Opinion: Living Longer Solves the Social Security Problem

By Clark Kendall



According to the 2005 Trustees' reports, "the fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions." The Social Security benefit fund is projected to become cash flow negative around 2017-2018.

The demographics supporting the U.S. population have changed dramatically since the creation of the Social Security system. For example, the grandparents of a current 45-year-old worker were born around 1900 and, at the time, had an average life expectancy of 67 years. Consequently, at the normal retirement age of 65, the Social Security system expected this couple to earn two or so years of retirement benefits.

In contrast, a child born in 2000 has a 50% statistical chance of living to be 100 years old. Under the current retirement system, this translates into a person expecting to spend 1/3 of his or her life as retired.



View From Above

The Bush proposal for private retirement accounts as part of the Social Security program is problematic. The Social Security program should be managed to benefit today's children and grandchildren so that the only individuals who benefit are individuals who are in need and for individuals during the statistical last 10% period of the life expectancy.

Two alternatives come to mind. First, there are many individuals in their 60s and 70s (and even 80s) who have much to contribute to society and would personally benefit if they continued to work. Second, in general, not enough U.S. taxpayers take full advantage of the tax-advantaged retirement accounts currently available. Individuals should take full advantage of the benefits offered by IRAs, Roth IRAs, SEP IRAs, profit-sharing plans, money purchase plans, 401(k) plans, 403(b) plans, etc.

By adding private accounts as part or a supplement to the Social Security program, it only shifts the investment risk from the government to the individual. An "ownership society" is a noble goal, but most individuals will not be the beneficiaries from a shift from a governmental social safety net to a separate, personal account of assets.



Let's Hear It

The Medicare budget has far more fiscal implications that social security. Our leaders in Washington are alarmingly silent as to the solution to this runaway budget item.

The Social Security system can be buttressed by several policy changes that will both protect the current recipients and allow for younger workers to have confidence in the system. The retirement age can be raised from the current level of 62 years to 65 to 67 years. The income level that is taxed for purposes of social security funding can be raised to broaden the tax base.

Raising the level beyond $100,000 would significantly add to the funding resources. Then eligibility for benefits can be "capped" at some level beyond which a recipient becomes ineligible for benefits.



Clark Kendall is the founder of Kendall Capital Management. He can be reached at 301-260-7935 and ckendall@kendall capital.com.