With the recent release of the Social Security Trustees’ 2019 report, there appears to be a renewed focus on Social Security and “stabilizing” the nation’s retirement plan.
Before efforts are made to stabilize Social Security, a hard question must be addressed. As currently designed, is the system sustainable? The Social Security Trust Fund report indicates the program will exceed its funds by 2035 if no changes are made.1 This would result in benefit cuts or dramatic payroll tax increases. That could be devastating to retirees relying on Social Security for a large segment of their retirement income.
Fixing Social Security is not a one-size-fits-all solution, and confronting the shortfalls identifies the need to address the issues. Most debate centers on the political ramifications. Other than delaying benefits or increasing the payroll tax, no real solutions have been offered. Isn’t it time to rethink this program?
Most employees are required to participate in Social Security. Only once since its inception in 1935 have there been major changes. That occurred in 1983, resulting in taxation of some benefits, an increase in the retirement age, and adding federal employees.2 These changes focused on charging more or delaying benefits. It is time for changes that provide a solution, to the solvency of the program. Is the program based on sound principles for pension funding or is it a plan that cash flow today is used to pay current benefits?
Social Security is not an actuarial program but a “pay as you go” plan which is no longer sustainable, since retirees are living longer and those still working are left to fund the benefits. Raising the income base subject to the payroll tax is no more than a tax increase. The 2019 taxable wage base is $132,9003, and some proposals suggest increasing the income base to $250,000. With a payroll tax of 6.2%, that would result in an additional $7,200 in payroll taxes. Employers also would have to match, so the combined payroll tax could hurt middle income Americans and small business owners.
If Social Security is designed to function as a retirement plan, why are the payroll taxes paid with “after tax” dollars? Retirement plans are funded with “pre-tax” dollars; so why not treat the Social Security payroll tax the same? In addition, at retirement many Americans must report this income as taxable income thus paying taxes twice. Is that fair?
It is time for a real discussion on Social Security reform, reform that does not call for taxing more and paying less. Those opposed to reform claim that changing the program will destroy it for future generations. But if nothing is done, what happens after 2035 when the trust fund is depleted? We owe it to future generations to design a solution that will truly reform the program.
If this is viewed as a retirement plan, let’s fund it like one. Congress should pass SIMPLE legislation to treat employee contributions as a pre-tax amount. Taxpayers would have a reduction in taxable income, just like 401(k) or 403(b) plans. This creates an immediate increase in spendable income to the taxpayer and no negative impact on revenue to Social Security. At retirement Social Security income would be taxed (because it has not been taxed previously). Beyond that let’s “fix” it for future generations. They are forced to pay into the program with no real assurance the program will be there when they retire. Today there is a $13.9 trillion 75-year actuarial deficit.4 That means that over the next 75 years, the payments promised exceeds the funds available to fulfill the promise.
That issue has no immediate fix, but it must be addressed. Using 21st Century computer modeling, we can project and compensate for the problem with creative alternatives. We have to communicate and educate without politicizing the issue. Having “real” numbers points that out and identifies a workable solution, both those nearing retirement as well as future generations. Our government made promises and should be required to honor those promises. Perhaps the solution would be to create two categories of workers, those over 40 and those under 40.
Workers under age 40 will have at least another 25 years to adjust their mindset and expectation of this program. Nothing is being taken away, because doing nothing creates a greater possibility of reduced benefits unless we continue to tax more and pay less. Most workers under age 40 understand 401k plans and do not have pension plans at work. Presented properly, the concept of owning your Social Security account asset would appeal to them. It also would prevent Congress from accessing the funds. The “private” asset would be invested into the economy creating opportunity for economic growth.
Workers over age 40 have less time, making it difficult to overcome major changes. Because the majority of recipients list Social Security as their primary source of retirement income, we must fulfill the promises made to them under Social Security. Any deficiency in promised benefits can be addressed through computer modeling of quantifying statistical data such life expectancy, projected income benefits, and revenue receipts. That deficiency could be identified and amortized over an extended period. At a future date, most people over age 40 today will have died. As that happens their personal benefit deficiency would decrease, thus reducing the outstanding total liability.
In the end, amortizing this liability over a long period addresses the issue of $13.9 trillion in unfunded liability. Adjusting for those under age 40 would also reduce the potential deficit as their plan would be owned by them and not the government.
It is easy to attack a solution rather than consider and debate. It is easy to say only the rich will benefit. It is simply criminal for any program to force participation and promise a benefit and then not deliver on that promise. The real problem today is that Congress does not seem to be serious in providing any solution that does not leave them in charge of the program. Reforming the program to make it sustainable might result in a loss of political power or talking points around every election cycle. That is a sorry reason to continue a program that is destined to fail without major changes. Isn’t it time to begin the debate?
Frank Owen is President of FR Owen & Associates.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.
1. Social Security Trust Fund Report 2019.
2. Nick Thornton, “Social Security About to Pay out more than it takes in — for first time in Decades.” Benefits Pro, April 22, 2019.
3. See https://www.journalofaccountancy.com/news/2018/nov/social-security-wage-...
4. Nick Thornton, “Social Security About to Pay out more than it takes in — for first time in Decades.” Benefits Pro, April 22, 2019.