POWIP Piece of Work In Progress – Former Abode of Dan Collins

Words Matter: “Entitlements” and Social Security

Ah, "entitlement reform". Sometimes referring to just Social Security, many times Medicare [and maybe even Medicaid] thrown in, and if they're being really expansive, they also mean public pensions.

But that word "entitlement".....is misleading.

Because this is what the various parties are entitled to:

Nothing.

I'm not meaning that people didn't "earn" whatever benefits in question. It's that government promises are worthless, and can turn on a dime. You cannot count on them being there if they are unsustainable in reality, as many government promises are. You can't be entitled to something when you've got no way to enforce getting it.

Let's consider Social Security. What promises were made? What promises have already been broken?

There were lies from the very beginning [a 1936 brochure]:

After the first 3 year--that is to say, beginning in 1940--you will pay, and your employer will pay, 1.5 cents for each dollar you earn, up to $3,000 a year. This will be the tax for 3 years, and then, beginning in 1943, you will pay 2 cents, and so will your employer, for every dollar you earn for the next 3 years. After that, you and your employer will each pay half a cent more for 3 years, and finally, beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

I don't think my grandparents were that gullible. They knew they would end up paying more. The more the government asserts, many times, without thinking, one can call such an assertion into question.

But due to the "richer people pay more, richer people get more" design of Social Security benefits, people got to feel like they "earned" the benefits. And that language is still used. But a 1960 Supreme Court case, Flemming v. Nestor affirmed that Congress can do whatever the hell it wants with Social Security. People were given the warning 50 years ago. They should have paid attention then.

Social Security, in many ways, is the easiest of all the entitlements to fix. It's a pure cash transfer. Congress can change the formulas and benefits at any times, and the formulas [and the tax status] of these benefits can be so obfuscated that the cash gets cut in dozens of "itty-bitty" cuts that add up to quite a lot. That's what has been done previously, but now it may require more overt changes to retain sustainability.

Several people have proposed means-testing Social Security benefits. I think my grandfather maxed out, and every year just sends his checks straight to the Church [he's got one of those generous, old-style defined benefit pensions from back when private companies could afford them]. Under any reasonable means-testing regime, he'd get nothing from Social Security. My grandmother on the other side has a state pension from her teaching job. I'm not sure how that stacks up against Social Security, but I hope it's a bit more.

Now, you would think that means-testing would be popular with progressives, given the class warfare underpinnings that have been in the estate tax debates. Hah. Expect consistency from progressives? =snort= No, and it's not a principled opposition. They know the moment that means-testing is on the table, Social Security starts its slide towards being an explicit welfare program for seniors. You know, the supposed purpose for which it was originally set up. Once it becomes that, and the benefit isn't "earned", but is a true safety net, and the tax argument becomes hairy. You want to raise payroll taxes to pay for welfare? Uh, I love granny, but.... [...and a lot of the problem is because a lot of these oldsters aren't grandparents]

The payroll tax has just been a sneaky way to gather in more taxes, while making people think they were earning something in return. News alert: you weren't earning anything. To link this a second time, that money was spent on all sorts of federal goodies and that money is long gone [even with those extra taxes, they ran deficits. Imagine what happens once the program no longer spews money, but sucks it.]

My fellow American actuaries have recommended that the full retirement age for full Social Security benefits should be increased, and I agree with that. It's a matter of setting expectations, not just cutting benefits down to size -- if you want to retire "early" [and I consider 65 early, given I can see my generation living into their 90s in large numbers], you need to prepare appropriately. [More actuarial stuff on changing the benefit formulas.]

If you guys wanted the rhetorical "children" to have paid for your goodies, you really should have had more children, boomers. Your parents had plenty, and so I do not begrudge them [my grandparents, having 9 children amongst them, and it would take me a while to count the grandchildren, so I'm not going to.... I've got 17 relatives by blood on facebook, that I've counted thus far.] But the cashflows are going in the wrong direction, and there aren't enough kiddies. So I think the entitlements aren't merely going to get cut for my generation, but also my parents' generation, the boomers, while they are getting those benefits.

Who knows? Perhaps Social Security will devolve to its original purpose. That's what I'm betting on.

Imagine, a government fulfilling its original promise.

Meep

Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.