the retirement age. When Social Security began, the retirement age was 65, and this was higher than life expectancy in 1940. So a baby born in 1940 was expected to die before going on SS. That lucky fraction who did make it to 65 could collect SS, and this helped keep costs down. As time went on and life expectancy rose, so did the percentage of your life that you could expect to spend receiving SS. By 2000, nearly 16% of your life (in expectation) will be spent on the program.

Even if we allow for the increase in retirement age to 67 (which only really hits in 2027), we're still looking at over 15% of your life on SS if life expectancy stays at 78 years. If we were to enforce a rule that the retirement age has to be set so that 12% of your expected life is spent on SS (much like it would have been in 1980, and much greater than it would have been in 1970, 1960, 1950, or 1940), we'd need to raise the retirement age to 68.6. This one and a half year increase would, from what I understand, solve almost the entire problem with SS.

Implementing this increase isn't problematic. We don't have to tell people who are 64 that all of the sudden they have to work an extra 4 years. You phase in this increase (much as the 1983 changes to SS are phasing in the increase to 67 even now) over time. The people affected would only be in the 20's or 30's now.

1 comment:

Anonymous said...

A fourth option in the SS debate to forgive the government the amount invested in the program, and opt out. I would be happy to forfit all benefits earned from this program to shed FICA taxes.