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Social Security Groundhog Day

You may have seen the movie “Groundhog Day” which was released in 1993.  In the movie, Bill Murray plays weatherman Phil Connors who was sent to Punxsutawney , PA to cover Groundhog Day, only to find himself repeating the same day over and over again.  No matter what he does, he can’t seem to escape Groundhog Day.

The annual report from the Trustees of the Social Security Administration seems like its own version of Groundhog Day.  Every report seems to be a repeat of the prior one.  The reports warn of the coming insolvency of Social Security and Medicare, but it’s projected to be far enough into the future, that no one seems to worry too much.

The 2012 report estimates the Social Security system will become insolvent in 2033, three years earlier than what was predicted a year ago.  The fiscal status of Social Security has been known for years, yet Congress and President Obama reduced the employee’s contribution rate to the Social Security system from 6.2% to 4.2% for 2011 and 2012.  The rate reduction was intended to stimulate the economy, and they argued it would have no long-term impact on the solvency of Social Security.  Anyone with a rudimentary understanding of economics and finance could tell you paying less taxes into a system that is already paying out more than it receives, will have a negative effect.  Only Washington politicians are surprised by the updated figures, or at least act surprised.

The staunch defenders of this ridiculous argument also contend the system is solvent for more than the next two decades.  They point to the trillions of dollars in the Social Security Trust Fund as the saving grace to the system.  You can read this article to learn the fallacy of this belief.

There are a couple of other facts in the report which might cause concern.  In 2011, the government collected $691 billion of Social Security Taxes and paid out $736 billion in benefits.  It appears there was a $45 billion shortage in 2011, but there wasn’t.   The Social Security Administration collected $111 billion of interest on its IOU’s from the US government, so it reported a surplus of $66 billion, rather than a deficit.  So where did the $111 billion of interest come from?  It’s part of the $1 trillion of additional debt the U.S. Treasury issued over the past year.

It’s easy to get lost and confused by the Federal government’s accounting methods, which may be intentionally arcane.  So here is the bottom line… call it what you want, but the U.S. government borrowed an additional $45 billion to pay out Social Security benefits in 2011.  If you read the report and analyze the projections, you’ll see this number is only going to grow exponentially over the next two decades.

What is it going to take to change the situation?  I really don’t know if we’ll ever realize what’s happening as long as the government keeps sending out checks.  But what happens if they stop?  It’s unlikely to occur, at least for a long time, but what would have happened if the U.S. Treasury wasn’t able to borrow the additional $45 billion? Since there are no real assets in the Social Security Trust Fund, $45 billion in checks would not have been sent.

So in essence, it’s like we’re stuck in our own Social Security Groundhog Day, but there is a difference between us and the character Phil Connors; Phil Connors recognized he was stuck and tried to change it.  Sadly, most of us don’t believe we’re living our very own Groundhog Day.

A New Record

On Wednesday, the United States of America established a new record, although it may not be one we want to boast about.  As of the close of business on Wednesday, the U.S. total debt exceeded $15 trillion.

This bad news gets worse… don’t expect the debt increase to stop or slow down anytime soon.  We’re already two months into the current budget year without an approved budget (that’s a different matter).   However, the 2012 Budget proposals put forth so far expect to add at least another $1 trillion to the debt, which is approximately $3 billion per day.

Interestingly enough, there was very little media coverage regarding this matter.  There was more coverage about Occupy Wall Street, the Supercommittee and the Penn State scandal than our debt breaking the $15 trillion barrier.  After all the acrimony earlier this year about raising the debt ceiling, it might not be considered important news.

Here are a few details about our national debt which might interest you.

  • The U.S. population is approximately 310 million people, which means there is approximately $48,000 of debt for every man, woman and child.
  • The debt is divided into two broad categories; intragovernmental debt and debt held by the public.  The intragovernmental debt is $4.7 trillion and the debt held by the public is $10.3 trillion.
  • The intragovernmental debt is essentially money owed to the Social Security system. When politicians refer to the Social Security Trust Fund, this is what they mean.  Its debt the government owes itself.
  • Even though it may be considered an independent government agency, the U.S. Federal Reserve is now the largest stakeholder of the debt held by the public.  The Fed currently holds $1.665 trillion of U.S. Treasury Securities.
  • China is the second largest holder of debt, with $1.148 trillion.
  • As a result of the Federal Reserve’s quantitative easing, its stake in U.S. debt obligations increased by over $850 billion over the past year.

I may be a bit cynical, but unfortunately I don’t think there is much hope Congress will act to stem the flow of red ink in the near term.  They battled a few months ago and agreed the debt will rise to over $16 trillion by the end of 2012, so I don’t expect much to happen on the political front.  The lack of media coverage is an indication of the lack of interest by Congress in this dubious milestone.

On the bright side, one thing that’s preventing us from being crushed by our own debt is that nearly one-third of the $15 trillion of Treasuries is effectively being held by the federal government (i.e., Social Security and the Federal Reserve).  Thus, our real debt to investors is effectively $10 trillion.  Not a good situation, but better than $15 trillion.

At the same time, it’s not a healthy position for the government to hold so much of its own debt.  Congress may have played fast and loose with the Social Security funds, but the day has arrived when the Social Security payments exceed the taxes collected.  It’s going to put more strain on the budget, and the real cash flow of the federal government, as Social Security starts cashing out its intragovernmental loans.

It’s also not great for the Federal Reserve to continually increase its Treasury holdings.  As I and others have previously written, the Federal Reserve essentially printed money to buy up a huge chunk of government debt issued over the past 12 months.  Quantitative easing may have some economic benefits, but there are tremendous long-term risks from this strategy.

Americans like to break records, and we just broke another one.  Unfortunately, it’s an honor we could have done without.  The real question is what are we going to do to stop the hemorrhaging and get our fiscal house in order?  We just set a new record, and it’s only a matter of months before we break the $16 trillion mark.

The Fight Over Social Security Reform

February 4, 2011 1 comment

If you’re tuned into the political scene, you know the fight for Social Security is heating up.  Irrespective of your political allegiances or persuasion, this is a battle that you should pay attention to. 

Social Security and Medicare currently cost approximately $1.5 trillion annually, which was 43% of all federal spending in 2010.  The Congressional Budget Office has predicted that the Social Security will pay $130 billion more in benefits in the coming year, than it receives in Social Security taxes.  The 2% reduction in employee Social Security taxes for 2011, which was part of the tax compromise between President Obama and the Republicans, caused the shortfall to increase substantially.

Recently, a couple of influential House Republicans floated the idea of raising the retirement age again, allowing younger taxpayers to invest a portion of their Social Security dollars in private investments, and issuing vouchers for seniors to purchase medical coverage.  Not surprisingly, these proposals sparked an impassioned response from the more ardent advocates of the current system.  Sen. Charles Schumer claimed, ““They want to privatize Social Security. Privatize equals end — no more.”  Such bold statements may be expected as some political strategists have suggested that Social Security is an issue favorable to Democrats, and one that they should try to use to regain some of the political clout they lost in the 2010 mid-term elections.  

If you read through some of my prior posts, you’ll discover that I believe the current system is broke and needs to be reformed.  I may not agree with any or all of these ideas, but I give the proponents credit for taking on this politically-charged issue and considering ideas for reform.  It may not be popular to talk about Social Security reform, but it needs to be done.

Exaggeration and misleading information is part of the fabric of modern American politics, but we need to get beyond it.  Social Security touches the lives of virtually every American.  Accordingly, we need to debate the issues and work towards a solution and not get bogged down in the typical Washington political spin cycle.

The Social Security Trust Fund is one area of this debate where few politicians are willing to be truthful with the American people.  As I pointed out in a prior article, the Social Security Trust Fund doesn’t exist.  Despite what you hear about trillions of dollars in this so-called trust fund or lockbox, it’s not real money.  It’s nothing more than paper IOU’s from the government to itself. 

Personally, I believe many politicians are too afraid to tell the truth, especially the ones who have been in Washington for years.  I think the American people would be outraged if they fully understood how Congress has spent so much money and put our nation on a path that is not fiscally sustainable.  Thus, it’s far easier for politicians to perpetuate the lie that this huge pile of money exists, rather than admit the truth.

The fight for the future of Social Security is just beginning.  I welcome you to join the discussion and debate, whether on this forum, or somewhere else.  I’m all for vigorous debate of the ideas and issues surrounding Social Security.  I’m less concerned about pontificating my ideas than trying to communicate the facts and truth, so you have the information necessary to make well-informed decisions on this issue.  This is why I keep harping on the non-existent Social Security Trust Fund.  Congress can’t make good decisions based upon a faulty premise that they have $2.5 trillion of money which doesn’t really exist.  I hope you’ll join the discussion.

Saving Social Security

Because Social Security impacts the lives of so many people, reforming the Social Security system is probably going to be one of the greatest fiscal and political challenges facing this generation. 

Nearly one-sixth of the population is receiving benefits, and this percentage will grow as the Baby Boomers move into retirement.   The increasing number of beneficiaries will also make it harder for the government to pay the promised benefits.  Social Security and Medicare already consume over one-third of the federal budget, and cost over $1 trillion each year.  The cost will only increase, and despite what politicians say, there is no Social Security Trust Fund to draw upon.  It’s only a bunch of paper IOU’s from the government to itself.  The excess Social Security taxes have been spent on other programs.

Unless some significant reforms are made, I predict a crisis will occur in the next decade.  Here are a few examples of modifications that will help sustain Social Security.

  • The retirement age should be adjusted every decade.  As the average life expectancy goes up or down, so should the age for receiving benefits.
  • Benefits should be adjusted based upon financial need, especially for disability and survivor benefits.
  • Increase taxes, but only after other benefit reductions have been enacted.  In the 75-year history of Social Security, benefits have not been curtailed, but the tax rate has nearly quadrupled.

I don’t see any way that current beneficiaries can be paid if money is taken out of the system, so complete privatization is off the table.  However, there needs to be a lot more transparency of the amount of taxes you pay on an annual basis, and the calculation of your projected benefits.  If Social Security must benefit everyone paying into the system, then let’s treat it more like a private pension plan. 

Having squandered nearly $2 trillion of excess Social Security taxes that was intended to pay benefits to the Baby Boomers, politicians and the Social Security administrators need to be held more accountable for their management of our money.  Social Security is not a 401(k), but more information can be provided than simply showing how much you have earned each year and the estimate of your future benefits.

Ideally, I think Social Security benefits should transition back to a program that is primarily a benefit for people who have little retirement assets or other income to support themselves.  Stop treating it like a private pension plan, where you pay a lot of money into the system, and expect to receive it back with a rate of return.   There will need to be a grandfathering for those who are currently receiving benefits and those close to retirement, but over time, the benefit structure can change.

Allow Social Security to be part of the safety net for those who are vulnerable and in need.  The benefits may not be great, but that’s okay.  It’s not intended to give you a lavish or comfortable lifestyle.  The purpose is to provide basic sustenance so that you can still live independently.  The cost of such a program should decrease dramatically, which should also reduce the tax burden and free up more money for you and I.  Therefore, the reduction in benefits should also be coupled with greater incentives for people to put more money into their own retirement plans.

 In the past few articles, I have made my case for why Social Security is in trouble, and offered some ideas of how to reform the system.  I hope that I’m wrong and the system won’t face a major crisis within the next few years, but from what I know I don’t see how that’s possible. 

I doubt you have agreed with all of my analysis, opinions and ideas.  Good.  My intention was to provoke your thinking and encourage a discussion.  The problem is enormous and no one has all the answers, especially not me, but I do believe that by working with all different types of people, we can avert a crisis and keep Social Security sound for many years to come.

The Politics of Social Security Reform

The current political discourse is probably one of the greatest barriers to reforming the Social Security system.  As I have tried to explain in the past several posts, Social Security is on the verge of an epic crisis, which will not be easily resolved. 

At present, there are more than 50 million Americans receiving Social Security benefits, which is approximately one-sixth of the U.S. population.  The U.S. government will spend a whopping $1.15 trillion on Social Security and Medicare in 2010, which is 32.5% of all federal spending.  These factors alone illustrate the importance of Social Security in our society.

Since it impacts the lives of so many Americans, the same old tired political clichés need to be abandoned.  Someone who believes Social Security is bankrupt and in need of reform is not necessarily a cold, heartless person looking to steal money from the elderly and see them live out their final days impoverished and alone.  At the same time, a person who believes in maintaining Social Security as a safety net for other people is not automatically a socialist or reckless spender. 

I believe the first thing that needs to happen is for politicians (of all political parties and persuasions) to come clean about the current status and future of Social Security.  Politicians who continue to maintain that we have nothing to worry about for the next 30-40 years are disingenuous at best, and dishonest at worst.  I don’t know if they are more afraid of the panic that might erupt if people knew the truth, or if they are afraid they will lose their power and position.  We may not like the current situation and future prospects, but continuing to pretend like there isn’t a problem is only going to make it worse.  The longer we wait, the fewer options we have, and the more painful the process is going to be.

It may sound rather egalitarian, but it’s time to respect our differences and come together to work towards a solution.  We need to set aside the labels of liberal vs. conservative; Democrat vs. Independent vs. Republican; socialist vs. capitalist, etc.  Everyone has something to bring to the table of ideas. 

For the conservative, reform is not about entitlements, welfare or socialism.  Your advocacy of individual freedom, personal responsibility and fiscal restraint is commendable.  At the same time, there are real people, with real situations, who need help.  Retain your conservative principles, yet show compassion for those who are hurting, destitute or in need, even if it is a result of their poor decisions.

For the liberal, change is not about greed or simply saving money.  Your consideration for people is admirable, but at the same time there are limits to what can and should be done.  Just like your personal finances, there is only so much money to go around, and you can’t spend what you don’t have. Maintain your compassion for those in need but recognize the realities and fiscal limitation of what can be provided.

Reforming Social Security won’t be easy, but it will be near impossible unless the political discourse is transformed.  If nothing changes, then little will be done.  If I’m correct, a crisis will erupt within the next decade, and we will be forced to address the issue.  Unfortunately, opportunities and alternatives will be lost because politicians refused to modify their approach to reforming Social Security.  It doesn’t have to be this way, and hopefully our leaders will rise to the occasion, or we’ll elect those who will.

Social Security Reform: Changing Perceptions

At present, there is a dichotomy in the perceptions and expectations of the Social Security system.  They are:

  • Social Security is a progressive/socialistic system of wealth redistribution – it takes money from one class of people (the workers) and gives it to another (the retirees).
  • Social Security is an individual pension plan – each person who pays into the system is entitled to a guaranteed benefit in return.

Wealth redistribution is contradictory to individual ownership.  The conflict between these perceptions will not be easily reconciled and will need to be confronted before serious reform will take place

A fundamental purpose of Social Security is to make sure that everyone has a basic level of survivor, disability or retirement benefits.  The need for these benefits is based on the presumption that the person does not have the wherewithal to provide for themselves, thus the government must step in to assist.  Whether or not you like the moniker, it is a socialistic concept.  In contrast, pure capitalism allows each person to fend for themself, irrespective of the consequences.

The Social Security Administration has also created an expectation that you will receive future benefits in return for the taxes currently paid in.  Each year you get an earnings history and a projection of your future benefits.  This is very analogous to a defined benefit pension plan, in which you are guaranteed a lifetime benefit based on your age and earnings history.  Armed with this information, is it any wonder people have a perception and expectation that they are entitled to a certain benefit and any potential reduction is seen as taking something that belongs to them?

I believe that politicians have been quite happy with this contradiction.  On the one hand, they argue that Social Security is a vital social program that must be funded.  On the other, the promise of a future benefit is justification for collecting taxes presently to fund their current spending (and overspending) habits.  Politicians have positioned Social Security to be a social program and an individual pension plan at the same time.

Lest you misread what I haven’t written, I believe Social Security does provide an important social purpose.  I may not agree with how benefits are calculated and administered, but taking care of the most vulnerable in our society is a good thing.

However, the promise and expectation of future benefits has allowed politicians throughout the decades to raise Social Security taxes and redirect the surpluses into other government programs.  A pension administrator would be guilty of breaching their fiduciary duty (maybe even fraud) if they managed your private pension assets the way the government has mismanaged Social Security.  Of course the politicians revert back to the argument that it’s a government social program, not an individual retirement account to justify their reallocation of Social Security taxes.

In the end, the politicians love the dichotomy, because they can triangulate between the two arguments to serve their immediate purpose.

True reform to Social Security should include a resolution of the conflicting principles and perceptions.  Either it’s a social program designed to provide basic retirement benefits for those who are most in need, and you have no entitlement to receive back any of the taxes you have paid.  Or, it’s a government sponsored pension plan whereby the administrators need to be held accountable for how the money is collected, disbursed and managed.

It can effectively be one or the other, but history has proven it can’t be both.  Let the debate begin and allow the American people decide what they want… after all… we are footing the bill.

Social Security Reform: Increase Taxes

One of the easiest solutions to help resolve the financial crisis of Social Security  is to raise the tax rate.  The rate has been raised four times in the past 75 years.  It started at 2.0% in 1935 and is currently at 12.4%.  Although often lumped together, Medicare taxes are assessed separately from Social Security.  The Medicare tax rate is currently 2.9%.  Combined you pay 15.3% of your earnings in Social Security and Medicare taxes, before any income taxes.

If you’re self-employed, you know that you pay the entire 15.3% tax.  If you are an employee, you pay half of the tax, and technically your employer pays the other half.  Although you don’t see it, trust me when I say that you’re paying it.  How?  Because employers include payroll taxes and benefits into the cost of each employee, which determines how much you get paid.  Said another way, if your employer wasn’t paying half of your Social Security taxes, they could pay you more.

The separate assessment of Social Security and Medicare taxes started on January 1, 1994 when the wage cap on Medicare taxes was removed.  For 2010, you will pay Social Security taxes on the first $106,800 you earn, but you will pay Medicare taxes on all of your earnings, no matter the amount.

One option for increasing Social Security tax revenues is to eliminate the wage cap.  The rate doesn’t change, but the amount of income subject to tax increases.  Some people consider the Social Security wage cap to be a regressive provision.  Thus, eliminating the cap would make Social Security taxes more progressive.

One challenge with this approach is that benefits are calculated based upon the taxes paid in.  If someone continues pays more into the system, they will be entitled to draw more out.  Congress can change the rules to be whatever they want.  However, eliminating the wage cap for paying taxes, but retaining the cap for receiving benefits is a fundamental change to the system and contrary to any other pension benefit calculation.

The other option is simply to raise the rate above 12.4%. This is the solution previous Congresses and presidents have used to solve prior solvency issues.  Each time they raise the rates, they promise the new rate will fix the Social Security problem for decades to come.  When President Carter signed legislation in 1977 that raised the Social Security and Medicare rate to 12.3%, he declared it would make Social Security sound until 2030.  It didn’t happen.  Additional reforms were needed in the 1980’s and 1990’s.  We’re still 20 years shy of 2030, and Social Security is facing a looming solvency issue.

Increasing taxes may need to part of the solution in reforming Social Security, but it should not be the first and only thing that is done.  Like other budgetary issues, there is an income and expense part of the equation.  It’s foolish to only look at one half when you’re trying to solve a problem.  For too long, we have tried keep Social Security sound by pumping more money into the system, but it hasn’t worked. 

Increasing Social Security taxes hasn’t fixed the problem in the past 40 years, and it won’t fix it now.  It’s time to take a new approach and reform the system of benefits, and then determine if additional revenue is needed.

Social Security Reform: Reducing Benefits

Let’s be honest.  Whether it’s Social Security or some other program, no one wants to see their government benefits reduced.  While most people agree the government needs to reduce spending, they just don’t want it to affect the benefits they receive.  It’s another form of NIMBY.

Increasing benefits is the history of Social Security.  The initial benefits paid in 1937 were primarily lump-sum death benefits for 53,236 beneficiaries.  In 1940, Social Security started sending monthly checks to recipients.  In 1956, disability benefits were added, and survivor benefits for dependent spouses and children were added in 1962.  For the first 25 years of Social Security, revenues exceeded expenditures, which made expanding benefits easy. 

The necessity and benefit s of passing Social Security was quite clear in the 1930’s.  Few people had pensions in the early 1900’s, and those who did were severely impacted by the Great Depression.  Providing for seniors had an additional benefit – it encouraged them to retire, which created more openings for unemployed workers.  Prior to the U.S. entering World War II, men held most of the jobs, which meant the financial stability and survival of a family was severely at risk if a man’s ability to work was hindered.  Thus, the inclusion of disability and survivor benefits were intended to help families survive if the primary breadwinner died or became incapacitated.

While far from perfect, we can be thankful a lot of things have changed in the past 75 years.  Many people have employer-provided or self-directed pension and retirement accounts.  Women comprise 46.8% of the current workforce making it less male-centric.  Today, it’s not uncommon for women to make more money than their husbands.  Even though society has changed in 75 years, Social Security basically remains the same.

Providing basic retirement, disability and survivorship benefits is a good idea, but it doesn’t mean that everyone who becomes disabled or experiences the loss of a loved one should receive the same benefits.  The financial security of your family may be totally independent of Social Security.  You may have personal assets or private disability insurance that is more than adequate to provide for you.  No amount of money can replace a child’s loss of a parent, but does a child living with a parent who earned all of the family’s money need a monthly stipend from Social Security?

Disability and survivor benefits are only a small piece of the pie.  Retirement benefits is the mother lode of Social Security.  This may not be popular with my wealthy friends, but I believe there is a point where the amount of money you’re receiving from Social Security has little effect on your finances or lifestyle.  It could be $100,000, $500,000 or $1,000,000, but at some level you really don’t need that Social Security check. 

Aside from whether or not you deserve it, consider a pure financial analysis.  Assume you’re receiving the maximum Social Security benefit (about $30,000), and 85% of your benefits are subject to income taxes.  At a 35% tax rate, you will have after-tax funds of approximately $21,000.  If tax rates increase by 5%, you’ll pay an extra $25,000 in taxes if you make $500,000.  In simple economics, you may continue to receive your Social Security benefits, but it may cost you more in additional taxes ($4,000 in my example) than you’re netting from Social Security.

Don’t think tax rates are going up? Read through some of my prior posts regarding the future budget deficits for Social Security, the nonexistent Social Security Trust fund and overall debt of the U.S. government and tell me you honestly believe tax rates are not on the rise.

Furthermore, what do you think is might happen to the economy and stock market as the U.S. debt continues to rack up more than $1 trillion a year?  Has your portfolio dropped more over the past 2 years than the Social Security checks you’ve received?  While it may not be a direct correlation, I believe the overall performance of the U.S. economy will eventually feel the strain of the uncontrolled spending and borrowing by the U.S. Treasury. 

My point is simple.  You’re going to pay one way or the other.  Whether it’s through increased taxes or lackluster performance of the economy, the looming Social Security deficits are going to cost you something.  You may find it’s less costly to give up the Social Security checks you don’t really need. Sure you worked hard, paid into the system and you deserve it, but just because you deserve it doesn’t mean you actually need it.

It’s a good thing to provide basic retirement, disability and survivorship benefits to people in need.  We can debate the level at which someone doesn’t need the benefits, but I believe that a needs-based requirement to receive benefits is appropriate. 

Therefore, I advocate that reducing or eliminating benefits to people who truly don’t need Social Security is part of the reform needed to secure the long-term viability of the Social Security system.

Social Security Reform: Raising the Retirement Age

One option for extending the life and solvency of Social Security is to extend the retirement age.  This has a two-fold benefit.  By working longer, more taxes are paid into the system, and less money is paid between retirement and death.

Since Social Security was passed in 1935 the retirement age has changed only once – in 1983.  The change was not implemented immediately, but phased in for people who were less the 40 years old at the time of enactment.  For the first 74 years of Social Security, you could retire with full benefits at age 65.  Starting in 2009, retirees had to wait until they were 66, and for those people who turned 50 this year, they will have to work an extra year… all the way to 67 to get their full benefits.

By the time the retirement date of 67 is fully implemented, Social Security will have been in operation for 92 years.  The average life expectancy of Americans has increased well in excess of 2 years during that period.  That’s not a bad thing, but Social Security was not originally designed to pay benefits to people for multiple decades.

The average life expectancy in 1930 was 58 for men and 62 for women; both below the retirement age of 65.  According to Social Security data, these statistics were skewed by a high infant mortality rate, and the life expectancy for those who reached 65 in 1935 is only 5 years less than those who reached 65 in 1990.  Aside from statistical arguments, common sense tells us that medical advances are allowing people to live longer today than they did 75 years ago.

Ida May Fuller received the first monthly Social Security check in 1940.  She had paid $24.75 in Social Security taxes.  Her first check was for $22.54.  She lived to be 100 and collected checks totaling $22,888.92.  Ida May Fuller received a 92,480% rate of return on her money. 

Most of us hope we have the genes like Ida May and enjoy a long life.  That’s all good, but Social Security was not intended to be a long-term pension system for large numbers of people.  It could be, but it would take a lot more tax dollars to support the system.  While Ida May is an extreme example, many current retirees have received money far in excess of their contributions, plus a reasonable rate of return.  In contrast, many Generation X’ers don’t believe they’ll see any of their money back.

With the future of Social Security on a perilous path, I believe that periodically increasing the retirement age to receive Social Security benefits is necessary.  Social Security was not supposed to be a mechanism to help you retire early and live as many years in retirement as you worked.  “Early retirement” was not common in 1935.  It’s great if you can afford to retire early, but don’t rely upon Social Security to do it.  It’s your choice to stop working early, but it’s also not up to the rest of us to help subsidize your life of leisure.

You may think it’s great if you get a rate of return similar to Ida May Fuller, but remember, the money isn’t just created.  Someone else’s tax dollars is the source of providing you an exceptional rate of return.  A few people can reap huge rewards, but eventually the system will collapse like an illegal Ponzi scheme if everyone wants to take out of the system far more than they paid in.

The retirement age shouldn’t change annually. It makes more sense to change it every decade after the census is completed.  Like the change in 1983, don’t change the deal for current beneficiaries or those very near to retirement.  Change it for those who are 50 or younger, which still gives you 15+ years to plan and prepare for the age you can receive your Social Security retirement benefits.

As the life expectancy goes up or down, it makes sense for the age to receive full Social Security benefits to change accordingly.

Is Social Security Sustainable?

“This report is yet another reminder of what we have known for some time: Social Security’s long-term financing problems are very serious, and will not be fixed by wishful thinking alone.”

This quote probably sounds like it comes from some radical right-winger warning of the pending doom of Social Security.  However, this statement was issued by Jo Anne Barnhart, Commissioner of Social Security on March 17, 2003 when the 2003 Social Security Trustees Report was issued.  The press release for the report stated, “The Social Security Board of Trustees today declared that the Social Security program is not sustainable over the long term.”

For years, economists, politicians and citizens have expressed concern about the longevity and future of Social Security, but little has been done to address the problem.  Social Security has been the third rail of politics. Touching it is tantamount to political suicide.  The brave souls who have tried to address the looming crisis have met with such resistance that little has been done to change the system.

You don’t have to be a rocket scientist to recognize the unsustainable structure of Social Security, which is probably why I can understand it.  People will banter around sophisticated arguments about comparisons to GDP, the Social Security Trust Fund, the lockbox, actuarial infinite horizons, pay-as-you-go, etc.

Beyond intellectual arguments, when you consider a few simple facts about Social Security, the picture is not rosy, but fairly clear.

  • The Social Security Trust Fund has no real money; it’s just IOU’s from the government to itself
  • When Social Security was passed in 1935, the average life expectancy at birth was age 60; by 2000, it had grown to 77
  • Social Security initially had 42 workers paying into the system for every one receiving benefits; the number has dropped to approximately 3:1 and is expected to decline to 2:1 over the next four decades
  • Social Security and Medicare currently consume about 40% of all federal spending; expect the percentage to increase as the Baby Boomers move into retirement

What do you conclude after considering these four simple points?

Is Social Security sustainable?  The quick answer is yes.  Like most spending, if it’s a high enough priority, you will find a way to make it happen.  Social Security may continue to consume a larger amount of the government revenue, but it can be sustained if it’s a high enough priority.

Probably the better question is whether or not Social Security can be sustained in its current form? In my opinion… No.  As was stated by the Social Security Board of Trustees in 2003, the program is not sustainable over the long term.  It can be maintained, but only if changes are made. 

Social Security may be the third rail of politics and addressing it could end a political career.  However, the continued failure to address the systemic problems of Social Security could cause economic and social peril for millions of Americans if something isn’t done soon. 

Having addressed the problems with the Social Security system, it’s time to consider some solutions. Coming up next…