Fixing Social Security

In a perfect world, it wouldn't be necessary to write this. In a perfect world, our representatives in Congress would see (and understand) the situation, take the bull by the horns, ignore the squalling from the AARP, and fix the system to make it permanently sustainable.

The world ain't perfect.

Let's recapitulate. Social Security (the System) is really several distinct programs. There is a long-term disability insurance component which, so far as I know, is in decent shape. There's a life insurance component, for "widows and orphans", which is also working well enough. Then there's the retirement annuity component, which is an impending train wreck. Finally, there's Medicare, a politically-designed health insurance program of sorts; with the recent addition of prescription drug coverage, Medicare has ceased to be a serious problem for the mid-term future, and become a near-term fiscal nightmare. I gather Medicare isn't technically part of Social Security, but that's a legal fiction which I see no reason to honor.

Let's ignore the disability and survivors' benefit programs; they may need tweaking, but they're not a serious problem. The problem is that the assets and future cash flows of the system will lead to its bankruptcy in a few years. (How many is "a few"? No one knows for sure, but twenty to forty years seems a good betting range.) There are a lot of reasons for this. One is that the baby boomers are starting to retire, and there aren't as many workers in the succeeding generations to pay for current benefits. Another is that benefits are double-indexed for inflation, and have been for several decades.

However, the biggest reason is that the system was corrupted early on, by politicians. As originally designed, the system was actuarially sound; people would pay a percentage of their earnings into a pool, the money would be invested, and earn profits, and the contributors would, on average, get back their contributions, plus interest. The politicians of that era found all that money to be an irresistable lure. They decided to spend the money immediately by legislating benefits for "retirees" who'd never contributed to the system. In short, they bought our great-grandparents votes by giving them our grandparents retirement savings, and put our parents on the hook to pay back our grandparents, and so on. This converted a rather clunky retirement savings plan into a giant pyramid scheme...and now we're running out of people to tax.

The future costs of all the benefits that have been "promised" are so great that our kids and grandchildren will have to pay over half their earnings in FICA taxes...unless they revolt. Make no mistake; this COULD end with an intergenerational civil war, with the under-forty taxpayers massacring us oldsters.

What's the solution? Well, if you're looking for a fairly painless way to adjust the system so everyone gets their benefits and no one has to pay through the nose, forget it. The system is far too broken for any easy fix. In fact, it's my opinion that it's too broken for any fix, no matter how difficult.

Social Security has to be dismantled.

If you're not prepared to believe that, don't bother reading further.

How do we dismantle a government program that provides most of the income for a large fraction of those over 65? Carefully. I'm certainly not suggesting we shut off the system all at once; not only would that be inhumane, it wouldn't be politically acceptable. For the same reasons, we can't just set a cutoff date and accept no more beneficiaries after it. But we HAVE to reduce our future liabilities.

My suggestion is to start raising the retirement age. There is, after all, no particular reason for it to be 65. (That age was originally selected, a century ago, as an age few people reached; those who did were usually too ill to work anyway, and weren't likely to survive very long.) Let's start raising it, slowly, perhaps three or four months per year. This has several advantages: it keeps people in the workforce longer, paying into the system; it reduces the number of years benefits are paid; and it gives people time to adjust to the change.

Another suggestion is to adjust the benefits of people who retire early. Let's say John Doe retires at 60, and taps his retirement funds to live until Social Security kicks in at, say, 75. That's fifteen years during which he wasn't paying into the system, and his benefits should be somewhat smaller as a result (not proportionally smaller, though; those last fifteen years are less important than the 40 or so years at the beginning).

Eventually, the future liabilities of the system will start to decrease. Social Security taxes can be reduced to match, leaving young workers with more funds to use in their private retirement accounts*. In fifty years, or a hundred, the system will phase itself out of existence, and our descendants will be able to thank us for making that happen.

* If you're concerned that people haven't the self-discipline to save for their retirement, you might want argue for some sort of mandatory savings: IRA, 401(k), whatever. That's OK with me. It isn't necessary, but if it makes you feel better, I'll live with it.

Mark Hagerman