Social Security

What does it mean when you hear that our Social Security system is broken? This is a complicated issue, but I believe we must all fully understand what is happening with the system now to implement a long-term solution.

Both the retirement and disability portions of the Old Age and Disability System (commonly called Social Security) are threatened by a significant shift in our country's demographics (specifically, the number of people in different age groups). In the program's early years, there were many more workers per retiree; for example, in 1950, there were 16 workers for every retiree. That ratio has decreased over the years, and is currently about 3.4 workers for every retiree. It is projected to be 2.1 workers per retiree in 2030. This ratio has changed dramatically due to birth rates dropping over time and baby boomers retiring.

Because of the change in demographics, along with the blessing of a longer life for most Americans, the tax rate has increased from 2% of the first $6,000 earned in the 1930s ($60 per year, per employee), to 12.4% (6.2% from employees and 6.2% from employers) of the first $106,000+ earned today (more than $13,000 per year if your yearly salary is more than $106,000).

If you want to find more about how things have changed over time, how much money Social Security takes in compared to how much it sends out and where all the extra money has gone over the years, then please click here to see a detailed presentation (pdf) I have prepared on this subject.

But to summarize the presentation here:

• Social Security is predicted to pay out more benefits than it will take in beginning in 2016 (if not before, due to the downturn in the economy).
• At that time, the federal government must begin to pay back the interest on all the loans made to it by Social Security. (That's right, the money was not put in a trust fund - it was being spent by politicians.)
• By 2026, the federal government must begin to repay both principal and interest on those loans. A larger portion of the federal budget will be needed for this, instead of going toward other federal obligations.
• By 2041, the debt payments from the federal government will cease, and, because of that, Social Security will no longer have the income to pay its obligations to retirees.

The pending retirement of baby boomers, and the associated decline in the ratio of workers to retirees, will force the government to do one of three things, or a combination of these, if the system is to remain viable: the retirement age must be increased even more than planned, retirement benefits must be cut or tax rates must be increased to approximately 23%.

But I believe there is a better solution.

My proposal is based on the following principles:

• First and foremost, the taxes paid by those who are retiring now, or are within a few years of retirement, must be fully honored.
• It is not the government's duty to care for us from cradle to grave. If we want to live as free men and women, we must acknowledge this and live accordingly.
• In a free nation, we should strive for equal opportunity, and acknowledge this will not always result in equal outcomes.

My proposal is also based upon these facts:

• Those born before 1962 have spent approximately 27 years in the work force and have about 20 more years to go (with the retirement age increasing to 67). Hence, they have about half of their productive years ahead, with the later years typically being some of the most productive in terms of income.
• People born in 1962 will begin to retire in 2029 - about 12 years before Social Security is predicted to run out of money.
• Those born after 1975 have been in the work force for about 12 years, and have another 33 years to prepare for their retirement.

Based on these principles and the accompanying facts, my proposed solution is this:

• Anyone born in 1961 or earlier would receive 100% of their current projected Social Security benefits.
• Beginning for those born in 1962 and after, Social Security benefits would be decreased by 7% per year. (For example, I was born in 1970. I would therefore be eligible to receive 37% of my currently projected benefits when I retire. If you were born in 1971, you would be eligible for 30%.
• Those born after 1975 would not be eligible to receive Social Security benefits.

The timing of this proposal is key. Under this approach, Social Security's obligations would decrease beginning in 2029 - 12 years before the system is predicted to go broke. Additionally, as of 2042, no new retirees would be eligible, thus dramatically reducing the system's expenses each year thereafter. This will accomplish the following: commitments are honored, we have a planned exit strategy and there is no tax increase.

Though this won't eliminate the need to pay into Social Security for the next 30 years, it will keep the rates from increasing to more than 22%, which saves money for employees and employers (which helps our economy grow). This is also a better alternative for those who won't gain anything from the system (those born after 1975), yet will still need to provide support to the system.

Note that a mechanism would also need to be implemented to reduce the tax burden for those paying into the system but receiving very little, or nothing, from it. One idea is to eliminate the Social Security tax for these citizens for a certain period before they retire, allowing them to increase their savings just before retirement.

Most people, and certainly most politicians, will think that trying to phase out Social Security is a very radical idea. It certainly is a change in the course that our government is on now – the course toward bigger government. However, with this issue and many others, this is exactly what we need to do: change direction. Social Security is undeniably a train wreck that is going to happen, and we must act now to provide a better option for America's work force.