Social Security turned 80 on Friday. Many people are partying. I’m not. The system is a financial train wreck and a user nightmare. It’s also incredibly outdated, sexist, and unfair across and within generations.
It does force us, via our FICA contributions, to save and purchase longevity, disability, and survivor insurance. And, yes, we need to be forced, because far too many of us are failing to save and insure adequately on our own. But that doesn’t mean that Social Security should be maintained in its current form through the end of time. On the contrary, the current system should be retired and replaced.
Lots of people know Social Security is financially stressed. What they don’t know, and the “they” seems to include the so-called Social Security “trustees,” is that the system is $25.8 trillion in the red. Don’t take it from me. Take a look at table VI.F1 buried as deep as possible in the Trustees Report, which was released last month.
This $25.8 trillion is the present value difference between everything the system is promising to pay over time and everything it’s projecting to collect in taxes.This figure, by the way, is net of the current value of the system’s peanut-sized “trust” fund.
Economists call this “infinite horizon fiscal gap accounting,” and strongly endorse it in very large numbers. It is the only form of fiscal accounting endorsed by economic theory. For good reason. It puts everything on the books and doesn’t assume the world will end at some finite date — like 75 years from now when most of our children and grandchildren will still be alive.
Since $25.8 trillion is 32 percent of the present value of projected future Social Security taxes, the system is 32 percent underfunded; i.e., we need to immediately and permanently raise Social Security’s 12.4 percent FICA tax by 32 percent — roughly 4 cents on the dollar earned — to pay for the benefits now promised. By comparison, Detroit’s two pensions were jointly about 20 percent under-financed when the city declared bankruptcy.
But can’t the rest of the fiscal system bail out Social Security? No. Based on the CBO’s forecast, the fiscal gap for the entire federal government enterprise is $210 trillion, or 58 percent of the present value of all projected federal receipts. Hence, balancing the government’s books requires not a 32 percent immediate and permanent hike in all federal taxes, but a 58 percent hike!
In short, Social Security is dead broke, and the rest of the fiscal system is in even worse shape. Now there are political economists on the left and the right who think we can save the day by spending more or taxing less. There are others who think we can make tons of money the old fashioned way, by printing it. But mainstream economists, including the 17 Nobel Laureates who endorse infinite-horizon fiscal gap accounting at www.TheInformAct.org, realize this is utter nonsense.
They also realize our nation’s fiscal policy is deeply immoral. The $210 trillion fiscal gap must be closed by someone — either by us adults or by today’s and tomorrow’s children. If we aren’t prepared to immediately raise all taxes by 58 percent or cut all spending by 33 percent our kids will face even larger permanent tax hikes or spending cuts. This is the terrible zero-sum nature of the generational game we are playing against our children.
If Social Security’s finances weren’t bad enough, it’s structure is even worse — arguably the most complex system ever designed by bureaucrats anywhere on the planet. It is replete with terrible gotchas that keep people from getting what they paid for. And the staff at Social Security are well meaning, but haven’t a clue. Having just co-authored a best seller about how to navigate the system, I hear every day from people who are being told things by the Social Security staff that are simply untrue.
An example is a lady I’ll call Joan in Tacoma, Wash.
Joan took her retirement benefit at 63. Now 66, Joan wants to suspend it and restart it at 70 at a 32 percent higher level. This is perfectly legal. But Joan called Social Security’s 800 number five times and five times she was told she could not suspend her benefit. She then, at my urging, went to her local office and was told by both a staffer and his supervisor that she couldn’t suspend her benefit. At this point I called and spoke to the head of the office who told me he didn’t know about suspending benefits, but would get back to me. He did and Joan was able to suspend.
This is no way to run a railroad.
The way to run this railroad is first, freeze Social Security — that is, pay off, over time, what the system owes, but do not let anyone accrue any more benefits. Second, adopt the Purple Social Security Plan, which forces all workers to contribute 8 percent of their pay to their own and their spouse’s personal security accounts on a 50-50 basis.
To make the system as progressive as desired, the government then makes matching contributions on behalf of the poor, disabled, and unemployed. All account balances are invested (with zero Wall-Street participation) in a global, market-weighted index of stocks, bonds, and real estate. The government guarantees a non-negative, inflation-adjusted cumulative return on this investment, so there is no downside risk. When an age-cohort reaches 58, the program sells off their account balances and buys inflation-indexed bonds. The return on these bonds would be used to pay for inflation-indexed pensions that continue until the worker dies.
There you have a system with just six rules that everyone can understand. You also have Social Security’s best birthday present — its full retirement!
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