Social Security was created in 1935 by the Franklin D. Roosevelt administration with the goal of making sure that the elderly did not drop dead in the street during the Great Depression. Social Security has been portrayed as a program synonymous with economic footing in one's old age. However, Social Security is on shaky ground.
A recent CBO report details how Social Security is the single largest federal government program in its budget (p. 14). Yes, the U.S. government spends more than it does on Social Security than it does on Medicare, Medicaid, defense spending, and interest payments. Those outlays will be 5.3 percent of GDP in 2024 to 6.0 of GDP in 2033 (p. 18). The CBO recognizes that Social Security is a major driver of federal deficits (p. 28).
Many are under the misimpression that your Social Security contributions go to your specific account and build value over time. That is patently untrue. This is not only because the Supreme Court ruled in Flemming v. Nestor that no one is guaranteed contractual right to Social Security. As I pointed out way back in 2011, your Social Security tax dollars are not going to a personal retirement account of yours, but to pay for current beneficiaries. While it might not have the same intent as a Ponzi scheme, even the Social Security Administration admits that Social Security uses the same pay-as-you-go payment mechanism as a Ponzi scheme.
The issue with the pay-as-you-go payment mechanism has shown its true colors over time. It was easier to support Social Security when the worker-to-beneficiary ratio was 159.4 to 1 in 1940 (see SSA historical data here). That ratio is now at 2.8 and is expected to decline to 2.2 by 2042.
The trajectory does not look good for Social Security, and yet one thing that both Biden and Trump agree on is that we should not decrease spending on Social Security. I have looked at payroll tax reform or raising the retirement age in the past to see if there are any viable reforms. I remember back in college when I was part of an initiative called Students for Saving Social Security that advocated for changing Social Security regulations to allow for the choice of personal savings accounts. I look back and I wonder if the option of personal savings accounts were enough. Perhaps it would be better to scrap Social Security in favor of privatization, as this video from Reason Magazine below suggests.
It is an awfully tempting policy option. According to the Social Security Administration's 2022 Trustees Report, the Social Security trust is projected to expire in 2034. After the surplus has dried up in 2034, retirees will 77 percent of what they were receiving prior to.
As a 2016 analysis from the Tax Foundation shows, Social Security provides a much lower return on investment (ROI) on Social Security than personal retirement plans or pensions. In 2016, the average annual payout was $19,646 annually. If someone invested 10 percent of wages at 22, it meant an annuitized annual income of $57,319, or nearly three times the payout. The difference in ROI will be more pronounced once the trust fund will run out. A report from OECD also found that privatization of retirement accounts supports broader economic growth.
I am aware that increased privatization or complete privatization would not be a change that would happen overnight. There would need to be ways to phase it out while helping out current beneficiaries. Over time, I am less convinced of the merits of reforming a broken program and guiding the American people towards something that will help retirees and the American economy in the long-run.
Social Security insolvency is not a matter of if, but when. The question is whether politicians will make some tough decisions now to help Americans retire or if they simply kick the can down the road as they always have and leave the responsibility of cleaning up this fiscal mess to future generations. I would like to be hopeful that we could find a bipartisan solution instead of making an even more painful choice in the future. But given the intransigence and nature of politicians to have a more myopic view dictated by election cycles, the more realist side of me is not going to hold its breath.
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