Investment advisors are familiar with the idea that past performance is not indicative of future returns.
And so it is in the realm of retirement income, according to financial economist Larry Kotlikoff, who argues that that a Social Security system that has by and large worked should not lead complacent Americans to assume its future viability.
That is one of the takeaway points from an online debate last week hosted by the National Academy of Social Insurance (NASI), a Washington, DC –based nonpartisan institute conducting research related to income security.
Both Kotlikoff and his opponent, Larry Thompson, a NASI founding board member, agree on the importance of social insurance (Kotlikoff is an academy member).
Indeed, Kotlikoff, the maverick Boston University economist who in 2012 sought the presidency on the Internet-based third party Americans Elect platform attests that Social Security represents a majority (55%) of the annual income of households headed by those 65 and older.
But Kotlikoff argues that Social Security is in “grave financial trouble,” worse than in 1983 when the Greenspan Commission reformed the system’s finances — indeed, “in worse shape than Detroit’s two pension systems, taken together,” Kotlikoff writes.
That is because the system is 32% underfunded, despite its nearly $3 trillion trust fund.
“In short, an immediate and permanent 32% hike in the Social Security payroll tax rate (from 12.4% to 16.4%, forever) is needed to pay the existing benefits. Alternatively, an immediate and permanent 23% cut in all OASDI benefits would provide long-term solvency,” Kotlikoff writes.
And while he does not think such drastic hikes or cuts are politically feasible, he argues that Social Security’s finances are just part of the system’s problems:
“Its Handbook has 2,728 complex rules, and its Program Operating Manual has thousands of even more complex rules to explain the Handbook’s rules,” he writes.
This complexity, together with rising federal income taxes on Social Security benefits (which he attributes to a lack of inflation indexation), contribute to Americans’ confusion about the benefits to which they are entitled and age at which they should take them, thus possibly overestimating their retirement income.
And beyond solvency and complexity issues, Kotlikoff sees issues of inequity and inefficiency: