By A. B. Jacobs
In case you haven’t noticed, since President Bush’s widely heralded and then aborted reform of Social Security in mid-2005, the subject essentially disappeared from the news. His attempt to institute a partial privatization of the system, though obviously well-meaning, never enjoyed the remotest possibility of acceptance. This doesn’t mean, however, that nothing happened since then. It’s for that reason I’d like to bring you up to date on a few things that indicate how the winds are blowing.
A revelation worth mentioning is the future solvency of the Social Security Trust Fund. As recently as February 2005 most knowledgeable analysts expected the system to remain financially solvent until 2042. By 2006 the Social Security Administration acknowledged that, at then-current FICA tax and benefit levels, payments would exceed collections by 2015, with general insolvency by 2037. A simple question must be asked: If you must continuously pay in, but receive no benefits for at least 30 years—those of you younger than about 37 years of age—what do you think of your retirement prospects?
The debate continues concerning removal of the limit on that portion of salary subject to the 6.2% old age, survivors, and disability insurance (OASDI) portion of FICA (since 1994 no limit exists on the 1.45% Medicare portion). Actually it’s somewhat hypothetical, in that the 2005 figure of $90,000 increased to $94,200 in 2006 and to $97,500 in 2007, with the future anyone’s guess. As a practical matter, while the subject is vigorously debated, the limit is evaporating.
Another profound change in the Medicare component of Social Security occurred January 1, 2007. For the first time in its history, some seniors began to pay more for Medicare Part B premiums, which provide doctors’ services and outpatient coverage, than other seniors. The change, enacted with little fanfare as a part of the 2003 Medicare drug legislation, institutes “income relating” (a euphemism for means testing), that ties premium to retiree’s adjusted gross income from a prior year. To illustrate how it works, the 2007 monthly premium for an individual with 2005 income under $80,000 is $93.50, but for one who earned over $200,000 it is $162.10. As with all such programs, future costs rapidly escalate. It’s estimated that in 2009, the lowest premium will be $116.50 whereas the highest becomes $372.60. Is the picture clear as to how it’s evolving into a simple welfare system?
We’re now down to a fundamental question. As it’s pretty well acknowledged the system will go broke in 2037 or thereabouts, is it reasonable to label it a crisis? A problem for the future, perhaps, but does that constitute a crisis? I suppose it depends upon perspective.
Let’s consider the view of Democratic Senate Majority Leader Harry Reid of Nevada, now in his fourth 6-year term in the senate, and far removed from the tiny town of Searchlight, where he grew up the son of a hard rock miner and a mother who took in washing. Although he still refers to Searchlight as his home, this ignores the fact that his actual residence is his three-quarter-million-dollar condominium at the Ritz Carlton in the Washington area. With the perks of his position and a comfortable retirement assured, the senator is quite correct when he stated that “Social Security is not a crisis.”
Viewing things somewhat closer to home, as I draw my social security checks I’m certainly not experiencing distress with the program. A little calculation reveals that to date I’ve paid $19,928 in FICA taxes into the system, while having taken out $117,772. If I manage to live out my actuarial years, I can expect to tap the till in grand style. It’s natural that those of us who get in early on a pyramid scheme do pretty well. It’s the late entrants that normally get the short end of the stick. You might expect we oldsters to experience some sense of guilt for profiting in such a manner. Some of us may, but you’d never know it from the actions of our official representative, the American Association of Retired Persons, which fervently supports the status quo. In any event, from my perspective, as well as from that of many other retirees, Senator Reid is correct: Social Security is not a crisis.
Now, another perspective: A young friend, age 25, is a self-employed property manager who, by dint of hard work and long hours, manages to support his wife and family on his annual income of about $60,000. After payment of state and federal income taxes, housing, auto expenses, medical, various insurance premiums, and all the other normal costs of living, his remaining cash would be about $10,000. I say would be, but for one additional expense: the FICA taxes he must pay. At 15.3% of his $60,000 income, the Social Security Trust Fund takes just about everything that’s left over. What he might set aside for retirement is systematically stripped from him, going instead into a communal pot over which he exercises no control. As the political winds shift, and the system’s insolvency becomes more unmanageable, there’ll be uncertain relief for him and millions of Americans like him. I contend that my friend’s crisis is not decades hence. In reality it is right now, for the earnings taken from him during these irreplaceable years can never be restored. As with a gangrenous leg, the crisis is current even though the amputation will not occur until some later time.
As I detest ending anything on a sour note, I want to convey at least a sliver of good news to that small but select group of persons with the ability to opt out of the system, either partially or wholly. These are generally the self-employed, with a certain amount of investment or other non-earnings income. There is not space here to provide details, but you’re invited to visit my website, www.onthemoneytrail.com, click onto Newsletter Archives, and read one of the bonus articles, Opting Out of Social Security: The Well-Kept Secret.
AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.
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