Sunday, February 14, 2016

Why Social Security benefits will actually explode

The Transformation will see a tenfold or more increase in prevailing incomes.  In other words, the typical family who, today, earns 55,000 2016USD will earn 550,000 2016USD or more by 2030 or so.  This is relevant even to a person already on Socia Security now.  I will be 80 and plan on having an active life and at least another decade of fun.  Social Security will finance some of that fun.

Now, today, the maximum income upon which Social Security tax is levied increases at about inflation and the benefits increase at about inflation.  What this means is that when we enter the period of dramatic income growth, if Social Security benefits remain constant on a real basis, their payment will represent a burden upon income producing people that is only 10% of what it is today.

However, the politics of it won't allow that to happen.  Right now, most people pay 6.2% of their income into the system.  That rate will fall to an average of .62% and this will happen by most people earning far more than the maximum base.  At the same time, the number of retired people will increase and, already a formidable voting block, they will be able to elect or defeat nearly all candidates if they violate basic political preferences.

What that means is that the astute politician will index the maximum taxable amount, not to inflation, but rather to GDP per capita.  The more progressive position will be to take the limit off entirely.  In combination with a lowering of the rate, this is the more expedient course of action early on.  Once most people exceed the maximum, the former proposal will be more attractive. 

In other words, today, progressive candidates should argue that the limit on taxable income is regressive and should be eliminated in exchange for a slight reduction in the rate.

If this comes to pass, the revenue generated for the Social Security fund will grow rapidly and there will be significant pressure to increase benefits. Because of the amount of income increase, retired people will become one issue voters and both Republicans and Democrats will be driven to satisfy the call to allow retired people to share in the income explosion.  This can be done while actually improving the liquidity of the system.

The argument will be made that current payers are actually paying a lower percent of their income than the current retired people paid.  That logic will blunt objections, though no such blunting will actually be necessary.  What it will do is mollify younger people who will likely accept it with little or no complaint.  After all, this is their parents and grandparents.

What will happen in the U.S. will happen through different mechanisms throughtout EUNA.  However, the average Social Security benefit will probably fall as a percent of the average salary, so, even though retired people will see a dramatic increase in purchasing power, they will have relatively less affluence.

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