Social Security: the Bipartisan 'Soft Default' Plan

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machinehead's picture
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Social Security: the Bipartisan 'Soft Default' Plan

BOHICA, as the saying goes. 'Bend over, here it comes again!'

House leaders of both parties recently signaled that they are prepared to tackle a leading long-term liability — Social Security — by raising the retirement age.

Speaking in unrelated forums, both House Majority Leader Steny H. Hoyer (D-Maryland) and House Minority Leader John A. Boehner (R-Ohio), stressed that with people living longer and enjoying better health in their senior years, the nation simply can't afford any longer to be paying out benefits for as long as 30 years after retirement.

"We need to look at the American people and explain to them that we're broke," Mr. Boehner said in an interview last week with the Pittsburgh Tribune-Review. Besides raising the retirement age for full Social Security benefits to 70 for people now 50 or younger, Mr. Boehner suggested curbing benefit growth by tying cost-of-living increases to the consumer price index rather than growth in wages, and providing benefits only to those who need them.

"If you have substantial non-Social Security income while you're retired, why are we paying you at a time when we're broke?" he said. "We just need to be honest with people."

Mr. Hoyer also said it was time to be honest with the public that the sheer size of the deficits and public debt means ... cuts and reforms in all major programs — including defense and Social Security — as well as tax increases.

"We could and should consider a higher retirement age, or one pegged to life span," he said in a speech last month before the Third Way think tank. Like Mr. Boehner, he suggested making Social Security and Medicare more "progressive," that is, providing benefits primarily to low-income people who need them the most.

If these proposals were made by a company from whom you bought a retirement annuity, you could take them to court. But the Supreme Court has ruled that Social Security is merely a political program, which Congress can modify or terminate at will. With many regarding SS as a significant part of their retirement income, the lack of contractual certainty is a potent recipe for INSECURITY.

A couple of things are structurally wrong with Social Security. First and foremost, it is not subject to ERISA, the 1974 law which governs the prudent operation of private-sector retirement plans. If it were, Social Security would have independent administrators with a fiduciary duty to its beneficiaries, not to politicians. Social Security would be required to use proper accrual-basis bookkeeping, maintain adequate reserves, and shun investments in hinky 'non-marketable' Treasury securities.

The second problem with Social Security is low return on its assets. While there are legitimate objections to government ownership of equities, equity returns have outstripped bonds by several percentage points over the past century. Private pension funds, as a necessity, include equities, as do public social security schemes in countries such as Chile and Singapore. 

Now politicians are proposing to kill the basic deal hatched by Frank Roosevelt to ensure political support for the plan: its universality. Means-testing is 'soft default' on a grand scale. So is waiting till 70 when you thought it would be 65. U.S. male life expectancy is 75.6 years, so there goes half your payout, dude. But if Social Security were downgraded to a welfare program for the indigent, the employment-killing FICA tax could be ditched or greatly reduced.

Another option would be to find a way for the program to achieve acceptable returns, for instance by offering a menu of mutual fund options as corporate plans do, perhaps with some guidelines or requirements for asset allocation.

Unfortunately, what Hoyer and Boehner are proposing is the worst of both worlds: slashing eligibility for benefits, while retaining the crushing 15.3% payroll tax. We lose, they cruise.


"You entrusted your retirement to the kindness of Congressional strangers? Ha ha, I sure didn't. DUMBKOPF!"

osb272646's picture
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Re: Social Security: the Bipartisan 'Soft Default' Plan

The only surprise here is that so many people are taken aback that Social Security (and Medicare) are not going to deliver on the promises they made to upcoming retirees.  I maintain that since at least 1972, anybody who reads anything besides Oprah and People would have seen this coming and could have prepared for it.

The demographic storm clouds were building on the horizon even back then.  The statistics were there for anybody to see.  The Boomer wave supported these programs during their working years with their FICA tax, and politicians in the '60's and '70's bought Senior votes by jacking up their benefits under these programs.  It's the Boomer's turn to collect, but surprise!  There's no age wave coming behind them to support the massive outlay the Boomers are expecting to be paid to them.   Even without the recesson of 2008, this was already baked into the cake.

Politicians took the surplus Social Security and Medicare tax revenues that the Boomers were paying and blew that money on their favorite pork, their favorite war, and their favorite social programs.  To replace all that stolen surplus,  the Politicians put Government IOUs into a drawer marked "Social Security".  The same IOUs that China buys, and the same ones that our government issues by the trillions each year to cover the spending deficits.  How could any one not see this coming?

A lot will be written about the flaws in the Social Security and Medicare systems, how if they would have been managed under ERISA, all this would not have happened.  Unfortunately, the horse is out of the barn and there's no way to retroactively fix the problem, so I submit that all such analysis about "what's wrong with the SS program", or even "what went wrong" is a total waste of time.   The failure of these programs will create a lot of disgust with our government, but that won't help anyone who was pinning their retirement hopes on Social Security.     





machinehead's picture
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Re: Social Security: the Bipartisan 'Soft Default' Plan

True, one shouldn't get hung up on the sunk cost fallacy, which is going to be the predominant reaction -- 'I paid XX thousand dollars into Social Security during my life, and I DESERVE my benefits.'

The original deception promoted by Frank Roosevelt, that we each have an ownership interest in a Social Security 'account,' was never true. The Supreme Court ruled fifty years ago in Flemming v. Nestor that there is no entitlement to Social Security benefits. Even then, the handwriting was on the wall that Social Security was erected on an unaccountable foundation of lies by weasel politicians.

But it does matter what happens going forward. Making SS a means-tested welfare program and slashing the heavy FICA tax would be a jobs booster, as it would cut the cost of employment. Or, raising the return on SS assets would reduce the scope of the coming soft default. But I suspect that the bipartisan consensus will feature the worst elements of both options: keep the FICA tax, keep the low-yield non-marketable securities, and slash the benefits.

Since the courts are barred to legal challenges, what's the recourse? Vote out your Depublicrat incumbent, who will be replaced by another Depublicrat just like her? Someday I expect to wake up and read that the entire Congress has fled the country in the middle of the night, to live in exile in places without extradition treaties.


rickets's picture
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Re: Social Security: the Bipartisan 'Soft Default' Plan

ok, I know Social Security is flawed in many many ways.  But, this is great news to me.  Lifespans are much longer, and so it makes sense to increase the benefit age. 

Lets not get mad at politicians trying to balance the out of control spending and benefits - lets applaud this type of action.  Sure, they never should have led us here in the first place, but this is a great step toward balancing the insane imbalances of our government. 

By raising the benefit age, then perhaps making a few other minor/major changes to SS, the dollar and our other debts are perceived much stronger in the internatinal community....and the can is kicked way down the road.  Buying time right now is key.  I applaud the efforts of government/benefit reductions. 

By the way, I think if the masses had this money in their own accounts the result would likely be the same after this past decade.  Just look how pensions/401ks across the board - private or public - are vastly underfunded right now.  Further, encouraging more risk taking in investments might not be the most prudent action for the ss fund given what many in the cm community predict!

joemanc's picture
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I call it THEFT!
rickets wrote:

ok, I know Social Security is flawed in many many ways.  But, this is great news to me.  Lifespans are much longer, and so it makes sense to increase the benefit age. 

Lets not get mad at politicians trying to balance the out of control spending and benefits - lets applaud this type of action.  Sure, they never should have led us here in the first place, but this is a great step toward balancing the insane imbalances of our government. 

whoa - easy there. Let's remember something from the Crash Course - There is NO Trust Fund. The money that you and I and everyone else has paid into that fund has been spent. And now, they want to increase the retirement age? You may call that kicking the can down the road. I call it theft! If you or I steal, we go to jail. When Congress steals, well, they get a pension, what do they care?!?

Maybe, rather than moving up the retirement age to 70, and cutting benefits by 50% as machinehead pointed out, the prudent thing to do would be to cut government spending and use that money to rebuild the depleted social security trust fund. And let me tell you, I know someone who works at the Social Security office - she said they are swamped with seniors filing early for benefits. Once you get into your 60's, it is very difficult to find a job.

yobob1's picture
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Posts: 132
Re: Social Security: the Bipartisan 'Soft Default' Plan

Being a recipient of Social Security Disability, I can tell you up front that the battle to get those benefits for most people is a very long drawn out process usually ending up in  front of a judge with an ambulance chaser beside you.  Two years from date of application is not unusual.  They don't make it easy.

Social Security was a bad idea from the get go and in my opinion should be phased out.  Means testing with a fairly high break point and eliminating the early retirement option would be my starting points.  I would phase out collections of FICA by age with the understanding that what you could expect in the end is reduced.  As an example someone 25 or under would have no FICA withheld, but also would have no eligibility.  At the other end of the scale someone who is 55 would continue to pay the full amount and be eligible for the full amount.  In between you would have a sliding scale of reduce pay-in and reduced benefits.  At this stage of the game I would keep the employer contribution for all employees constant for some period of time and also remove the wage cap - for say 20 years after which it would also be on a sliding scale by age..  This would prevent an age bias in hiring and frankly the money is required to keep the thing alive long enough to kill it with minimal pain.

In the end the government has no business being in the "retirement" business - they have no record of ever managing anything for the benefit of anyone other than a connected few and the bureaucrats in charge of the program.  In my above scenario someone who is 25 would have an additional 6.2% income to invest or save.  Whether they do or not is up to them.  They have the freedom to succeed and they have the freedom to fail.  That's all the Constitution provides.

Medicare is an entirely different can of worms - that one will have to blow up with the rest of the medical, insurer, legal complex which is simply spiraling out of control.  You want much lower cost medical services?  Eliminate all insurance.  The medical world would undergo a radical cost restructuring in a very short period of time.

SingleSpeak's picture
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Re: Social Security: the Bipartisan 'Soft Default' Plan

Eliminate all insurance.  The medical world would undergo a radical cost restructuring in a very short period of time.

           Wonderful idea, why didn't I think of that? It would also free up countless hours wasted on ridiculous paperwork.

Carl Veritas's picture
Carl Veritas
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Posts: 294
Re: Social Security: the Bipartisan 'Soft Default' Plan

I'd like to add that some people hang their hat on the issue that there are government bonds held by the trust, and is therefore supported by the full faith and credit of the United States.   

But this provision can only kick in if the bonds are actually issued by the U.S. to another party.   The social security statute does not provide for this. In other words, the 'full faith and credit" language is illusory.    The U.S. cannot issue 'bonds' to itself and have their terms bind future congresses.   Bottom line:   these social security bonds are neither assets of the U.S. nor property of the workers and their families. (from Charles E. Rounds Jr)


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