Photo by 401(K) 2013A comment by Doug Wright on his show this morning got me thinking. Doug talked about how incensed he was by a comment made by someone running against Harry Reid that her father never cashed a social security check because he refused to take a handout. (I’m assuming he was referring to Sharron Angle but I’m too lazy to confirm that because the identity of the person he was quoting has no bearing on my subject.) Doug was incensed because of the characterization of Social Security as a handout considering that “we have all paid into it.”
The thought that struck me was that perhaps Social Security should be charity – as opposed to an expectation. The way the system is currently set up, everybody who pays into Social Security expects to receive checks from Social Security when they retire. That’s not entirely true of my generation, many of whom are highly skeptical that Social Security will still be around when we arrive at retirement age, but it is historically true. How much of our Social Security solvency problem would evaporate if we were to add means testing to the social security calculations such that those receiving payments would receive reduced payments or no payments depending on the amount of wealth they had available (regardless of whether they were tapping into that wealth).
Specific numbers could be worked out but for the sake of discussion I would offer the following as an example of how such a calculation could be made. People seeking social security benefits would be required to disclose their financial assets – this would mean investments or other financial accounts, property, and business interests excluding their primary residence and one vehicle per driver (in other words, a married couple would be allowed to exclude two vehicles but they would also file jointly for benefits) – as well as their income. In calculating their payments the social security administration would start with the level of payment that their work history would entitle them to and then would subtract 0.7% of their assets and 50% of their post-tax monthly income and would pay them whatever amount was left.
The more assets a person had the less they would receive. If they were unable to live on the payment they were receiving they could work to augment their income or sell off some of their assets in order to maintain the lifestyle they desired. I chose 0.7% of their assets because that equates to a sell-off rate that should be almost indefinitely sustainable if those assets are even modestly appreciating in value. Those without assets (beyond the allowed cars and primary residence) would receive their full payment minus half of any income they had. The expectation being that if they were productive during their working life that base payment would be sufficient to maintain a modest lifestyle compared to the lifestyle they maintained while working. We have no responsibility to make people comfortable who chose not to be productive while they were able but we could provide a financial backstop for those who are unable to work due to age and health restrictions who were productive before their circumstances changed.
The idea here is that if we are having entitlement programs to ensure that people do not become destitute simply based on the vicissitudes of life those entitlements should not be made freely available to those who have the means to continue to support themselves. It makes no sense, especially when we are borrowing by the trillions, to provide monthly payments to people who have amassed $5 Million in assets besides their house and car. Those individuals who object to disclosing their full assets would be free to opt out by simply not taking any benefits (although they would still have to disclose and pay taxes on income like anyone else).
I’m sure there are some details I have overlooked. I would love to hear what I am missing and I would love to have a discussion on the intended purpose of Social Security (past, present, and future) and how to actually achieve that purpose rather than continuing on the unsustainable road we are currently driving.
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