The Social Security Benefits Gap

The Congressional Budget Office estimates that the Social Security shortfall over the next 75 years will be equal to 0.6% of the Gross Domestic Product. Do you understand what that means? In the next 75 years it will take 100.6% of the GDP to pay for the benefits of Social Security. That is why I call this socialist program Social Insecurity. Recently, while participating in a conference call discussing the options available for closing the gap, four basic ideas were mentioned.

Change the taxation of earnings. By increasing the payroll tax 1% today, 50% of the shortfall can be overcome. This would slow the pace at which the greatest Ponzi scheme ever played on the American people would eventually overtake the GDP, but it would not stop the eventuality of insolvency. Keep in mind that Social Security is based on the current workforce paying for the previous workforce’s retirement. I know many believe that the money they pay into the program is there for them when they retire, but the reality is that the money the current generation pays into the program is used to cover the expenses of the previous generations. Changing the taxation of earnings only adds to the burden of the current generation as it tries to raise the next generation charged with funding the Ponzi scheme.

Change the benefit formula. In other words, index the benefits to changes in longevity. The biggest problem with this idea is that quantity does not always translate to quality. As a population increases in longevity, the benefits provided are increased. The question that needs to be asked is “When longevity decreases, will the index adjust down as easily as it adjusts up?” This idea rewards seniority by providing more benefits as longevity increases. Control the determination of longevity and you control the distribution of benefits. See the problem with this idea? Changing the benefit formula in relationship to longevity is thought to be able to eliminate only 33% of the shortfall. Who knows if quantity translates into quality?

Raise the full retirement age. Different from changing the benefit formula, this idea indexes the full retirement age to changes in longevity. Instead of graduating benefits, the age at which a person can take full benefits is graduated with changes in longevity. As the population lives longer, the government will decide when you can retire and receive the benefits you believe you are “contributing” to. Here again, the concern is if the population longevity decreases, will the government quickly reduce the age at which a retiree can receive full benefits? The answer is no. This idea will result in the Full Retirement Age (FRA) increasing quickly as the longevity of the population numbers are manipulated upwards and will never, or nearly never, be lowered if the longevity measurement decreases. Only a 33% impact on the overall shortfall is expected with this idea.

Reduce the Cost-of-Living Adjustments. The idea is to determine the real inflation rate by using the shift in consumer’s decisions as prices in markets increase. This idea is a little convoluted, but basically it means that when the price of beef goes up, the consumer might buy more chicken. If the CPI is weighted on a fixed basket of products, it will not take into account that the consumer is not buying beef. Therefore, the CPI is overstated. But shifting the COLA to the more accurate Chain-Weighted CPI, the COLA would reflect the more fluctuating inflation rate and not the more stagnate fixed-weighted CPI. Doing this reduces the COLA adjustments realized by retirees, but is thought to only affect about a third of the shortfall.

These four ideas can all be considered stop-gap measures. None solve the problem and no combination will solve the problem without causing additional problems. With the advent of the Unaffordable Care Act of 2010, the amount of financial resources available for socialist programs will eventually dry up leaving those who were promised a pie-in-the-sky utopia without both the means to afford such programs and receipt of the promised benefits.

One simple idea that could solve 100% of the problem. It was briefly mentioned, but never discussed. Eliminate the taxable maximum. Remove the cap on income where Social Security taxes cease to be extracted from one’s income. For 2016, the maximum amount of taxable earnings is $118,500. If you earn more than that, you are released from the obligation to pay Social Security taxes. However, if you removed that artificial cap that protects the wealthy income earners, the problem would be solved.

Another idea that would solve the problem is to transition from a government controlled system to a privatized system where the tax still exists, but the lock box would be controlled by the individual citizen. The individual would have the ability to direct his or her Social Security tax in an account that only becomes available when the individual reaches 62.

Politicians will rarely consider real solutions for several reasons. First, they have an allergic reaction to losing the control over other people’s money and the people themselves. If they were to privatize the system, they would lose their political slush-fund. Anyone who believes that the money he or she is forced to contribute is sitting there waiting for him or her to reach FRA is kidding him or herself. Money being paid in today is used to pay benefits today. It is the future earnings of future generations that will be relied upon to pay for your benefits.

Second, the changes required will not win them favor with the higher income voters. In other words, they worry about political optics. If they remove the cap on income exposed to the Social Security tax, those earning more than $118,500 would come unglued. Liberals talk all the time about the rich paying more, but no one will actually make the rich pay more by simply removing the Social Security taxable maximum. It is the easiest solution, but politically the optics would crush many borderline politicians. If you want to tax the rich more to help those who do not have as much, simply remove all income caps that restrict higher income earners from not paying Social Security taxes on their whole income.

Third, they are not smart enough to figure out an exit strategy. I support a transition to privatized Social Security accounts. I have a strategy to accomplish this, but I doubt the politicians have the intelligence to fully comprehend the process. Politicians do not have the political will to actually take a private sector idea and allow it to work because, if they did, they would prove their own worthlessness.

The system is broken because it was designed on a faulty foundation. It was built on socialism. The problem with socialism is that eventually you run out of other people’s money. The best social program is the one that allows the individual to take responsibility for his or her own destiny. People need to learn that life does not respond to your desires as much as it responds to your decisions. Therefore a person’s destiny is directly linked to his or her decisions and not desires. When your decisions support your desires then and only then will you be successful.

Government programs cause dependency, not responsibility. The current system needs to be scraped, but in a way that make sense. I suggest a transition to a hybrid system where the percentage of the Social Security tax paid by the individual must be put in a tax-free investment account to be managed by the individual and the corporate portion is paid to the government. I also advocate for a buy-out plan where current workers can opt out of future Social Security benefits. The details are far too complicated to explain in a blog, but I will debate the merits of such a system if there are any political leaders who are interested in such a conversation.

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