Close
ThinkAdvisor

Retirement Planning > Social Security

The new debate about Social Security

X
Your article was successfully shared with the contacts you provided.

Between Chris Christie and Senator Warren (D-MA), Social Security reform is getting more media coverage today than at any time in the past 30 years. From hearing the details, you might conclude they are talking about different government programs. They aren’t. 

These people are part of the changing debate that is taking shape in Washington. For decades, any problem that developed within Social Security was fixed by shifting the cost to future workers. Today that isn’t possible. 

What is the problem? Social Security contains a massive imbalance between resources and promises.  The Trustees of the Social Security’s Trust Funds estimate that the system carries roughly $25 trillion dollars of promises for which the system does not expect to generate cash.  The figure means that we would have to add $25 trillion dollars today to the Trust Fund so that Social Security can work for all generations. That is more than $1.50 of brokenness for every $1 collected since its inception.

The primary force driving the gap wider is time, not demographics. According to the Trustees, adding a year to the clock created roughly 900 billion in unfunded liabilities because the gap grows just as though it were a bond charging the system interest.  Time measures the nothing that Congress has done every year for the last 32 years, and it is driving the crisis forming in Social Security more than all other demographic forces combined. 

Someone who is 32 today was born in the year of the last Social Security reform.  Congress has done nothing about the imbalances since that time.  Someone under the age of 50 didn’t even have a vote at the time.  The point here is that less than half of voting aged-Americans had a vote in the how the system is structured today. So the Social Security debate is in part a discussion about how to allocate the brokenness of the system to people who had nothing to do with the creation of it.  

For example,

  • Eliminating the cap would push the cost difference onto high wage workers.
  • Adding means-testing to the benefits formula means that wealthy retirees would absorb the gap.
  • Increasing the retirement age allocates the cost to future retirees.
  • Increasing the payroll tax distributes the cost to future workers. 

In the past, Congress has largely shifted the cost from generation to generation.  The last major reform to Social Security in 1983 allocated the highest tax increases and benefit cuts on people who were 11 and younger at the time.  Today the costs to fix Social Security are so large that there is no way to completely insulate voters from the changes.

So the new debate that is forming today is how to redefine what Social Security does so that voters will agree that the system works.  The Far Left would like to transform the program into a welfare program to keep the elderly out of poverty.  The Far Right wants Social Security to become a form of forced savings, in which workers are required to save for their own retirement. These changes are somewhat like fixing a broken refrigerator by calling it a doorstop.

These ideas do not fix Social Security.  They simply change the role that it plays in our lives. Originally Social Security was designed to be old-age insurance which would help a retiree hedge the potential cost of longevity.  It is statistically possible that for a retiree to live to 100, the cost of which would be staggering.  The point of Social Security 70 years ago was to give that worker some protection against outliving their resources.

Americans should think seriously about these transformations. We are trading what we can’t get for something that we already have. The government already offers many welfare programs.  The government already incentivizes retirement savings with an alphabet soup of retirement plans.  There is no alternative for the vast majority of Americans who need old-age insurance. 

These changes haven’t been well thought out because the goal isn’t to fix Social Security. The goal of the real Social Security debate is to create a program named Social Security that doesn’t hemorrhage cash.  For example, reformers would like to change the COLA to a new measure of inflation. This proposal would fix a system which is supposed to provide old-age insurance by reducing buying power of benefits as someone gets older. That is like auto insurance which increases the deductible as the car wreck gets worse.

Do you want to privatize Social Security? The math is simple. There is no way to privatize a negative number.  We will have to fill in the $25 trillion dollar hole before there is anything to privatize.

Do you want Social Security to be a safety-net?  Social Security has no visibility into the need of anyone. Millions of Americans are not even eligible for benefits. The irony of this approach is that the cost of supporting Social Security as a safety-net would drive even greater numbers of younger Americans into the poverty that the welfare program is supposed to alleviate.

There is no real debate about Social Security reform. It is a shouting match where few people are actually listening. We aren’t trying to fix a broken system.  We are trying to find someone willing to pay for one.

More on this topic