Sunday, January 24, 2010

Misinformed Opinion

I had some downtime this week and rather than do actual household chores or take care of bodily functions, I decided to read U.S. News. Yes, I might as well have been reading the Valupak coupon circulars for eaves cleaners and landscapers, but I read it anyways. If you do not read U.S. News, it has changed its format recently, and now includes a pro/con opposition of opinions for the question of the week. This week’s question was whether Social Security should apply means testing in order to keep itself viable.

Personally, I think that means testing is a ridiculous way to save Social Security and was likely thought up by a simpleton who only completed algebra and not very easily. Means testing is in theory a way to filter out people who should not need Social Security payments. Those people who continue to pay taxes for Social Security, but never receive Social Security themselves when they come of age. Instead, that saved money would go to people who do depend on Social Security. The reduced drain on the fantastic money pot would also Social Security to stay viable for many more years.

My beef with the article was not with the “pro” opinion for means testing. After all, there was a “con” opinion following it. My beef was that the author of the “pro” article, a professor of psychology, either put no thought into her piece or is rather ignorant of the nuances of Social Security. And as is true for any manager that tries to micromanage something about which he knows none of the nooks and crannies, things end up as garbage. So it was with this piece. As an aside, U.S. News also could not even manage to find a person trained in economics to write the “pro” piece. Star journalism, U.S. News. Star journalism.

The major argument of this psychology hack was that the rich do not need Social Security, and by expecting it show themselves to be entitled fools destroying the system. She argues that means testing will eliminate payments to these entitled fools while still taking their money. A very Robin Hoodish viewpoint to take. She then makes a feeble attempt to say that people who diligently save should not be prevented from receiving Social Security, but fails to come up with any solution or even a bad brainstorming idea. After reading her piece I secretly wept for any students she has or will come into contact with in her lifetime.

The problem with Social Security most certainly is not that rich people collect it when they should not. Given the current calculations for how much you can receive at retirement, the rich do not soak up much Social Security. They are already outnumbered. Ten percent of the population holds ninety percent of the wealth. Denying those people with not save you much money. It will save money, but only enough to be a band aid because it is not proportional. Making twice as much money does not get you twice the Social Security payment.

The problem with Social Security is its generosity. Social Security payments are based on credits earned for each year you worked and earned enough money. You then need to earn a certain number of credits to qualify to receiver Social Security. Once you have enough credits, you may start collecting payments at retirement. But the kicker is that it carries over to your family! Your family, and a divorced ex-wife is considered family, can also collect benefits if you die or become disabled. And they do not just collect your benefit amount. They can collect upwards of 180% of your Social Security payment for life. For instance, a widow can collect her husband’s Social Security, as can the children. But the family’s net collection is capped at 150% to 180% of the deceased payment. That means that one person’s Social Security payments can be increased and prolonged far beyond his lifespan. What that also means is that a widow, who may also have worked and collected Social Security credits but not enough to match the payments of her spouse, will collect more Social Security at retirement than if her spouse had not died.

We could debate the many nuances and unique couple and family scenarios possible. We could also debate how personal savings rates affect need of Social Security and whether one person’s inability or unwillingness to save for his own future should become the responsibility of the working American public. But the bottom line will always be the same. Social Security, whether or not it is serving or spoiling the greater good, will simply go bankrupt because it is too generous.