Wednesday, May 11, 2011

Is Social Security As Bad Off As Everyone Thinks?

We hear a lot of bad things about Social Security coming out of the media - specifically focusing on how it is underfunded. In fact, if you listen to all the reports, the system is completely dysfunctional. If you are relying on Social Security for your retirement planning, then frankly you must be crazy. Is that the real truth, though? According to Ezra Klein, many of these notions are being exaggerated. Economics professor Mark Thoma takes a closer look at Klein's article in his blog post below.

Ezra Klein on Social Security:
  1. Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).
  2. For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.
  3. Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.
  4. Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.
  5. People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.
  6. Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.
  7. In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.
  8. In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.
Among his comments, my preferred solution:
Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000. Source (PDF).
This post was republished with permission from The Economist's View.

1 comment:

Anonymous said...

If you remove the ceiling (and keep the cap on payouts), then it simply becomes old age welfare. Another wealth redistribution system. Oh joy.