It’s coming into election season again and I’m not going to tell anyone how to vote. I am going to look at some of the issues, with just a little bias and a lot of open mind and I’m going to encourage other people to really know the issues instead of latching on to their party’s buzz-word platform stances.
I’m not a fan of Social Security. I think it’s an inspired idea with a failed implementation. I do think the system needs reformed.
The main problem with the Social Security system is that it relies on a model where the working population is constantly growing. It doesn’t actually save the money put into the system, it uses the current payments to pay out to the current recipients. This is how it was planned to work.
An even bigger problem is the lack of viable alternative to the program.
We need to start by understanding what, exactly is Social Security.
It is not a retirement account like a 401k. It is an insurance account, which makes it a lot less tangible in terms of actual value. Basically, with every payment to the Social Security program, you are buying a policy that says, “If I live longer than I can work, I’m insured to have a base level of income.” Most people live at least a few years longer than they work. At the time Social Security started, this was a couple years for most people. Now, the average number of years people live after retiring is approaching fifteen to twenty.
Though it’s an insurance policy and not a saving account, people expect their Social Security contributions to be building equity. This is not true, which is the primary flaw in the most commonly mentioned alternative: Privatization.
The misconception is that if we allowed people to use a private retirement insurance plan, or an alternative retirement savings plan instead of the Government-run Social Security, whatever they’ve contributed so far to Social Security would transfer to their new privatized account. There’s no guarantee this would happen. Let’s look at what would happen if it did: If the government paid out all the living potential recipient’s Social Security contributions to date, it would raise the deficit by seven trillion or so. At that point in the deficit, our taxes would skyrocket. We would still be making a Social Security payment, albeit to a private bank, but we’d also be paying higher taxes to cover the government’s debt.
Social Security was a flawed program from the start, but fixing it will be painful no matter how we do it.
There are three basic ways to fix Social Security:
1) Raise Taxes to cover the deficit between pay-ins and pay-outs. Not popular. No politician will run with this as part of their platform.
2) Reduce pay-outs; reduce benefits to meet the pay-ins amount. This one is popular with some of the people who don’t rely on Social Security Benefits for food and housing costs. One way to accomplish this method is to increase retirement age. There are lots of downsides to that other than having to wait a few more years to move south.
3) Privatize: Transfer the Social Security program to private insurers and banks.
That last one is not a real solution. Here’s why:
First, as I mentioned above, there’s no guarantee any current equity (there is none) would transfer. If any did, it would be a fraction of the total contributions for each individual. This means that, upon transferring from the government program to a private account, everyone would be starting over or at least taking several steps back in their retirement plans. For people with thirty years left to retirement this doesn’t sound so bad. For people with two, it kind of sucks. Either way, the government is still stuck paying out the current retirees until they die, since no bank or insurance company would want to take over an account that was just outgoing payments. Why yes, that means that the amount that we are paying now to Social Security Tax–we’d still be paying that amount to the federal government as some other tax to cover the governments existing agreements. The primary difference is that we’d be doing so without even a false hope of getting that money back when we retire.
Second, as we are discovering with the new Health Care plan, the government isn’t really allowed to dictate what we must buy. There’s a complex explanation of how Social Security is legal but mandatory retirement plans are not, let’s just suffice to say that’s the way it is. If we privatized Retirement Insurance, people would opt out of contributing. What happens to these people who didn’t plan for retirement? They become a burden on the tax-payers one way or another.
Third, private companies fail a whole lot more often than governments. Retirement insurance is not FDIC covered. Most retirement account investments are not FDIC insured. This is irrelevant. Whether the private accounts are or are not insured by something like the FDIC, the end result is the same. Tax Payers not only have the burden of their own mandatory retirement plan, but have to cover the costs of the people who don’t have them or whose plans fell through due to failed banks or insurance companies.
But wait, we already have a program to cover the people who don’t plan properly for retirement or whose plans fail, it’s called Social Security.
Bottom line, Social Security sucks, but until someone comes up with a true viable permanent fix, we’re stuck with it. Just maybe the solution lies in combination of the three, but compromise is not a language politicians speak these days.