Curiously absent from the din, discord and discourse of the Presidential campaign has been an open and honest debate over Social Security's future. Visit either candidate's website to explore his position on this subject and you are greeted with the internet equivalent of dead silence. Yes, there is some accompanying verbiage but not much given the magnitude, importance or complexity of the issue. President Obama's platform can be summed up in the phrase, No change contemplated; his opponent's in the words, Same half-measures as before. For voters then the choice is between putting your head in the sand or kicking the can further down the road.
This comparative silence is striking in light of all the talk about jobs. How to create more jobs. How to create more. better paying jobs. And, how to create more, more better paying jobs that remain in the United States. Now the success or failure of any ambitious job creation program is inextricably tied to the long-term fiscal health and solvency of Social Security. Gordian knot is the analogy which springs to mind. Half-measures will not suffice. Bold, decisive action is needed to severe the link.
Since the onset of the Great Recession, the number of payroll tax contributors has declined. We estimate there is still almost 4.5 Million fewer workers paying into the system today than in 2008. Meanwhile almost 6 Million more retirees are drawing payments from the trust fund. Unless dramatic action is taken, the combination of fewer workers contributing and more retirees collecting pensions will push the system to the brink. In its 2008 report on Social Security's fiscal health, the Congressional Budget Office (CBO) forecasted the trust fund would go broke in 2050. Last year the CBO revised its estimate to 2039. This year, the CBO has advanced the date by six years to 2033. At this pace our room to maneuver is rapidly contracting.
The measures needed to restore the system to financial health are fairly simple: either payroll taxes must increase, benefit growth checked or some combination of the two. Assuming a reduction in current benefits (or even the pace of benefit growth) is politically unfeasible, then the CBO estimates an immediate 1.9 percent hike in the levy on taxable payrolls for both employee and employer. In other words, the combined payroll tax rate would jump from 10.6 to 14.4 percent — a 35 percent increase. The specter of such a possibility is one potential reason why businesses may be reluctant to add new jobs.
Politicians may be reticent to bring up the topic of the system's fiscal health in polite conversation, lest they alienate a constituency needed to secure re-election; but the electorate appears to be under no illusions. In a poll conducted in September 2011 by the Pew Research Center, 89 percent of respondents were either very or somewhat concerned about the ability of the Social Security (and Medicare) Trust Fund to provide benefits in the future.
We believe this fear is a major factor motivating a fundamental rethinking by American households regarding retirement finances. In the past, the strategy was savings and investments (in housing as well as securities) would make good the gap between spending and pension income. Today, after two stock market crashes in a decade, a housing bubble and a decline in employer provided defined benefit plans, what assets are available will be supplemented by income from work. This transition is mirrored in ongoing polls conducted by Pew. Before 2007, the focus was on assets; post 2009 the preparedness gauge is both assets and income.
Retirement's definition is being altered. There was a time when retirement connoted a cessation of all paid activity. Today for most Americans nearing retirement, work — part-time or seasonal — may be necessary to make ends meet. While politicians dither, working Americans have lowered their expectations for retirement to meet the new fiscal realities.
Notes on Sources and Methods:
Survey data is from the Pew Research Center for People and The Press. Prior to 2007 the variant question in the left-hand graph was asked; after 2009, the variant in the right hand graph was asked. More details may be found in the report, "Fewer, Poorer, Gloomier. The Lost Decade of the Middle Class." published by the Pew Research Center (August 22, 2012).
Congressional Budget Office (CBO) Social Security Trust Fund solvency forecasts are obtained from annual reports from 2008 to 2012. The latest estimate is in "The 2012 Long-Term Budget Outlook" released June 2012.
(Sources: Pew Research Center; CBO; and, AIFS estimates.)
About American Independence Financial Services, LLC
American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds and the NestEgg Target Date Funds. The firm is a limited liability company founded in 2004.
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