A Post on Retirement That I Don't Have a Good Title For

Sometimes, the federal government has a pretty good sense of humor. One of the best and longest running jokes they've come up with arrives in my mail annually when they send me an update on how much I have paid into Social Security and what my projected benefit will be when I retire. The fact that as of right now should I and others in my age group actually receive said benefit amount at retirement the entire country would be bankrupted is what makes it such a good joke.

The Economist did a special report on ageing a few weeks ago. I found this passage particularly enlightening:

When Otto von Bismarck introduced the first pension for workers over 70 in 1889, the life expectancy of a Prussian was 45. In 1908, when Lloyd George bullied through a payment of five shillings a week for poor men who had reached 70, Britons, especially poor ones, were lucky to survive much past 50. By 1935, when America set up its Social Security system, the official pension age was 65—three years beyond the lifespan of the typical American. State-sponsored retirement was designed to be a brief sunset to life, for a few hardy souls.
Now retirement is for everyone, and often as long as whole lives once were. In some European countries the average retirement lasts more than a quarter of a century. In America the official pension age is 66, but the average American retires at 64 and can then expect to live for another 16 years.

Though the report was well written, it essentially took 20 pages to say the following: we are all going to have to work longer. And for proof of that, you don't need a whole lot more than the preceding paragraph. Our current social security scheme only works when one of two conditions are met: 1) an ever increasing population; or 2) a constantly expanding economy. Number 1 has pretty much stopped already (we have population growth only because of immigration) and if nothing else I think that the last year has taught us the folly of being completely dependent on number 2. We have a surplus in Social Security right now because with the vast majority of the baby-boomers still working we have many more payors than payees in the system right now. Also from the Economist: "In 1950 the OECD countries had seven people aged 20-64 for every one of 65 and over. Now it is four to one—and on course to be two to one by 2050." A two to one ratio simply is not sustainable for paying social security in the current manner. Right now the average U.S. worker makes ~$40,000 per year, and the social security tax is a flat 6.2%. Thus, at 7-1 it means that we can afford to pay each retiree the equivalent of 43.4% (7*6.2%) of the average salary (43.4% of $40,000 = $17,360) and still be solvent. At 4-1, the figure drops to $9920 which is not great but at ~$800/month could provide a decent base for someone who presumably no longer has a mortgage or car payment, will have all their medical expenses paid by Medicare, and who hopefully has some private pension saved up to supplement. But at 2-1 we're now down to $413/month. Try living off of that

This is yet another great example of a problem that is actually very simple to understand, but almost impossible to solve; at least from a political standpoint. The math is quite easy. You either need to increase the retirement age (and thus increase the ratio of payors to payees), increase the social security tax rate to get more money per person into the system, or decrease the benefit amounts. How many Congressmen you suppose are lining up to sponsor legislation for any of those 3 ideas right now?

I think that probably the best solution, although far from ideal, is to take an arbitrary age (like 60) and say that if you're older than that as of right now you will still get your benefits at 65. But they will be reduced from their current levels. However, if you opt to work an additional two years, you will get your full benefit amount beginning at 67. For people aged 55-59 it's reduced benefits at 66 and full at 68 and for people 50-54 it would be 67 and 69. For everyone under 50 though, the retirement age will just be raised to 70.

Of course, the absolute best solution from an individual standpoint is to see to it that you can take care of your own retirement savings and then you can retire whenever the hell you want.