The Complete Overhaul Social Security Needs to Survive

secret meetingAs the Huffington Post reported last week, AARP is planning a "salon style" invitation-only gathering in Washington later this month. In this DailyFinance exclusive, two retirement experts propose dramatically different solutions to the Social Security crisis. Below, Chuck Saletta weighs in. Click here to read Dan Caplinger's take on the topic.

AARP's planned and formerly secret Salon-style meeting on the future of Social Security is causing quite a stir. After all, it wasn't that long ago that AARP itself voted to accept the inevitability of benefit cuts, given the deteriorating state of those programs' finances.

And "inevitable" really is the right word to use. Whether you want to believe it, Social Security as we know it is a collapsing program. Its spending on benefits outpaces its tax revenues, and its Trust Fund is expected to run dry in or before 2036, slashing benefits by about a quarter.

If I were in that secret salon meeting, I'd make it absolutely clear that what's needed is a way to:
  • Take care of the people who currently or will very soon depend on Social Security.
  • Move future generations to a far more sustainable retirement system.
  • Provide a smooth transition for those who've paid in but still have many years before collecting.
The Wrong Way to Fix Social Security

There are those who believe that with a few "minor tweaks," the current system can be saved. (You can read my colleague Dan Caplinger's proposal for fixing Social Security here.) With all due respect, Social Security has been "tweaked" -- repeatedly -- over decades, with little to show for it beyond pushing back that inevitable day of reckoning. It's also the same concept that brought us:
  • Tax rates that now sit at 12.4% (less a 2% temporary rollback), from an original 2% total.
  • Taxes levied on income as high as $110,100, up from an original $3,000.
  • Taxability of Social Security benefits (since 1984) for people with sufficient other income.
The suggestion of yet again raising taxes, at this point, starts running into the ugly reality that at high enough rates, one of two things is bound to happen:
  • Those who can figure out ways to legally reduce their exposure to the tax will find it much more profitable to do.
  • Those who can't reduce their exposure to the tax discover that the higher tax rates make it all that much harder to save anything else for their retirement.
There comes a point where the pain inflicted from the cumulative total of those "minor tweaks" outweighs any additional shoring up of the program's own financial standing. If we haven't hit that point yet, we likely soon will.

Here's a Better Answer

One of the key benefits of Social Security is that it's a mandatory retirement-focused program, without which many people would likely have nothing saved for their retirement. Any replacement system would also need some sort of mandatory savings component to it, or else all we'd really be doing is trading one problem (a collapsing system) for another (old-age abject poverty).

Even with that constraint, there are at least two existing retirement programs that can serve as a solid foundation for Social Security's replacement: Chile's equivalent of Social Security and the U.S. government's own Thrift Savings Plan.

Both options would replace the "guaranteed" payment aspect of Social Security with investment-like accounts. Still, as Chile's real-world outcome has shown, over a career-long period of time, the long-run improvements are more than worth the short-term variability.

Chile's program combines a series of investment options with a government-guaranteed minimum pension that in some ways is more generous than a typical U.S. Social Security benefit. The U.S. Thrift Savings Plan does not have a guaranteed pension amount, but it does offer both "lifecycle" funds and very low administrative fees (0.025%) that keep costs down and money flowing toward participants.

Either -- or perhaps a combination of both -- would make a far better long-term plan than the minimum-wage-like benefits of today's Social Security or the $29.02 a day expected after the trust fund is gone.

Remember, too, that the Chilean system is succeeding wildly, and it's based on a 10% mandatory contribution rate. On the flip side, America's Social Security system is floundering, and its fully loaded tax rate (aside from a temporary rollback) is already 12.4%.

What About the Transition?

As great as that future state can be, the elephant in the room is the tremendous obligations of the current Social Security system.

More than $630 billion in taxes flow into that program each year, and the Congressional Budget Office projects that even that will be $60 billion short, just to cover 2012's benefits. Social Security does have a trust fund with around $2.6 trillion that can help soften the cost of a transition, but that transition is still the toughest nut to crack.

In Chile, the transition was handled in part by selling off state-owned businesses. For the U.S., the labor minister who led the transition for Chile has suggested that the U.S. has assets -- such as huge swaths of the nation's land -- that could also be privatized to help fund the costs, as well.

Regardless of how the transition happens, the pending collapse of America's current Social Security system makes it perfectly clear that the sooner it happens, the better for all involved. If nothing else happens, within the next 24 years, the current system's trust fund will be emptied and benefits cut. A transition starting now -- while there are still trillions in direct Social Security assets to help defray the costs -- will be far less painful than waiting until after the trust fund completely empties.

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Social security was supposed to be a fund. but congress decided to run it as a ponzi scheme. To make matters worse, the democratic controlled congresses constantly raided its funds to pay for pet entitlements and grants. never one cent went in an account .

June 15 2013 at 2:26 AM Report abuse rate up rate down Reply

The so-called "surplus" is, in reality, a collection of IOUs from the government who have borrowed this money to fund ill-conceived and inefficient programs such as the USPS and Metra.

April 25 2012 at 5:24 AM Report abuse rate up rate down Reply

Perhaps Chile, with a 17 million population (about the size of the U.S. population in 1840), is not the best place to find a fix our SS system with its 56 million current beneficiaries.

An interesting NY Times article from 2006 about Chilean pensions had this to say:
“"Most people perceive the costs of pensions and the pensions themselves as unfair," said Patricio Navia, a political science professor at New York University and at Diego Portales University here. "Many of those who started work when the system was first adopted are realizing that they have not been able to contribute enough to get a significant pension," Navia said. He added that they resent "overhead costs that are so high" and have led to record profits for the pension funds that manage contributions, which are automatically deducted from workers' paychecks.”

Try again!

April 23 2012 at 12:55 PM Report abuse rate up rate down Reply

Per the 2011 Trustees report, it forecasts the Consumer Price Index increasing at an annual rate of 2.8% and the annual wage increase increasing 4.0% for 65 years in a row starting in 2020. This is nonsense because the FED would intervene. This creates a high inflationary period wherein a 2011 dollar in 2035 is only worth 54 cents in buying power. The forecast keeps the number of beneficies increasing beyond 2030 (the year the last beby boomer retires) and continues this increase until at least 2050 (the date by which the last of the baby boomer passes). This is irresponsible. The report forecasts the maximum annual benefit trending to $110,000 in 2050. Therefore a 23%-26% reduction in benefits is not significant (except for the false inflationary period forecasted).The report shows the Surplus (which is all borrowed by the government) to peak at $3.8 trillion in 2023. This results in a threat of default by the governemnt on guaranteed securities.

Americans need to demand that the CBO provide an independent, accurate forecast. Also that the Justice Department investigate for possible criminal charges. Americans need the truth, not excuses to privitize the program for the benefit of the financial institutions.

Go to medicare.

April 02 2012 at 2:42 PM Report abuse +1 rate up rate down Reply
Joel Weinberger

I do not know why Today and Continuing the People who wil never understand what has happened in the Past, Present and Future can be Callous without all the facts.

First Social Security and Medicare is not an Abomination it is much more efficient than the Writer.
Mr. Writer let us say someone took away 25% of your Savings if you could have savings and never returned the money with very high prevaling interest at that time.

This has nothing to do with so called safety net. This has something to do with Decency and Fairness.

I bet you guys have no idea how wasteful our Defense Budget has been and will be. In excess of 50% But you can only say we need it.

You would not run your self that way. You would Be asking for more and more credit cards. Huh!

Just forget about Greed. Where is there more Greed in these Government Budgets. Seniors or Defense Primes, Sub Primes, Lobbyists, Super Pac Donors. Where?

You people talked together. A group of the Best Minds and Experts in this Country? Taking care of Defense would Balance the Budget Ad Infinitinitim. The Littoral Battle Field is here. Don't you know. We are the Safest Most Powerful Country in the World with all the previous Defense inefficiencies. Let us stop now. We should make Medicare More Efficent.
Just like our Health Care Can. Which should get more Bang for the Buck.

Defense can get a Bigger Bang for the Buck without either being Deprived of what We thePeople Need.
Social Security would be solvent. But who stoled the Trust Funds Money.

Ok let us raise the Age of Social Security. Starting at 50 Years Old Big Corporation want to replace you with lower paying young Individuals. Now you are let go. Your next job offers will not allow you to pay for 20% of your living costs. This is if you get a job.

Maybe do not stop paying into Social Security at a wage limit. Businesses who show a hardship can opt out at the same present wage matching.

Litmus test for People who qualify for Social Security and Medicare base upon there need.

Corporate Anerica stopped hiring as long as the Technology allowed a very High Productivity level. I know you? will not believe this.

I worked with the highest security Clearance in this Country. Did major Defense Program Cost Analyses Top Secret above and Below War Fighters. Red Ink and Late.

If Social Security and Medicare were allowed to operate this way. Broke before they started.

Go back and do real Research. We use these Quasi Analyst think Tanks who compared low Database Samples. Incorrect Distributions in size and time.

Yes there are problems and they can be fixed but not by Broken Logic and a Person who needs a By Line.

Google SMART and see if any one used a very old approach as a Litmus test. There are tools used, Cost Models, Processes. Cost As An Independent Variable.

I want the Truth.valuation Tools. What was used. Put some real Facts on the Table.

We the People Need the Truth Told not some opinionated person who wants to sell subscriptions.

March 31 2012 at 2:10 PM Report abuse rate up rate down Reply

Three things need to be done to fix Social Security.

1. Remove it from the General Fund so no Congress can ever spend another dime of it.
2. Require the Federal Government to repay the entire $2.67 + Trillion they have borrowed from it.
3. Raise the annual limit because the greater majority of Americans pay on 100% of their income and it isn't
fair that others do not.

Once these 3 things have been accomplished, Social Security will be just fine as along as politicians leave it alone. They do not contribute to the system so they have no interest in saving it. I say end to their pension benefits and require them to contribute to Social Security. Remember, not one cent paid into the system belongs to them. We pay our share and our employers match it. Politicians need to keep their hands OFF OUR MONEY.

March 29 2012 at 12:38 PM Report abuse +1 rate up rate down Reply

SS is a bad deal for nearly all that contribute. Many don't even receive the dollar value of what was contributed, nonetheless the opportunity cost of the interest they could have gained. If you put it in a savings account, it will gain more interest.
This is nothing more than theft from big government.

March 28 2012 at 2:09 PM Report abuse rate up rate down Reply

We are still not imposing FICA on all forms of personal income - like capital gains and carried interest...
Also, shifting to a means based benefit system could help reduce payouts.
I'd like to believe that there are some people who have sufficient assets to generate income streams and that have no need to collect social security benefits - that would actually opt out, and think of it as performing a civic duty... It is my hope that I will be able to be one of those people...

March 27 2012 at 8:03 AM Report abuse -1 rate up rate down Reply

Soon after George W. Bush came into office, he raided the Social Security trust fund to give tax breaks for the rich.

March 26 2012 at 9:50 PM Report abuse -4 rate up rate down Reply
4 replies to rgkarasiewicz's comment

AARP is nothing more than another leftist front--right down to their profit making and stil getting their tax free status.

March 26 2012 at 7:53 PM Report abuse +6 rate up rate down Reply
1 reply to Setanta's comment

Could not agree with you more! They tell their members one thing and then work hand in hand with the Obama adminastration behind their members backs!

March 27 2012 at 1:30 PM Report abuse +2 rate up rate down Reply