Social Security was born out of crisis. In the depths of the Great Depression, about half of the elderly in America lacked sufficient income to be self-supporting. The idea was simple: ensure that those less fortunate, the elderly in particular, would not fall into destitution. It was not meant to be elegant. It was simply meant to help people stay afloat during a time of economic crisis.
Nearly a century later, the program has exceeded its initial scope and is struggling under the weight. Social Security's long-term financing is no longer a concern in the distant future. The Social Security Trust Fund could be depleted as early as 2032. Once that happens, there will be a statutory cut to Social Security benefits up to 24 percent.
Faced with this fiscal reality, policymakers have proposed increasing taxes, cutting benefits, or some combination of both. Increasingly, politicians have eyed benefits to higher earners, both for political and fiscal reasons. Earlier this week, the bipartisan Committee for a Responsible Federal Budget (CRFB) proposed a Six Figure Limit (SFL). The SFL would cap a couple's normal retirement age (NRA) earnings at $100,000, whereas that cap would be at $50,000 for a single person. For clarification, those caps are for not just Social Security income, but all income, including wages or earnings from work, investment income, pension income, and any other income sources.
The SFL has a number of benefits. One is that would close at least 20 percent of Social Security's solvency gap. This option would save at least $100 billion over a decade while reducing the debt-to-GDP ratio by at least 2 percentage points. Since debt is a drag on economic growth, this is indeed good news.
Some might complain that the SFL might weaken the link between benefits and contributions. However, the SFL would bring it back to what Social Security was in its inception: a modest safety net. The fact that Americans receive more in retirement benefits from the government than even the French do is ridiculous (see below).
A proposal like the SFL that can improve solvency and reduce government debt while scaling back Social Security is definitely an improvement over the status quo. However, I would still contend that the SFL is a second-best option.
Last year, I criticized Social Security in honor of its 90th anniversary and pointed out how it is structurally problematic. One issue is the pay-as-you-go payment mechanism. This is unsustainable due to demographic shift of fewer workers supporting more retirees, which creates an inevitable shortfall. The second issue is precisely that there is a strong link between contributions and benefits. Higher-income individuals receive disproportionate benefits, which acts more like a redistribution scheme rather than a safety net.
As much as I can appreciate that the SFL can help mitigate the fiscal woes with Social Security, it does not address or resolve Social Security's structural and systemic issues. The pay-as-you-go mechanism will continue to be untenable, whereas the link between contributions and benefits imposes more costs on those with lower earnings.
On the other hand, a private social security account would allow individuals to control their own retirement savings while being able to have way more saved for retirement. It is time to stop treating Social Security like a handout and start treating it like an investment. Ditching the Social Security program would put retirement savings where they belong: in the hands of the people, not the government.
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