Social Security

It is believed that many politicians are privately pushing an agenda to kill Social Security.  Some will adamantly deny that they are working to kill Social Security but logic says otherwise for most of the proposed changes to Social Security would ensure its demise.

Some will claim that they are looking to take the money out of the hands of the government and give them back to the hard working people.  Some will argue that the program is doomed to fail and therefore it would be best for workers not to be forced to pay money with the expectation of not receiving anything in return.  Some will argue that individuals should have the freedom to invest or not in each person’s own manner.  Each of these three positions is flawed in reasoning.

First we should better understand what Social Security currently provides.  Let’s take the example of “Bill” who has worked 40+ years with the top 35 best years determining the retirement payout.  At the time just prior to retirement he was making $50,000 and if retiring at the age of full retirement is due to receive $1500 per month for life (increasing to adjust for inflation).  In addition, this covers monetary monthly survivor benefits for spouse and children if applicable.  Next let’s consider the example of “Bob” who is 45 years old and has worked 20+ years before becoming permanently disabled.  He now receives $1500 life increasing to adjust for inflation.  In addition, this also covers monetary monthly survivor benefits for spouse and children if applicable.

For most people, when given the choice of saving for the future or taking an immediate payout, the option of now wins out versus later.  To assume that this is because most people do not think about or care enough to ensure their future is simplistic and does not account for the reality that most working people are living paycheck to paycheck.  When faced with either making tough choices about which current needs should be unfulfilled or whether there will be enough money to pay the bills when too elderly to work, it is reasonable to put the present situation ahead of what might or might not be in the future.  I argue that if the money that was placed in Social Security was given as wages, though the standard of living might be slightly higher for most people in the present, the gain would be vastly offset by the increased shared cost from supporting the disabled, elderly and survivors who would no longer have an income to survive on.  If I make $50,000 per year and pay $3,100 for FICA (matched by my employer), would that be enough to care for two sets of parents and perhaps a disabled relative?  Would that also be enough to cover the likely increase in taxes to pay for the massive increase in impoverished people (disabled, elderly and survivors) who do not have family to take on the added burden?  If there were no mandatory means for providing for the disabled, elderly and survivors there would likely be a significantly higher indirect cost paid by each citizen than any income increase from not having to pay toward Social Security.

The stance that Social Security is doomed to fail and therefore should be immediately replaced is also simplistic and unreasonable.  The faulty thinking here is the presumption that nothing can be done to correct the problem of reaching a point where the program can not fund its current beneficiaries.  The current crisis comes from the fact that there are more people that made up the “Babyboom generation” than in subsequent generations.  There are several approaches that have been worked out to keep the program solvent.  These range from increasing the contribution amount to decreasing eligibility of beneficiaries.

The claim that we should just let each individual take the amount of money spent for Social Security each year and invest as he or she likes sounds reasonable but actually can work to the disadvantage of most people.  The biggest problem with this idea is that most vehicles for investment exist in volatile markets.  My understanding is that if everyone were to be able to invest with complete freedom, the amount of money for retirement for most people would be greatly diminished.  There might be individuals who would make much more by investing outside of the Social Security program, but most would make much less.  This becomes a great problem when working to find subsistence funding for the disabled, elderly and survivors who would not be covered under their personal choice of investment due to poor or lack of investing.  That fact would alone would offset the benefit for most of the successful investors.  What good does it do a person to increase his or her investment portfolio if required to pay great sums toward the subsistence of people who chose not to invest or invest well?

For the recent past, the Social Security program has maintained a great surplus which is designed to fund the program during times where the amount paid to beneficiaries is greater than the amount being paid into the program by the workforce.  By law the surplus must be safely invested to grow the base and therefore work to provide additional funds for the program.  A common claim is that the government is pilfering from the Social Security program to use elsewhere.  This claim is misleading in that it suggests that the money is taken away or exchanged for a worthless IOU.  In reality the surplus is invested in a special non-marketable Treasury bond which accrues interest.  It is true the government is borrowing money from itself.  But, this should be viewed similarly to people who take loans times of need against their 401k accounts.  It is preferable to sacrifice a potential return on investment in favor of offsetting the interest expense paid on borrowed money.   As long as the federal government is financially solvent, the Social Security program would have access to the loaned out surplus money plus a small amount due to interest paid.  However, a realistic concern is that our federal government may not be able to maintain solvency due to high budget deficits and national debt.  However, wouldn’t all federal programs cease if the federal government became insolvent?  Therefore the only logical reason why the borrowing of money from itself would be imprudent would be in a situation where the act of borrowing that money is hastening the decline of the federal government’s ability to remain solvent.  This is exactly what some suggest though in truth this issue is more complex than it would seem.  Borrowing money from surplus in one area to offset debt in another is good business practice from a pure financial perspective.  However, in this case the federal government (ie. Congress) is also utilizing this benefit to downplay the budget deficit.  When calculating the budget deficit (income via taxes versus spending), the government should not assess annual spending after offsetting spending amounts using loans from itself.  This type of accounting practice in the business world might result in jail time.  In order for this or any other federal program to be sustainable, the government is going to need to maintain a balanced budget and to work fast to decrease the national debt.

I believe that most people are considering only what money gets taken from their pay to fund Social Security and what might or might not be available for retirement.  Most of the options suggested for replacing Social Security leave out the most important part which is that the employer matches dollar for dollar.  If Bill who made $50,000 pays $3100 toward Social Security his employer matches that amount with an additional $3100.  That should imply that Bill actually makes $50,000 plus $3100 toward his retirement paid by the employer.  If Social Security was replaced by allowing Bill to invest his contribution in a 401k, Bill would be losing $3100 in contributions by his employer.  This is great for the employer (in the short term) but terrible for the worker as he or she would be cutting the retirement contributions in half.  Equally important to note is that without the Social Security program as we know it, people would need to pay for additional insurance covering disability and/or survivors plus the indirect cost of supporting those individuals who are disabled and/or survivors but opted for not enrolling in any additional programs.