Is Bush Making Sense?

Well, no, not really. That much should be obvious. I have to say, though, that I was impressed to hear him broach the topic of actual benefits reductions in Social Security.

What he's now advocating isn't actually a reduction in benefits, but a reduction in the growth of benefits for some retirees. I liked that he's distinguishing between the poorer Americans and the wealthier Americans, though I'm not sure that 30% is the appropriate line. I still don't think his revised plan is good, in large part because Bush is still adamant about private accounts, or whatever the current euphamism is for letting the wealthiest individuals shelter some of their FICA payments from the general fund.

Another thing I don't like about the President's new plan is that benefit increases would be based on earnings, as the benefits already are based on earnings. The point of Social Security isn't to be a comprehensive retirement plan for all Americans; the point is to be a safety net so that retirees aren't left homeless and starving, and ideally so that they can live fairly comfortable.

In my opinion, Social Security should provide a basic level of benefits to those who need it while weaning those who don't off of the benefits rolls. Benefits should be set based on local cost-of-living rates, and rather than paying more to those who earned more while they worked Social Security should pay less to those who have more income after retirement. This can be done very gradually, and in such a way that it doesn't really have a significant impact on those who legitimately need government retirement assistance.

The idea is fairly simple. For every, say, ten dollars of income received by someone eligible for Social Security, that person's benefits would be reduced by one dollar. This means that people are rewarded for saving or continuing to work, but that extra income reduces people's reliance on Social Security benefits.

A gentler reduction in benefits could be introduced by using a progressive scale, as with the current tax rates. Up to a certain amount of additional income could be exempt from benefits reduction, the next band reduced at a rate of as low as one-hundred-to-one, and so on. The point is that, eventually, the very wealthy should not receive Social Security benefits that they don't really need. Those who have earned and saved enough through their careers to ensure themselves a comfortable retirement should similarly leave what funds are available for those who didn't have the option of saving.

Will this encourage people to spend all of their money now and not save for retirement? I don't think so, for the simple reason that saving still guarantees you a higher total income during retirement, and hence a better quality of life. Nobody is punished for saving, their income from Social Security, wages, savings, investments, and so on is always strictly increasing.

Calculating benefits becomes considerably more complex, of course. Benefits would have to be calculated conservatively, so that nobody receives lower benefits than to what they're entitled. There's likely no fool-proof way of ensuring this, but a decent starting point is to begin with full benefits and calculate the appropriate reductions in the following year. That is, if I received $10,000 one year, but I should only have received $3,000, then the following year my benefits would be reduced either by $7,000 or by an amount that amortizes the excess over, say, five years. The baseline for benefits would not change, only the amount of the reduction based on prior-year overpayments.

I don't pretend that this is a solution to whatever problems Social Security might be facing. I don't even know if it's a sensible solution given current and expected demographics, or even a naive view of how Social Security operates. It does, however, present another way to look at how benefits are calculated. I'm currently saving for my retirement, because I can, and I don't expect that I'll need Social Security benefits when I retire. If I do need the benefits, I'd like them to be available; if not, I don't want them. My attitude towards FICA withholdings are that they're just another tax, and I'll never see the money again.