How I would fix it – Social Security

One of the things that often gets Republicans labeled as “heartless” is their apparent lack of support of social programs.  While I am not a Republican I do agree that ending social programs as we know it would be a step in the right direction.

Does that mean I lack compassion?  No.  What I lack is the ability or desire to force some into supporting any program let alone a failing institution.

Before you get mad at me, let me give you a little history.  Once upon a time, Matt and I were poor, starving students.  We had two children while covered by medicare, have been on WIC and we also received food stamp benefits.  When we used medicare we chose midwives and home birth, partially because the expense to the state would be minimal.  Beggars can’t be choosers; midwives are far cheaper than hospitals and we didn’t want to take advantage of the system.  We used WIC and food stamps by justifying that once he entered the work force, Matt’s career would be such that we would pay far more into the system than we would ever get out of it.  If I had known then what I know now, I don’t think we would have signed up for the food programs.

With that little history lesson behind us I will move on to the point of this post.  Social programs as we know them are sucking our economy dry.  Medicaid and Social Security are already bankrupt and other smaller welfare programs are getting larger by the minute.

Currently, Medicaid and Social Security eat up more than half of our annual tax revenue.  Add interest to our national debt and we are up to two thirds of our annual revenue.  That leaves only one third of the amount our government takes in for things like military, veteran benefits, and administrative costs (government workers need to be paid after all).  Add Obamacare (the latest entitlement) to this pie and soon we won’t have any money left for defense (which is the ONE thing I have mentioned here that is listed in the Constitution as a responsibility of the federal government.)

This cannot go on.

Social Security was broken with the second check that it paid out.  Ida May Fuller was the first person to collect a Social Security check.  She paid $24.75 into the system and by the time she received her second SS check she had already received more in benefits than she paid in.  She collected a total of $22,888.72.  That is approximately 925% more than she paid.  Who paid for that 925%? Those who were working that hadn’t retired yet.  When they retired who paid for their SS checks?  SS, since it’s inception has been an epic failure that, with all due respect to Mitt Romney, looks a lot like a Ponzi Scheme (definition being a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors).

What would I do?  I would allow anyone who wanted to opt out of SS to do so.  Those who want to receive benefits will have to continue to pay into it. Those who wanted to take responsibility for their own retirement wouldn’t have to pay in, but they also wouldn’t be allowed to receive SS benefits.  Allow individuals to keep and invest their own money and three things will happen:

  • The stock market would boom because more people would be investing.  The stock market would also become less volatile because more people would be investing wisely.
  • Retirees would have a better quality of life and more money to spend because the return the on investments are far greater than that of SS ( while almost everyone receives more than they pay in, the days of Ida May and a 925% return are far behind us).
  • Since you can bequeath your retirement accounts to your spouse, children or whomever else you want, the next generation’s retirement would be even more comfortable than the first because they are starting out with more to begin with.

I will admit this plan has some flaws.  The biggest flaw being that our entire population has counted on this for some if not all of their retirement.  Even if we were to pretend that SS wasn’t already bankrupt and working off of a system of IOU’s, as soon as we open up the ability for people to opt out I believe that the number of people who would stop contributing to FICA would make it impossible to keep paying the benefits for those who decided to stay in.  The American people, especially those with their entire careers ahead of them, would realize which option was better and quickly start investing their own money.

I believe that my plan would have to be introduced slowly, say over 15 or 20 years.  Here is how I would do that:

  • No one who is not a citizen of this country will be allowed to receive Social Security or any other entitlement benefits.
  • People would no longer be allowed to receive benefits until they die.  They would receive benefits until they reach the amount they have contributed and then stop.  Since almost everyone withdraws more in benefits than they put into the program, that extra money has to come from somewhere or more importantly someone.  While the potential for wealth is unlimited, money also does not grow on trees.  You can’t just print more money and have it not effect the overall economy in a bad way.  The extra checks you get are pillaged either from another program’s budget or another person’s paycheck.  Sound harsh?  The truth hurts sometimes.
  • I would incrementally raise the retirement age to 80 (yes 80).  The current retirement age of 65 was established in 1935 when SS was enacted and when the average life expectancy was 62.  As our life expectancy has increased, the retirement age has not.  Life expectancy for 2010 was 79.  Raising the retirement age for SS benefits would put things back the way they were when SS began.  Those who want to retire sooner would be responsible for making sure they can cover themselves until they reach the age of 80.  This would also make sure that SS continues to be a safety net for those who really need it.
  • As unpalatable as it is for me, I think one of the only ways to pay for the current seniors is to put an income cap for SS eligibility.  Those who have an annual income of say $500,000 a year would not be eligible for SS benefits.  If we can figure out a way for small businesses not to get kicked by this, a family making 500k a year is making more than enough to save for a comfortable retirement.  It’s incredibly unfair to have to pay into something you won’t be able to benefit from, but we can’t just jerk the rug out from under this monster.  We have to fix it incrementally.
  • Those who opt would not be able to get money back that they had already paid in.
  • I would have the “opt out” option be on a sliding scale by age.  Younger people (say up to age 45) would be able to withdraw 100%.  Pay nothing, get nothing.  You are on your own.  If you decide to stay in you will only receive benefits in the amount you paid in.  This is an excellent incentive to get younger people off of the system.  You have a choice, show some self-discepline and save and invest for your own retirement or let the government take an interest free loan out of your paycheck every month.  It doesn’t take a genius to decide which is the better option.
  • The older you are, the closer you are to retirement and the more likely it is that you are counting on SS benefits.  The likelihood of you being able to save enough for retirement isn’t as good as it is for the younger folks.  Healthy investments take time to grow.  If you decide to opt out after age 45 or so, you will still have to pay into SS, but only half of what you are paying now.  The older you are when you decide to opt out the larger percentage that you will have to continue to pay into SS.  Those who are too old to opt out 100% would also be able to withdraw some SS benefits, just not 100% like those who stay in and pay the full FICA tax.
  • Employer contributions would incrementally be reduced until it is gone.  I believe it would be far better for the economy if employers and employees were incentivized to participate in a retirement match program rather than punished with a tax (which is all FICA is).  Since employers pay 7% in payroll taxes for their employee, even if they were to offer a 100% match of up to 6 percent of the employee’s income (which is very generous), the employer is still coming out ahead (not to mention the great head start on retirement the employee is getting).  This would allow employers to have more capital with which they could either raise salaries, hire more employees, offer additional benefits or expand their company.  This would be done quickly, say over five years so that the individual would be more incentivized and have more time to take advantage of a retirement match program.
  • I would not, as some have suggested raise the income cap on the SS tax, nor would I increase the percentage paid into the program.  This will not solve the problem and will only ensure that less people will have enough to make their own arrangements for retirement.  This type of suggestion is like trying to use a bandaid on an amputated leg.

The goal for me is not to make Social Security financially viable but to eliminate the need for it all together.  People need to take responsibility for their own lives.  Social Security should not be considered a retirement program.  It should be considered a safety net.  Safety nets are not meant to be for everyone but for those who truly need it.  If we can eliminate the need for SS for all but the poorest and oldest who truly can neither save for their own retirement nor work because of advanced age, real health problems or disability, it will take a tiny fraction of the amount we are currently paying into it to save it.  Social Security as it currently stands is so monstrous that it has it’s very own tax which doesn’t even begin to cover the benefits being paid out. If we can get the need for SS down to what I have suggested, we would easily be able to pay for it along with everything else the federal government is responsible for with the revenue from a regular federal income tax rather than a payroll tax.  Cut the payroll tax out of the equation and everyone gets a 7% raise, who can argue with that!

This isn’t about not having compassion or not wanting to help our neighbor.  This is about what type of system is more likely to produce the maximum standard of living for the maximum number of people.  It is a fact of life that those who prepare, save and invest for their retirement have a far greater standard of living than those who rely on SS.  Social Security has failed.  The average SS benefit starting in 2012 is $1230 a month (max benefit is $2513).  That is a joke.  No one can live comfortably on $1230 a month.  Let us please stop pretending that Social Security is a good idea and figure out a way to scrap it all together.

Next time: Medicaid.


12 Comments Add yours

  1. I greatly appreciate your interest in Social Security reform, and willingness to talk about it. But there are a number of things that you need to consider.

    1) Life expectancy has increased primarily because of lower infant mortality. The data you want to consider is life expectancy of a retiree and the statistical probability of reaching retirement. These forces are increasing benefits, neither has kept pace with increasing costs. If you want to base today’s retirement age on 1935 life expectancy then you have to return to the same cost structure – 2% of the first $50,000 (inflation adjusted).

    2) Social Security is not intended to be sole support for anyone. It has over time become a larger part of someone’s retirement planning because the high cost of the system makes it difficult for people to save outside of SS. Social Security has an astounding feat – it has produced declining returns for all 77 years of its existance. Today return is negative – and that doesn’t factor in means testing which reduces the incentive to save for retirement.

    3) Social Security is insurance. By your logic you would call the auto insurer and tell them don’t pay for the $30,000 car because I only paid $2000 in premiums.

    4) Insurance is pooled risk. Comparing it to a savings vehicle is completely misguided. SS shouldn’t be treated as a savings vehicle. It is risk management – an expense – like auto insurance that protects you from outliving your outside savings. The problem is that the system is so poorly run that it doesn’t provide any security.


    1. Courtney says:

      Thanks for commenting. You make a few good points.

      1.) I hadn’t included infant mortality in my analysis, so 80 might be a little on the old side. Lowering the infant mortality rate doesn’t mean that someone who is 67 is incapable of working. My point wasn’t that people shouldn’t be allowed to retire until they are 80, but that a when you retire should be your choice. If you have the savings needed to retire at 40, go for it. No one wants to work up until they are 80 and if you know you won’t get SS before then you will be more incentivized to make it happen on your own, but if you make it to that age and still can’t make it work then chances are you need a little more help. 65 has become the “magic number” for people to retire, not only because of SS but because the Tax structure us such that you are penalized for withdrawing money from your retirement accounts before 59 1/2. People would rather work those last few years and increase their SS benefit pay out than retire whenever they want (which isn’t possible anyway because of the retirement account penalties).

      2.) I don’t judge programs by their intentions, I judge them by their results. It doesn’t matter if SS wasn’t meant to be the sole support for anyone. The fact of the matter is that far too many people could not get along without it and we need to change things so that the next generation won’t depend on it at all.

      3.) Social Security is not an insurance. It was sold as an insurance program to the American people by FDR but when it came before the Supreme Court he defended it as a tax. They found it constitutional on the grounds that it is a tax ( There is no trust fund, there is no lock box, if there were than there wouldn’t be any talk of SS coming out of “mandatory vs discretionary spending” because it would have already been paid for (except for the fact that people always receive more than they pay) and we wouldn’t be needing to have this conversation to begin with. It’s a tax and is treated as a tax. Income, FICA, Medicare all goes into the same pot. That extra money has to come from somewhere. Where does it come from? They are robbing Peter to pay Paul.

      4.) I think it would go a lot further if it WERE treated as an insurance, but that is not how the government, nor the American people look at it. If it were an insurance then there would be no guarantee you would receive anything at all unless you met certain qualifying factors (ie, getting into a car accident if we are comparing to auto insurance.)


      1. In terms of (3), Social Security is collected as a tax (Heverling V Davis), but it is difficult to call something a tax that is directly tied to expected benefits. In the case of the low-wage worker, it is expected that they will collect more from Social Security than they could collect from any private market investment. It is very difficult to call that a tax. In the case of high wage workers, it is part tax and part insurance. At the same time it is hard to call SS insurance because there is no guarantee (Flemming V Nestor). But structurally, Social Security is closer to insurance than a tax. The mix depends upon marital status, wage, and co-hort.

        “too many people could not get along without it and we need to change things so that the next generation won’t depend on it at all.”

        The size of this problem makes it impossible to do that. You cannot make good on the last promises without making indentured servants out of the next generation. We want to feel that there is a way to protect those at and near retirement, but we are just kidding ourselves. If you want the next generation to be free of SS, you need to just end it.


      2. “I think it would go a lot further if it WERE treated as an insurance, but that is not how the government, nor the American people look at it. If it were an insurance then there would be no guarantee you would receive anything at all unless you met certain qualifying factors (ie, getting into a car accident if we are comparing to auto insurance.)”

        Social Security Old-Age and Survivors has no guarantee (Flemming V Nestor) and you have strict conditions under which you can collect.


  2. “I will admit this plan has some flaws. The biggest flaw being that our entire population has counted on this for some if not all of their retirement. ”

    It is considerably worse than flaws. Maybe you aren’t familiar with the size of the problem or the consequence of adverse selection. Not all people are equal within Social Security. Single people are getting mugged. Rich people are getting mugged. These people contribute more than they expect to collect. The only people under 50 who would stay would be those who can’t count. So your solution would drive the system into the ground faster. Without payroll taxes, the Trust Fund would pay benefits for about three year.

    “Even if we were to pretend that SS wasn’t already bankrupt and working off of a system of IOU’s, as soon as we open up the ability for people to opt out I believe that the number of people who would stop contributing to FICA would make it impossible to keep paying the benefits for those who decided to stay in.”

    I appreciate your honesty here. But this is were your cost savings comes from – degrading benefits not superior market returns. Virtually all plans in the public domain that have opt-out options put this cost on the general taxpayer. Here I have to ask, when those who are completely dependent on Social Security, are they eligible for food stamps and other welfare items. Because if they are – you have saved nothing. You are simply switching pockets. Where is the money for food stamps coming from ? In part from the people who thought that they were opting out. So you have to finish the paragraph : ” it impossible to keep paying the benefits for those who decided to stay in” with “And they aren’t eligible for welfare funded by the general taxpayer.”

    I disagree that you will be materiallly better off. Those children who have savings from leaving the system will end-up supporting their parents as benefits are ended not putting those savings to work in the stock market.

    I don’t disagree with you that it is a horribly flawed system. But your solution will make it worse. It will end in an unplanned end, and a lot of pain.


    1. Courtney says:

      “your solution would drive the system into the ground faster”

      That is my point! Let’s make it possible and easy to get people off of it as soon as possible without penalizing those who currently depend on (current seniors or those very close to retirement). If everyone were able to control their own retirements and keep that 6. whatever % then we would quickly make SS obsolete. 15 years is plenty of time to climb out of debt and save for a modest retirement.

      I realize that without reforming all other welfare programs getting rid of SS would be counter productive. I have tried to keep this at a reasonable length for a blog post. I have my ideas on all other social programs as well. They would all have to be done in order for any to work.

      A person who starts funding and investing in his retirement when he gets his first job at 16 will have plenty of capital to take care of ailing parents, fund his children’s education (especially if he has married a like minded woman) and fund their own retirement. That is why getting the young people on board is the key. It won’t be easy, but if we can get kids to do this before they start being stupid with their money (ie buying brand new cars, running up credit card debt and buying houses that are too expensive) then we can get rid of it in little more than a generation. It won’t be needed! Those who are truly in need will be able to be taken care of because those who don’t need it won’t be draining the system.


  3. “That is my point! Let’s make it possible and easy to get people off of it as soon as possible without penalizing those who currently depend on (current seniors or those very close to retirement). ”

    My point is that there is no way to do what you are proposing. The Trustees have said that there is no way to do it even if we make it impossible for people to get out. Today someone 63 or younger expects to live long enough to have their benefits cuts. We want to feel like SS is just a bandage that we can pull off with little more than a sting. When we pull it off, body parts are coming with it.

    Your are right about this : “This cannot go on.” The better question is how it doesn’t go on. The imbalnces in Social Security will be resolved whether by planned or unplanned means.


  4. Our site http://www.FixSSNow.Org provides one stop shopping for people interested in reform. While we don’t agree that ending SS is sensible, we do offer a page on it. Feel free to tell us where we are wrong.


    1. Courtney says:

      I will definitely look more closely at your site! Thanks :)

      Yes, it seems the main disagreement between us is what the end product would be. From what you are saying it sounds like you would like to reform it in order to save it and I would like to reform it in order to make it easier for the people to get rid of in it’s entirety.


      1. Our difference isn’t on the end-product, but the end crisis. We are pretty far apart on the size of the problem.

        Today poverty in households headed by someone 35 and under is at historic highs. It is double the level of the 1970s when we started increasing payroll taxes. Consider the boomers are counting on a generation to lift them out of poverty that has been unable to lift itself out of poverty.

        The experts in DC are talking about the workers to retiree ratios as though these factors were constant. They aren’t. Workers today contribute about 15 times what workers did in the 1940s in real terms. Future workers will not be able to contribute what current workers do because they will have to pay more taxes to control the debt. The average American is now carrying 4 or 5 times the per capita debt level of say 1995. At some point, workers will have to choose between supporting the debt or supporting the retirees, who largely created the debt by irresponsible voting habits.

        You are right that ‘this can’t go on’. Where we differ is the how ‘it will not go on.’


  5. Heather B says:

    I thought your post was excellent!

    And as far as SS being an insurance versus a tax, the last time I checked, I pay my insurance voluntarily because I choose to. When something is forcibly taken from me without my consent, if it’s done by a random person that’s called theft, if it’s done by the government, it’s called a tax. That’s pretty simple. Changing the wording to make it sound more palatable and voluntary doesn’t change the reality of the thing itself. It’s a tax, plain and simple.


    1. Heather,

      The last time I check, insurance isn’t voluntary. In my state, you are legally required to carry auto insurance to drive a car. Soon enough, the government is going to require health insurance. Compulsion has nothing to do with the product.

      A tax isn’t something on which you can collect private economic rents on for upwards of 40 years. Social Security is a tax the day that you can’t collect from it. And some people who pay it today will never collect. Social Security is a mix of a tax and insurance depending upon your wage, martial status, and co-hort. The one thing that Social Security isn’t is a saving account which is what people want to consider it.


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