Recently it was reported that Social Security will payout less to the average worker than they will collect, for workers retiring now (1). The deal only gets worse going forward, even if the benefits are paid as projected today. In fairness the study should have removed the 1.8% portion of the tax used for the disability insurance, but even then the return is not even as good as long term treasury bonds. The real takeaway from article is that Social Security is a worse deal for each succeeding generation. This raises two questions. The first question is why is Social Security a bad deal? The second is what should be done?
The main answer to the question as to why it is a bad deal is obvious, it is a failing Ponzi scheme. Since the government has the ability to force people to participate in the plan, this scheme could work if the ratio of working to retired remained the same. Unfortunately this ratio is projected to decline for the foreseeable future, due to demographic shifts and increased life span. The ratio will decline fast over the next 15 years as the baby boomers retire. After that the ratio continues to decline but at a much slower pace. A secondary reason is that with each year retirees will have earned more of their money after the last tax increase to “Fix” Social Security back in 1989.
In researching the need for reform of entitlements, I found some not so honest groups trying to use dependency ratios to declare that paying for entitlements will not be a problem. These studies add in children, since people are having less children, the studies presume money that would be spent on things such as education would just be shifted to pay for retired people. Of course this idea is troubled in many ways. First, many states other than Wisconsin, are in deep financial trouble and have huge unfunded pension liabilities. Second, they are using savings that might accrue to state governments to fund a Federal Program.
Now for the more difficult question what should be done? Last year it appeared some Democrats were willing to work with the GOP to pass a Social Security reform bill, since it is the easiest entitlement to reform. Then President Obama made it clear he did not want a deal on Social Security. His plan was to campaign that he is somehow protecting Social Security and Medicare by refusing to deal with the impending bankruptcy of both plans, despite having no reasonable plan for either.
Two things are clear regarding reform, we can’t trust the government to run a trust fund, and that we must not increase Social Security taxes. As a forced retirement plan, Social Security is already making the vast majority of people worse off. Also, increasing the payroll tax would continue the mistake of the past of committing intergenerational theft to solve the problem, thus making each generation worse off than the last. The other usual solution is to increase the upper limit on Social Security. This may be possible to some extent, but with a top rate 43% scheduled to go into effect by current tax law adding another 12.4% tax would be a disaster for the economy. It would also likely reduce total revenues to the government from the loss of growth. There is also the issue of fairness, I do not think the Federal Government should take more than 35% of anyone’s income and the top 10% already pay 72% of all the taxes paid.
The end deal will likely be structured to not effect people in or close to retirement to allow people time to adjust their plans for the reformed plan. It will have to involve pushing the retirement age back and indexing it to life expectancy. It will likely also involve cutting benefits for high income earners. No one will like the plan but there is no magic way to fix a collapsing Ponzi scheme without any pain. Many will say, but I paid in and I was promised this. But, the fact that we were irresponsible to elect people to promise unreasonable things, does not justify stealing from our children to pay ourselves these benefits.
I am willing to accept the even worse deal Social Security will be, to save the plan future generations. I am also willing to accept the worse deal to protect my children from increasing the intergenerational theft and the resulting worse economy, or fiscal collapse.