There’s long been a common misconception about what Americans think and know about Social Security. Probably most believe their payroll taxes are saved in a trust fund that can be drawn down when they retire, right? The truth is, Social Security has never operated as a savings system; it is, instead, a massive transfer program.
Taxes collected from today’s workers immediately fund the benefits for current retirees. Not many people realize this or are honest enough in D.C. to admit it. And, the consequences of that ignorance might be dire. Social Security was designed to transfer income and not to save it.
Here’s a history lesson I learned that I’d like to share in order to elaborate and buttress my point and ultimate editorial conclusion: The first recipient of Social Security, Ida May Fuller, illustrates a good case in point. Fuller paid less than $25 in Social Security taxes (about $500 in today’s money) before retiring in 1940. Her first check nearly matched what she had paid in and over the next 35 years she collected $23,000 in benefits—nearly 1,000 times what she contributed, or roughly $500,000 in today’s terms.
So far, so good: SS worked out great for earlier generations; however today’s workers aren’t as fortunate. Workers are now paying very high taxes for a benefit that’s a lot lower than what they could earn instead if they invested the money in a balanced portfolio of stocks and bonds. If you’re even remotely interested in capitalism or the market, you’ve heard that argument/conclusion many times. And you’ve heard it many times because it’s true.
Back in the 1930s, the idea of government assistance was unpopular and politicians and wonks needed a way to sell Social Security to a skeptical public. Self reliance was the name of the game back then if you can believe it.
Labeling SS as an “earned” benefit apparently convinced Americans they had a personal stake in the new government program. However, in truth it was always a government transfer program. The idea that folks are simply getting back what they paid in makes it a politically difficult move to reduce benefits; even trying to slow the growth of benefits would be and is still considered off limits despite the program providing higher benefits in absolute terms (after factoring in inflation) to successive cohorts of beneficiaries, because initial benefits are boosted by economy-wide wage gains.
Here’s what I’ve gathered. And, I’m sounding an old warning, however it’s warranted: SS is unsustainable as designed and it faces severe financial challenges.
The increasingly large number of retirees, combined with lower fertility rates in our country means there are fewer workers to support those retirees. And actually, the government is expected to borrow $4.1 trillion by 2033 just to keep up with benefit payments. Waiting until the so-called trust fund runs out in nine years will no doubt lead to more drastic adjustments that will threaten the financial security of both retirees and workers.
All of this is a time bomb ready to explode. We need reform and we need it sooner rather than later.
How about a more fair system that avoids excessively taxing younger workers to fund extended retirements for older generations who on average are much wealthier?
Right now we need to reform and change SS to focus on keeping seniors out of poverty, reducing benefits for higher earners who truly don’t need them, and slowing the growth in future benefits ASAP. Doing so would take the pressure off of younger workers with the higher taxes and enable them to save more for their retirements through personal accounts they own, control, and choose themselves. Like things were back when the nation was more self reliant.
Social Security’s Ponzi-like structure, where current contributions fund current benefits, has always been its flaw. But, the Ponzi’s scheme was illegal: Social Security’s issues are legal and transparent, rooted in deeply-flawed program design and unaccounted for changing demographics.
If the Trump administration and the new Congress don’t immediately make addressing the SS problem a priority, the result will be disastrous for our children and grandchildren.
Doing nothing, which is all too common when D.C. faces a major issue, is a terrible reaction if you can call ignoring an issue a reaction. Kicking the can might save politicians from both parties some finger-pointing from the public, but it’s sure not going to stop the program’s funding obligation shortfall from growing as it continues to do, or do anything to positively impact the Old-Age and Survivors Insurance Trust Fund (OASI) or SS’s—asset reserves, which are on track to be exhausted in less than a decade. I’ll repeat that, less than a decade.
Action must be taken now. Let’s hope those in Washington wake up and smell the coffee while there is still a chance to turn around this awful situation.
