Should Social Security Be Fixed?
Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University
The Social Security trust fund is expected to run out of money by the mid 2030s. Without changes to it, benefits would be cut and the payout would only be about 75% of promised benefits. In essence, Congress would have to allocate funds from the general federal budget to make up the difference. Given our budgetary challenges there certainly is not the funding necessary to fill the gap. Despite the looming threat Congress has been reluctant to make changes to make the program viable for the longer term. President Bush proposed allowing younger people to invest the social security payments in common stocks. Others have advocated changing the retirement age to reflect the longer average lifetime of Americans and others have suggested a sliding scale for benefit payments with those with high incomes receiving lower payments and others suggest increasing the social security taxes. President Trump has pledged to leave Social Security as is—no changes. Should Social Security be changed? What changes should be made if Congress and the President have enough political will to address this problem? What is the “Right Thing to do?” Let’s look at some issues:
- The original intent of the Social Security law that was passed in the 1930s was to provide a supplement for retired Americans. Since then that intention seems to have changed with the expectation that social security benefits are to provide the majority if not the entire support for retirees. Currently, there is a $32 trillion unfunded liability for benefits.
- Currently, social security benefits are determined on your lifetime earnings. They adjust or index the actual earnings to account for changes in average earnings since the year the earnings were received. Social Security then calculates your average indexed monthly earnings during the 35 years in which you earned the most. A formula is applied to these earnings and the benefit is determined.
- Full retirement age is now 65 if born 1937 or earlier, 66 if born 1943 to 1954 and 67 if born 1960 or later, with a sliding scale for other birth dates, but people can receive benefits as early as 62 years of age at decreased amounts. If you delay taking benefits, you can increase the monthly payouts per year up to age 70.
- Advocates for changing the retirement age cite that Americans are living longer and therefore should be working longer and retiring at an older age. One suggestion is to increase the retirement age for those born after 1960 to age 69 or higher and raising the early retirement age to 65.
- Studies have shown that increasing the full retirement age is particularly hard on the lower paid, because they tend to retire early. The average labor force participation rate, percentage of working age people who are employed, is the lowest for people who have a high school diploma or less at age 62. If the average retirement age is defined as the age at which half the group is still in the labor force, then the average retirement age is about 62 for low earners, 64 for middle earners and 66 for the top third.
- Some advocate raising the social security tax on those with higher incomes, similar to the current medicare system. As of now social security taxes are capped at an income level, Medicare payments continue regardless of income. At a time when Congress and the President are talking about cutting income tax rates, it is unlikely that increasing social security taxes would be possible.
- Social Security is funded on a pay as you go basis. There is no fund as such that invests the payments made by the employer or employee. There is currently $2.9 trillion in the Social Security trust fund that are merely claims against future revenues for the government. Current employee payments fund the benefits of those retired. For a long time there were 3 or more people currently working and making payments to cover the benefits of those retired. Because of the large number of baby boomers retired or about to retire, the number of active workers covering those retired will shrink to 2 or less. The decrease of inactive workers per retiree will essentially cause the trust fund to run dry in the mid 2030s.
- Since the trust funds are not invested, there is no opportunity to gain from the historical appreciation in the stock or bond markets. President Bush suggested limited privatization, allowing younger workers to invest some of their future benefits in the stock or bond markets. This suggestion was soundly defeated and widely criticized as potentially jeopardizing future social security benefits.
- A more recent suggestion is to have the government invest some social security assets in the stock market, which is separate from the privatization notion of allowing individuals to do the investing. A typical proposal would increase the percentage of the trust fund invested in stocks by 2-3 percentage points a year until stocks accounted for 40% of total Social Security assets.
- If stock investment had occurred in the 1980s or 1990s, trust fund assets would be significantly higher than they currently are. Even if stock returns moving forward will average a 6.8% return rather than the 9.8% historical average, simulations show after 75 years a healthy ratio of trust fund assets to benefits while the current trust fund is completely exhausted.
- Opponents to investing in stocks, cite the total value of stocks traded on the NYSE is about $21 trillion and government purchases would result in the government controlling a major share in virtually every major company in America. This could open the government to even more control of special interests.
When is the right time to seriously consider making changes to the social security system? Will Congress continue to wait as the mid-2030s approach and the threat for benefit cuts is closer to reality? Are there some incremental changes that could be done now to avoid major wholesale changes later? Should retirement ages be changed? Taxes increased? Benefits capped for the wealthy? Privatization resurrected to allow younger workers to invest their money? Should the government invest in the stock market? What is the “Right Thing to do?” At one time, retirement age was considered to be 65, with the potential for early retirement benefits non-existent. Now it seems to have become more of the norm. If there is concern for requiring people to work longer say to age 69 or 70 for full benefits, why not cut out the early retirement benefits instead? Rather than force people to work longer, have early retirement become more of a luxury, that is, if you want to retire early, fund those early years yourself without help from the government. Raising taxes is especially regressive, hurting the lower wage earners. Somehow, whether through privatization or government investing in the stock market, the returns on the social security trust fund and/or individual benefits should be increased. It is time to move from the 1930s to the modern investment world. There is no excuse to wait until the social security system is in crisis. It is in crisis now and needs to be fixed.