Wean­ing work­ers off fail­ing So­cial Se­cu­rity

The Progress-Index - - OPINION -

It’s com­ing time for the So­cial Se­cu­rity Board of Trustees to re­lease its an­nual re­port, and no one should ex­pect much to have changed since last year. For a sink­ing ship, that’s not good news.

As of last year, the Board of Trustees pro­jected that So­cial Se­cu­rity’s ex­penses will ex­ceed its rev­enues by 2022. At that point, it will need to start cash­ing in the more than $5 tril­lion in U.S. Trea­sury Bills the trust fund has ac­cu­mu­lated over the years. By 2035, about the time that today’s 50 year-olds will be re­tir­ing, the trust fund’s pool of Trea­sury Bills will have run dry. At that point, re­tirees will have to take a ben­e­fits cut, work­ers will have to pay a lot more in So­cial Se­cu­rity taxes, or, more likely, both groups will have to give up some­thing.

Not only is this a prob­lem nearly a cen­tury in the mak­ing, it is one that the nu­mer­i­cally lit­er­ate have seen com­ing since today’s re­tirees were land­ing their first jobs. The Board of Trustees projects that it can ex­tend So­cial Se­cu­rity by a few more decades if Congress im­poses cuts or tax hikes now. But that won’t fix the prob­lem; it will merely push it into the fu­ture. And the fur­ther Congress pushes the prob­lem into the fu­ture, the more ex­pen­sive it be­comes to fix.

The real prob­lem here is that the Amer­i­can peo­ple love pro­grams that of­fer them money and ser­vices, but they only love them to the ex­tent that they can ex­tract more in ben­e­fits than they pay in taxes, and that is a los­ing propo­si­tion over the long term. Nonethe­less, the gov­ern­ment made prom­ises and it needs to keep them. It is time, though, that politi­cians stopped promis­ing things they can’t de­liver. And that means wean­ing peo­ple off So­cial Se­cu­rity start­ing now.

In one way, So­cial Se­cu­rity it­self makes that goal rel­a­tively easy. The rate of re­turn on the av­er­age worker’s So­cial Se­cu­rity con­tri­bu­tions is around 3 per­cent. That’s al­most noth­ing. A con­ser­va­tive 401(k) or IRA can re­turn twice that. Ag­gres­sive in­vest­ing — the sort that young work­ers should be mak­ing — can yield three or four times that.

Be­cause So­cial Se­cu­rity’s rate of re­turn is so low, the typ­i­cal worker is ac­tu­ally bet­ter off pay­ing into So­cial Se­cu­rity un­til about age 40, and then walk­ing away — giv­ing up all claim to re­tire­ment ben­e­fits but also be­ing re­lieved of the 12.4 per­cent com­bined tax that the worker and the worker’s em­ployer pay.

If the typ­i­cal worker, start­ing at age 41, in­vested that 12.4 per­cent in a 401(k) or IRA, she could ex­pect to end up with a nest egg about the same size as the So­cial Se­cu­rity ben­e­fits she for­feited. In other words, So­cial Se­cu­rity is such a bad in­vest­ment that the worker is bet­ter off walk­ing away from 20 years’ worth of re­tire­ment con­tri­bu­tions than con­tin­u­ing in the sys­tem.

This points to a clear way out of So­cial Se­cu­rity. Tell work­ers 40 and younger that they will re­ceive no So­cial Se­cu­rity re­tire­ment ben­e­fits, but that they must con­tinue to pay So­cial Se­cu­rity taxes un­til their 41st birthday. From that point for­ward, they must in­vest in a 401(k) or IRA the 12.4 per­cent they were pay­ing to So­cial Se­cu­rity. This will start a wave of work­ers who are off So­cial Se­cu­rity. Over the course of the next 60 years, So­cial Se­cu­rity would grad­u­ally wind down, and then dis­ap­pear.

We are 83 years into the So­cial Se­cu­rity ex­per­i­ment, and the laws of fi­nance and math­e­mat­ics are poised ei­ther to shut it down or to make its con­tin­u­a­tion pro­hib­i­tively ex­pen­sive. We would all be bet­ter served ad­mit­ting that So­cial Se­cu­rity is sim­ply too big to suc­ceed and plan­ning our way out of it — while there’s still time.

Antony Davies Duquesne Univer­sity Pitts­burgh, PA James R. Har­ri­gan Free­domTrust

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