Social Security's Winners and Losers
The latest annual Social Security trustees report recently came out. One of its “lowlights” was the program’s massive unfunded liabilities (currently a $42.1 trillion cumulative shortfall under intermediate population and economic growth assumptions), reiterating what has long been known, though frequently ignored. The program is far from sustainable. Continuing the status quo, is not an option, despite being the default approach every time government decision-makers just kick the can down the road.
Responsible leadership would require serious efforts toward deflating Social Security’s excess promises bubble. But that is not what Americans have seen. Many Democrats have pushed a massive expansion, even though they know it will already be unable to pay all its bills. Others are maintaining their long-time strategy of targeting anyone who brings any aspect of the program into question, particularly when pandering for senior votes at the expense of future generations.
Such a position implies that no change other than increased taxes on “the rich” could possibly improve Social Security. But that position is indefensible, since the program is not just unsustainable in its current form, but it is the source of multiple inequities and deprives Americans of many valuable options.
Winners and Losers
Social Security’s structure guarantees inequities. It gave earlier retirees far more than they paid in, but that has left a 14-digit tab for later generations to pick up, with progressively worse results the younger a worker is now.
Since benefits are only available monthly after retirement, those with shorter life expectancies are treated far worse than others. Similarly, since taxes are paid over one’s entire working life, but only the highest 35 years of earnings determine benefits, those who begin work at younger ages, including those with the least education, are penalized. For instance, if the standard retirement age is 66 and real earnings rise with age and experience, the return from Social Security “contributions” made before age 31 is zero.
Social Security also treats single people worse than married people, because non-contributing spouses qualify for benefits. Non-working wives, who are eligible for 50% of their spouse’s benefits, but pay no Social Security taxes, are treated far better than working wives, whose Social Security taxes often add little to their benefits (and nothing at all if they qualify for more benefits as a dependent spouse than from their own earnings).
We need to also consider valuable options lost due to Social Security. An important one is derived from one of its inequities. The program’s underfunding, which imposes added burdens on younger generations, means that current workers are denied even the returns available from risk-free government bonds.
Further, when retirement saving is replaced with Social Security taxes, Americans lose the power to choose the risk and return they will bear in financing retirement, foregoing far higher average returns that every financial advisor can demonstrate. That substitution also imposes other restrictions. It eliminates the ability to leave accumulated retirement savings as a bequest, if one dies before retirement. It sacrifices the ability to choose a lump-sum distribution of retirement savings, rather than being forced to receive a monthly annuity (which imposes a huge burden on those with shorter life expectancies). It sacrifices the ability to use accumulated funds for emergencies prior to retirement. It sacrifices the ability to retire and live on accumulated savings, starting before the program allows. It also undermines the potential to finance one’s later years by continuing to work.
Social Security has also depressed incomes. Substituting its underfunded benefit promises for retirement saving has reduced investment and slowed the growth of the capital stock (particularly in conjunction with the burdens of many other taxes and regulations) for decades, leaving productivity and worker earnings substantially below what they would have been. Yet those burdens, which compound over time and are borne by all workers, are almost always ignored in discussions of its burdens.
Importantly, the Supreme Court has also ruled that, unlike private saving for retirement, Social Security “contributions” do not actually entitle workers to the benefits they have been promised. That makes the supposedly “sure thing” of Social Security only as reliable as future politicians facing insurmountable shortfalls, which is less reliable than each of us can accomplish via diversified market investments, backed by real assets.
If Social Security was efficient, equitable, reliable and sustainable, defending the status quo might be sensible. But it is none of those things. Further, delaying adjustments that must occur will only expand its problems and make things worse in the future. So the sooner we realize the multiple inequities Social Security creates and the valuable options it eliminates, the sooner we might question how “sacred” everything about it should be. Only then might we be able to reason our way to the least painful options, rather than demonizing our way into an even more painful financial hole.