“Saving” Social Security

“Saving” Social Security

Pardon me for posting the penultimate lecture to my Financial Markets and Institutions class.

People are saying that Social Security is running out of funds and will go bankrupt. Those people that are clamoring to save Social Security seem to be under the impression that Social Security is going bankrupt and taking their benefits with it. Excuse me but this is crazy talk. Social Security cannot go bankrupt. What is confusing people is that the Social Security Trust Funds will be depleted in 2033. That means that retirees would receive 76% of their promised benefits not zero. The trust funds might be depleted but the only way Social Security will go away is if the sun goes super nova and wipes us all out. That is because Social Security is a pay-as-you-go system where the payroll taxes of current workers contribute to the payment to current recipients. As long as there are people working and paying Social Security taxes, benefits will be paid albeit reduced from current levels. Since most people prefer to receive 100% of the promised benefits rather than 76%, then how can Social Security be “saved”?

Here are some ways. Let’s do the easy ones first:

 Increase Payroll Taxes

Currently Social Security taxes are 12.4% on the first $168,000 of income. Yes I know they tell you that you pay 6.2% and your employer pays the other 6.2 percent, but who is fooling who (to quote Aretha Franklin). You pay the entire 12.4 percent. The 6.2% that your employer supposedly pays is coming out of your pay. So you can raise payroll taxes say to 15%. This will decrease your income today but will keep Social Security payments in the future from falling.

 Increase Income Levels Subject to Social Security Taxes

Just the first $168,000 of earned income is subject to Social Security taxation. There are proposals to raise if above $200,000 and some to remove the limit entirely. This would be accompanied with a proposal to have a maximum cap on the amount of benefits paid to the retiree.

Change the COLA from wage indexing to price indexing

By Instituting this change Social Security would have run surpluses every year from 1982 to 2023 except for 2021.

Now the more difficult ones:

Increase the Full Benefit Age

The full benefit age for those born after 1960 is 67. The earliest you can claim Social Security is at age 62. When Social Security was first implemented the full benefit age was four years past the life expectancy of the population. For example, my father was born in 1913 and had a life expectancy of 58 years. Now an individual who reaches age 65 is expected to live to 85. But when Social Security was enacted in 1935 the full retirement age was 65 and the life expectancy for men was 61 years and 65 for women. This means that Social Security was intended as a safety net rather than a retirement plan. Now men are expected to live to 74 and women to 80. Of course, it is less for blacks. Some estimates are that raising the full benefit age to 70 would make the system solvent for an additional 75 years. But I bet that the AARP would fiercely resist raising it because Social Security has moved from being a safety net to being a retirement pension fund.

Means test Social Security

Here Social Security benefits are determined by one’s income, instead of benefits being determined by what one has contributed. Also benefits can be determined by one’s income stream post- retirement. So if one has a 401(k) or 403(b), a pension or other benefits post-retirement, then their Social Security benefits would be reduced. This proposal is controversial because some recipients will be receiving less than their total contributions. My attitude is that I was forced to pay into this dog of a “pension “plan with its dismal rate of return and it is my money and I want it back.

Have more babies

Americans are getting older and living longer causing fewer and fewer workers to support an ever growing number of retirees. The declining ratio of workers to beneficiaries creates financial difficulties for Social Security. In 1960, the Social Security program had revenues of $12 billion and outlays just shy of $12 billion. However, by 2021, the smaller ratio led to outlays ($1,145 billion) exceeding revenues ($1,088 billion). The gap between outlays and income will continue to grow. By 2034, the last year before funds are expected to become depleted, the Social Security Trustees expect that costs will exceed income by $437 billion. When the trust funds are depleted, benefits will be limited by the income assigned to the program and absent changes to law, benefits would be reduced by 20 percent.

Is the solution to have more babies? That is not likely since birth rates are declining among all races and cultures. Although Hispanic birthrates are above those of white and black women, those birthrates are also declining. The rates in the countries in Latin America where most Hispanic immigrants are from are all below replacement (2.1).  Moreover, the birthrates of Hispanics in the United States are also falling. In countries that have offered economic inducements to have more babies, those inducements have failed to stop the declining birthrates. So it does not appear that trying to induce having more babies is going to work to “save” Social Security.

Privatize Social Security

Being a free market laissez-faire thinker, one would think that this should be my favorite. George Bush II tried to advance such a notion in 2005 but it failed. Why? Well the spectre of old gray-haired women picketing the congress is unseemly. Social Security funds are not invested per se so there are no significant returns coming to the recipients. Bush wanted to take part of the contribution to Social Security and have individuals put them in their own retirement accounts. Those account returns would be tied to the market and the accounts privately managed in equity index funds. The problem with such a proposal is that because Social Security is a pay-as-you-go program with current benefits being paid from current receipts, the program would suffer an instant shortfall. Would the government have to step in to make up that shortfall? That would be doubtful given the size of the existing government debt. 

If when first enacted, Social Security had been privatized, it would have been viable and would have produced greater returns than the current system. Consider that assuming historical rates of return, if individuals born in 1970 were allowed to invest in a stock market index fund what they pay in the Social Security taxes, those individuals could receive nearly six times the benefits that they receive under Social Security, around $11,000 per month rather than the $1,913 that Social Security would pay. Even a low-wage earner would receive nearly three times the return on Social Security. 

And a frivolous one

Since women live longer, they will receive more payments than men. In the spirit of fairness, delay their payments but not the men’s.

A Modest Proposal

My suggestion is to keep the current regime of Social Security in place and let it gradually fade away. Over time the 76 percent figure will continue to fall as the ratio of workers to retirees continues to fall. Social Security will eventually cease to be a viable source of retirement funds. Instead, remove the contribution limits on IRA accounts. There will be no need to try to privatize Social Security which would meet resistance from all the democrats and the AARP. Let IRA accounts be the alternative if donation restrictions were removed. The IRA contribution limits for 2025 are $7,000 for those under age 50, and $8,000 for those age 50 or older. Why not eliminate those limits? The reason is that the IRA contributions are tax deferred. Money contributed to an IRA is on a pretax basis. When the money is withdrawn is when they are taxed and then presumably at a lower tax bracket. The opponents will say that the increase in the IRAs will be at the expense of current tax receipts which are required to pay for government expenditures causing the debt to rise. Now that is a fairly easy solution – reduce government spending.

BTW, since none of my ideas seem to find traction, I don’t expect this one to do so either.