Politicians avoid talking about social security because they don’t see a way to fix it without imposing significant costs on workers, pensioners, or both. Recent podcast discussion Words and numbersexplored a possible solution that would allow the program to end without benefit cuts or tax increases.
At some point over the next 13 years, Social Security will undergo a big change when, in the opinion of the Social Security Board of Regents, the program will become insolvent. Politicians like Elizabeth Warren and Bernie Sanders tried to calm the waters, speaking that Social Security would not go bankrupt because it would be able to continue paying a “substantial portion” of benefits. Here in the real world, “payability” means that you can pay everything, not just a fraction of what you promised to pay. And Social Security won’t be able to pay what it promised.
A popular objection is that insolvency is a myth because Congress could (according to the Board of Trustees) continue the program by raising payroll taxes by 26 percent or a 20 percent reduction in pension benefits. Except that it doesn’t make Social Security as we know it solvent. This makes different programs solvent according to different rules. For workers who have been told they will pay 12.4 percent of their wages into the system and receive specific benefits back, any tax increase or benefit cut looks exactly like insolvency.
But “saving” Social Security is a fool’s errand because it’s impossible to save it. People who were older than retirement age when the program began receiving retirement benefits, even if they never paid into the system. This made Social Security a Ponzi scheme rather than a savings plan. The ponzi ends when they run out of new investors to pay off old investors. And, as with all Ponzi schemes, extending Social Security does not eliminate insolvency. This simply shifts insolvency to the next generation, where it will be an even bigger problem than it is now. The only way to escape a Ponzi scheme is to shut it down. We don’t need to fix social security. We need an exit.
And it turns out there is a way out.
According to social security benefits calculator, the average worker retiring today can expect to receive about $1,600 a month in retirement benefits. Adjusted for inflation, this worker would earn more than $2 million from 22 to 66 years (excluding possible periods of unemployment). Together, the worker and the worker’s employer would pay about $270,000 in Social Security taxes. If this person lives to be 100 years old, he will collect $340,000 in pension payments. This is income less than one percent above inflation. If a person lives only to 85 years, life expectation today, a 67-year-old man can expect to receive $290,000 in retirement benefits, which is one-third of a percent of inflation.
In the future, the safest corporate bonds historically, returns are about 3 percent greater than inflation, and stock returns 7 percent more than inflation. The typical answer is that financial assets are risky and Social Security benefits are guaranteed. But this guarantee concerns only the solvency of the government. And the Social Security Trust Fund has called that ability into question. In comparison, even though the stock market has lost 20% on many occasions, it has always bounced back and back. The Social Security trustees predict that in order to remain solvent, the 20 percent cut in benefits must be permanent. What looks more risky now?
But it’s the monstrous Social Security revenues that provide a way out of this age-old Ponzi scheme. It turns out that the return on investment in Social Security is so low that the average worker would be better off paying into Social Security until age 40 and then, at age 41, quit. This fact forms the basis of a phase-out plan that could rid us of this albatross by ensuring that no one falls into the cracks during the phase-out.
Phase out plan
The phase-out plan applies to people under 41 at the time the phase-out begins. Anyone 41 years of age or older when the phase-out begins continues to pay and receive Social Security benefits under current rules until death do us part.
Under the phase-out, workers aged 40 and under will continue to pay payroll taxes in exactly the same way as they do now. But from the time an employee turns 41, the 12.4% tax that the employee and employer paid into the social security fund up to that point is now transferred to a private retirement account. In exchange, the employee forfeits all future Social Security retirement benefits. By investing that 12.4 percent in stocks and bonds that earn 5 percent above inflation, the average worker could expect to retire with $340,000 in today’s dollars. Savings this size can bring in nearly $1,800 in monthly income, or eight percent more than the Social Security benefits the worker forfeited.
And the good news doesn’t end there. A 67-year-old man can expect to die at the age of 85. If a person received Social Security retirement benefits, those benefits ended with the person’s death (if the person was married, the benefits ended with the death of the spouse). Basically, the government charges a 100 percent death tax on Social Security benefits. But with a private retirement account, the median worker will have more than $230,000 (in today’s dollars) left in their private retirement account after their expected death at age 85. This is a significant legacy that he could have left to his heirs.
For the average worker, leaving Social Security at age 41 means higher expected benefits than they could get from Social Security, plus an expected bequest of a quarter of a million dollars to be left to their heirs.
The proposed phase-out is good news for workers, but what about the government?
The millions of workers who drop out of the system at age 41 are depriving Social Security of significant tax revenue. If phase-out were introduced today, those who are currently 41 years of age or older (they account for two-thirds or payroll tax income) will remain in the old system and thus continue to pay into the Social Security fund as usual. But those who turn 41 after today will stop paying into the Social Security fund on their 41st birthday. This means that annual Social Security tax receipts will steadily decline: $25 billion this year, $50 billion next year, $75 billion the year after, and so on for twenty-six years. By year 26, Social Security will be raising (in today’s dollars) about $700 billion. less in payroll taxes each year than it collects today. An annual deficit of this magnitude would be catastrophic were it not for the fact that, starting in 2020, the first group of workers who dropped out of the social security system would retire. And because they dropped out, Social Security won’t pay them retirement benefits. Social Security spending will begin to decline: $16 billion in 27, then $33 billion in 28, then $51 billion in 29, and so on. In the forty-seventh year, the annual savings in Social Security expenses will exceed its annual income loss. By 1959, everyone who worked under the old system will be dead, and from then on, assuming workers under the age of 41 continue to pay their 12.4 percent payroll taxes, the government will receive $430 billion more per year. year than the government. savings from non-payment of pension benefits exceed the lost income from workers aged 41 years and older who do not pay payroll taxes.
In total, it will take about 90 years for the phase-out plan to fully pay for itself. But it took the Social Security almost a century to dig the hole we’re in now. What is remarkable is not that the implementation of this plan will take almost a century. What is remarkable is that a plan that would improve the lot of pensioners, improve the position of the government, and close the welfare system without cutting benefits to existing retirees or raising payroll taxes on existing workers would be possible at all.