September 26, 2011

Saving Social Security

Social Security makes for an interesting case study in changing political times. At its creation, the idea was hailed by Democrats and reviled by Republicans. At its looming demise, Social Security is a political third rail for Republicans and a bargaining chip for Democrats. The one thing they all have in common in an endless fretting about what should be done to "save" Social Security. (And yes, it really is a Ponzi scheme of sorts, but then so is any form of insurance. Who do you think pays for that roof you lost to wind damage or that X-ray you just had?)

So what should we do about Social Security? It's obvious, really: means-test benefits and increase the retirement age. No one is better at stating the obvious than one of my faves, John Mauldin. Here is a brief except from his latest columns in his newsletter, Thoughts from the Frontline:
I think Social Security should be means tested. We should recognize it for what it is, for what Krugman called it: a redistributionist scheme. And a good and necessary one from the perspective of civilized society. Means testing would go a long ways to "fixing" the problem. But it doesn't get us there.
We need to raise the retirement age, and by more than a few years. And this is where I get called a heartless (insert expletive)! "How could you want us to work until 70 or even later? How can we do that? Is that fair?"
Let's use as our model that icon of the left, the King of Compassion, President Franklin Delano Roosevelt (FDR). He created the Social Security Act in 1935. He put the retirement age at 65. From today's perspective, that seems about right, if not a little early. But what did it look like back then? I refer you to a report from the US Senate in 2006 on life expectancy in the US. Interesting reading, but for our purposes we will scroll down to page 26 and the detailed life-expectancy tables. ( http://aging.senate.gov/crs/aging1.pdf)
In 1900, the average life expectancy was 47 years (shockingly, the life expectancy for black males was only 32). By 1930 it was 59, which, if they kept such records then, would have been what they were looking at when the designed Social Security. In 1935 it had risen to 61.
So FDR set the retirement age four years above the average life expectancy. So much for compassion. He (they) assumed you would work into what was for them advanced old age. ...
So when someone suggests that we move the retirement age to (gasp!) 70 in a few decades, I just smile and think back to what FDR would do. If Social Security had been set up to track life expectancy in 1935, when it was formed, then retirement would be set at 83 or 84 today! Not exactly the golden-years concept, is it?

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