Recent news reports indicate that the Social Security system is on pace to be insolvent by 2032.
Contrary to what some have said, Social Security isn’t a Ponzi scheme or a scam. It’s a prime example of government doing a good thing the wrong way, which sadly the government has a really bad habit of doing.
Little history lesson: The Social Security system was founded in 1935; the worker-to-beneficiary ratio was 159.4 to 1. By 1945, the ratio was 41.9 to 1. In 1950, the ratio was 16.5 to 1. By 1960, the ratio was 5.1 to 1. By 1970, the ratio was 3.7 to 1, and in 1980 the ratio was 3.2 to 1.
In 1983, President Reagan and Speaker Tip O’Neill were staring down Social Security insolvency. They formed a bipartisan commission and crafted a deal to increase payroll taxes, reduce the increase of benefits, and gradually delay the retirement age. The agreement saved the program for 75 years.
Since then, the country’s demographics have continued to change. Birth rates continue to decline, meaning fewer and fewer people are contributing to the system. The baby boomer generation started to retire en masse. Also, due to advances in modern medicine, Americans are living significantly longer than previous generations. In 2010, the trust fund spent more on benefits than it received from taxpayers.
Making matters worse, Congress has borrowed from the trust fund more than $2 trillion to cover current operations and only paid interest back to SSA. Similar to a government bond, but minus a key difference, there’s no maturity date on the principal balance. The bill is coming due starting in 2032.
Social Security is funded 6.2% employee/employer match, and self-employed people pay the full 12.4%, effectively a taxpayer-funded pension managed by the federal government. The funds are invested, but only in Treasury securities and government bonds, which historically have barely kept up with inflation.
Congress could learn from Kentucky’s experience. In the early 2000s, the Kentucky State Employee Retirement System was one of the lowest funded systems in the country; at one point, it had enough assets to cover 30.2 percent of its liabilities. In 2013, the Republicans and Democrats came together and adopted significant reforms, including changing the actuarial assumptions to account for less workers due to increased efficiency, adding a cash balance for new employees that blended pension and 401k, and committing to fully fund the actuarially required contribution.
I recommend that Congress consider the following reforms:
First and foremost, Congress needs to commit to aggressively repaying the $2 trillion borrowed and set a 20-year schedule.
My conservative friends won’t like this idea, but remove the payroll tax cap to align with income and Medicare taxes. It’s the taxpayer’s money for a very specific, defined purpose — for the taxpayer’s direct benefit.
Restructure the program for long-term sustainability and financial stability for taxpayers. Total payroll tax is 12.4%. Enrollees’ contributions to date remain in the pension system. Disability benefits are funded at 1.8%, the current pension plan is funded with 4.24%, and it implements a new cash balance using the remaining 6.36% to be invested similarly to the Federal Employee Thrift Savings Plan.
The TSP core funds:
G Fund (Government Securities): Invests in short-term U.S. Treasury securities. 10-year return is 2.89%
F Fund(Fixed-Income Index): Tracks a broad index of U.S. government and corporate bonds. 10-year return is 1.63%
C Fund (Common Stock Index): Tracks the S&P 500 Index; 10-year return is 15.47%
S Fund (Small Cap Stock Index): Invests in smaller U.S. companies that are not included in the S&P 500. 10-year return is 12.63%
I Fund(International Stock Index): Tracks an index of stocks from companies in developed countries outside the United States. 10-year return is 10.76%.
All new Social Security enrollees will be in the new plan, and their TSP contributions will be in an automatic static allocation, but they can adjust it to suit their risk tolerance. Also, existing enrollees can elect to enroll in the new plan with the TSP option for future contributions. Allocations in the Social Security TSP can be adjusted once a year to prevent people from trying to time the market.
Upon death, the pension survivor benefits remain in place, which normally stop after the surviving beneficiary dies. The benefits don’t cascade to additional beneficiaries. However, the cash balance account would become an asset of the estate to be distributed as defined by a will and probate court to include relatives, charitable foundations, or nonprofit organizations.
The reform legislation can honor the late Senator William Roth, who created the Roth accounts that singlehandedly created everyday millionaires that will greatly benefit countless generations.
David Harris in an Independent Public Affairs and Campaign consultant. He grew up in Oldham County and lives in Lexington. A UK graduate, he has more than a decade of experience in lobbying, nonprofit advocacy, local and state governments, and political campaigns at the local, state, and federal levels. Contact him at kydave82@gmail.com.