Social Security is a topic ignored by many, but one that should be of concern to most. Politicians avoid talking about it, as it’s known as the “third rail of politics.” Yet, the system as it is currently structured is not sustainable.
Starting in 2010, Social Security payments began exceeding payroll-tax revenues. The unfunded liability of Social Security is least $13 trillion in present value. To put this in perspective, the entire output of the U.S. economy, the gross domestic product, is $18 trillion, so this is not a trivial number.
The basic design of the system is flawed. Many people think that the way the system works is that your Social Security taxes and that of your employer is set aside, earns interest, and then is returned to you when you claim your benefits. This is not the way it works at all.
Your taxes are used to make payments to those who are currently claiming benefits. Nothing is set aside. This can work in a sense as long as there are lots of people paying taxes and not many claiming benefits. When Social Security was enacted in 1935, the life expectancy was 63 and you collected benefits at 65. There were 50 people working for every person getting benefits. Today, you can claim benefits at 62 and life expectancy is 76. There are about 2.5 people working for every beneficiary.
How should our Congress deal with this? While the problem is difficult, it is not intractable. The best way would be to do as other countries have done, most notably Chile, and privatize the system. In other words, make it as many people think it is: Your taxes go into your account that is invested, and you withdraw at a given age. Unfortunately, this is hard to do since all of your taxes are being used to make payments to existing beneficiaries.
A less difficult step is fairly obvious; namely, extend the age at which you can claim benefits to reflect increased life expectancy. This can be effective in making benefits line up with taxes, but someone who is 60 may not want to hear they will have to wait until 70 to collect. Such a move would have to be phased in and apply to younger age cohorts.
A second approach is to acknowledge that Social Security is really an income-transfer program. Does it make sense to tax the single mom working at the grocery store in Sarasota to pay for Warren Buffet’s benefits? That is effectively what’s happening.
We can make payments to those who are low-income elderly, reduce taxes on all workers, and let people save for their retirement or even require them to do so. Of course, many people who were expecting to get benefits will say they paid taxes and are just getting them back, but as noted above, this is not true. Their taxes were given away to someone else, and now there are not enough people to tax to keep the scheme going.