Ways to Fix Social Security
I recently got a social security statement. At first I thought that it was one of those direct mail scam programs. I sat there and thought what if I were to calculate my already earned credits as a present value. What would 13.76% of my cumulative income look like in a IRA or 401k plan, instead of a forecasted amount of fixed income at some future date? I didn’t actually do the exercise knowing the result would make me sick to my stomach. My father just turned 68 this last year. He handed me his social security print out and asked me to explain again why I have encouraged him not to take social security yet. My explanation was that we need to shore up the benefits for him and my mother. We expect for them to both have a longer life expectancy then generally assumed. Again, I shutter to think what his savings would be if we were to calculate it throughout his working life. What amount has been contributed to social security on his behalf and what amount of wealth would that be for him and my mom? Not to be selfish, but what difference in an inheritance could that be to me and my siblings? I am also curious as to what effect that could have had positively if deployed into the capital markets.
I do have mixed opinions about privatizing social security though. Ideally, yes I would say lets allow for that, because you could offer more investment choice and control, encourage a culture of personal responsibility as well as provide for a greater legacy for the worker’s family. If all the people who had the desire and insight to opt out of social security and preserve their contributions for themselves were able to do so and did, we would immediately destroy the entire program. It is built on the principle of pooling resources, insurance. The original design of social security in no way was intended to be as pervasive as it is today. I blame politics for that. What I am trying to avoid is suggesting the idea that social security is bad and should be privatized. I understand why our politicians are challenged with what to do to fix it.
There are a lot of people that have benefited from social security and there have been a lot of people who have paid for that benefit and deserve it. Consider the low income communities that almost live entirely on social security, that helps them for sure.
Unfortunately, social security provides no lump sum benefit that can provide a family with a legacy or inheritance. That earned benefit has no designed function to leave wealth to that workers family. How would that one particular aspect have helped elevate our poor communities if they had wealth to transfer to the next generation? How could that have eliminated poverty instead of perpetuated it? I think there is a component to the law of unintended consequences at play here.
I believe that social security should be revamped to accommodate for a modern economy. It should account for mortality in a more responsive manner. The problem now is it has been put on a path to destruction because of the lack of political will to proactively and over a series of generations modernize mortality rates and assumption of benefits. If social security is to survive it should be structured in such a way to protect itself from catastrophic effects of insolvency and mismanagement by politicians and bureaucrats. Imagine the retiree, where 70-80% of their income is from social security. How would they be effected if benefit amounts had to be restructured? Imagine the implications to public confidence in our system of governance? I read recently that if they were to use the same mortality assumptions as they did when beginning social security, benefits would begin at 82- 83, not 62-66 & 70. So clearly we need to reform the program to accommodate revised mortality rates.
I think that a solution would be to treat the program more like a cash balance pension plan. Help the worker understand what the benefit is if they chose a monthly income or a lump sum payout. Both present pro’s and con’s. I think that if the social security program where required to comply by ERISA rules just like other qualified plans in this country it would be in a much better position. There is a need to maintain essential benefits for the poor, but also provide for modern approaches to maintain quality and confidence in the system.