Saturday, February 04, 2006

Solving social security shortfall

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I am going to solve this social security shortfall problem today.

Yawwwwwwn..... 2006 is almost here and I am going to solve this social security shortfall problem today. The more I read about this social security shortfall issue the more confused i seem it get. Why do they have to make it so complicated?
My way of looking at it is that we can be solve this problem using a) Benefits Reduction or b) Revenue Increases or c) a mix of the two approaches complemented by an increase in d) Investment Income.
a) Benefits reduction: Since life expectancy is increasing and people are living healtheir lives it would make sense to increase the retirement age to 67-68.It also makes sense to reduce the cost of living adjustment. Future retirees must not take their benefits for a given. This will be politically difficult to achieve of course but a small cut of 5% will set the stage for future generations to make it more palatable. This who already enjoy a high income say > 65,000$ ought to be able to share the burden of those below poverty line. By increasing wages subject to social security tax we can have the rich subsidize the very poor. So we can 1) Accelerate increase in retirement age to 67 and index thereafter. 2) Reduce cost-of-living adjustment by say 1 or 1/2 percentage points. 3 ) Reduce benefits by 5-10% for future retirees. 4) Reduce benefits for those whose total retirement income exceeds $65,000 per year. I've pulled out these magic numbers from my hat:)
The other way is by Revenue Increases
b) Revenue Increases: By raising payroll taxes by a modest 1/2 percentage one can contribute in a large way to the long term problem of deficit. By eliminating the cap on wages subject to Social Security tax for example . So we can 1) do the above AND 2) Raise payroll tax on workers and employers by 1/2 percentage points each 2) Increase wages subject to Social Security tax 3) Tax Social Security benefits like pension benefits
In reality the issues will have to be addressed taking political consideration , government will as well as a mix of benefits reduction, revenue increase and investment income gains through better asset allocation with defined risk adjusted return characteristics that are palatable. Thats where it gets messy..sighhh


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