As you contemplate the rather gloomy data reflected in either of the previous two blogs, and particularly in Social Security - Part 1, you will no doubt ask, "where's the solution?"  Unfortunately, the solution is worthless without a touch of history.  But, here goes what this accountant perceives as the only "viable" solution(s) at this point for Social Security.

 

First, retirement age will have to be INCREASED.  Americans are living longer, meaning that they will have an ability to drag out their social security benefits for a longer-than-anticipated time (unless of course multitudes of retirees suddenly expire rather than retire).  As many prognosticators are predicting a labor shortage at some point when true baby boomers start to retire, this may serve additional benefits.  But in the meantime, the only possible solution is to start ratcheting up the age before full benefits from social security kick in.

 

Second, we will have to most likely increase payroll taxes to cover the obvious shortfalls.  Sorry folks, but this is the reason NO politician wants to talk about Social Security - raising employment taxes is by nature recessionary.  So increasing the rates on both employers and employees reduces cash for investment, spending, etc.

 

Third, Congress and the President will have to STOP spending any potential excess  accruing in the so-called trust fund.  The future obligations (referred to for older CPAs as the Present Value of Future Benefits) simply gets larger with the accrued interest expense from the IOUs currently sitting in the trust fund.

 

Fourth, we will have to implement needs-based testing.  Sorry, AARP, but if you're sole purpose of existence is to ensure social security benefits for your members, the only way to legitimately provide solvency is to have needs-based testing.  Yes, Greenspan's taxation of Social Security benefits over a certain income threshold is a form of needs-based testing, but it ignores the cash-flow fundamental of draining down the trust fund accumulations.  Accordingly, folks over a certain income threshold will have to endure a reduction or phaseout of their social security benefits; this will probably have to be a test based on both income (measured by AGI) and by net worth.

 

Fifth, we will likely have to implement higher thresholds for tax-deferred savings to allow certain age-groups to save MORE for their retirement, as benefits will have to experience some reduction, at least as represented in the needs-based testing mechanism in # 4 above.  Bush's plan for private accounts was a good idea, but unfortunately ignored the necessity for cash flow into the Social Security trust to pay current benefits AND SERVICE DEBT from Reagan, Bush (42), Clinton, and Bush (44).  Basically, at 40 years old with a decent income, let me (and many others like me) defer MORE than $15,500 into my 401k because I'm likely NOT going to have any social security and would like the ability to sock away more with some sort of tax advantage (don't sweat it, IRS - you'll still end up getting yours).

 

Sixth, governmental spending will have to be reined in across the board.  The saddest aspect of the Bush (44) legacy is the failure of his leadership to exercise a small shred of fiscal conservatism; the so-called Contract with America ended up being a farce of pork-barrel spending that made the GOP freakishly identical to the so-called tax-and-spend liberals of the 70s.  Bush's tax cuts are producing record tax revenues (feel free to adjust for real inflation here), yet the spending by Congress (thanks, Ted Stevens - nice bus stops) dwarfed even the tax revenues.  For shame, boys!

 

Seventh, it would be nice to get a tax-deduction for the charitable contribution to Social Security that I am making.  Most in their 30s and 40s don't really have a snowball's chance in hell of seeing any payback for their contributions to Social Security.  So why not call a spade a spade and deem the contributions a deductible expense as a charitable contribution (with no phaseout for high income taxpayers).