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Tuesday, April 24, 2007

"Good News" from the Social Security Administration

I say "good news" in the way a patient who has been given a one year reprieve from imminent death treats the news as "good." The outcome is the same, only the patient has the chance to experience a few more chuckles. In the case of the Social Security system, an extra year of expected solvency seems to be good news, after all that's one more year that the system can survive. At the same time, it might be bad news, as it gives the politicians another excuse to avoid reforming the system without undue financial pain.

The latest report from the Social Security Administration predicts that outflows from the the SS system will exceed inflows in 2017; no change from last year's prediction. In other words, another year has gone by and the good folks in Washington, DC have done nothing about reforming the system - which I wager will include a combination of the following: a) raising the retirement age, b) increasing taxes from 6.2% to 6.8% or 7%, c) lifting the cap on wages that are subject to Social Security tax, d) means testing benefits (rather than simply reducing them across the board).

It is a shame that enough of the politicians on both sides of the aisle (who, by the way, are not at all worried about their retirement income) have failed to even attempt to reform a clearly broken system. In many cases the "kick the problem down the road so that it's someone else's problem" approach is fine - limited government intervention is often an improvement over the alternative. In the case of Social Security and the unfunded liability it includes, estimated to be $4.7 trillion (but it's really more than that, isn't it?), calls for adults to act now when people like myself could put a few more dollars away and more easily fend for ourselves in the future.

The annual report predicts the system will go belly up in 2041 (although taxes will likely increase long before then). In 2041, I will be 72. Great. Right when I am slated to retire , if I make it that long, the SS administration might have to say "Sorry, you're out of luck." In other words - members of Gen X, Y, and Next might need to assume they should kiss all of their contributions into the SS system goodbye.

How high could taxes go? The SS system is nice enough to provide their forecasts of inflow and outflow as a percentage of national payroll:

That's not a pretty picture - not pretty at all.

Stata Data file

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