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What Will Happen When Social Security Runs Out

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 24 minute read

According to a 2014 Pew Research report, more than half of Millennials worry there won’t be enough money in Social Security when they retire. Not a single person I know expects to ever get a dime of the money they put into Social Security. 

Author of “Generation X” Doug Coupland believes that everyone understands that it is going to go bankrupt or kaput. What went incorrectly? Is the insolvency of Social Security a real possibility?

A Synopsis of Social Security’s History

Few in 1935 could have imagined the Social Security system as it exists today. A quarter of the workforce, or 15 million people, were unemployed during the Great Depression, and the remaining people were having trouble making ends meet due to a loss of more than 50 percent in hourly wages from 1929 to 1935. 

Because of their inability to make their mortgage or rent payments, several families were forced to leave their homes. The majority of employment losses were experienced by older workers, many of whom lacked the resources to maintain themselves. The year was 1934, and a despondent Chicagoan had said, A man over 40 might as well go out and shoot himself.

Many people in the United States saw their life savings of several decades wiped out in the space of five years as a result of the failure of hundreds of banks. Hoovervilles were made up of people who had to sleep in the open or on “Hoover blankets” made out of old newspapers. 

Cities and towns all across the world started establishing breadlines to help feed the poor. To get to where they thought they could find work, thousands of young men in the United States jumped on passing trains and hid in open boxcars.

In 1932, Democrat Franklin D. Roosevelt (FDR) competed against incumbent Republican Herbert Hoover and won with more than 57% of the popular vote and 472 of 531 Electoral College votes, paving the way for his New Deal. 

FDR approved a bill three years later that would provide some amount of security to the typical citizen and to his family against the loss of a job and against poverty-ridden old age.

Social insurance laws in the United States lagged well behind those in other industrialized countries, often by decades. In 1889, Germany was the pioneer in launching a program, followed by Denmark (1891), the United Kingdom (1908), and France (1908). (1910).

Even though the American people were in a dire situation, certain politicians shouted against the new law:

  • One New York Republican House member, James W. Wadsworth, said the Act welcomed a force so great as to endanger the integrity of our institutions and to pull the pillars of the temple down upon the heads of our descendants, as reported in the Congressional Record.
  • Sen. Daniel Hastings, a Republican from Delaware, expressed concern that the Act’s approval could stop the progress of a great country and lower its people below the level of the average European… It would discourage and undermine the American trait of thrift. It will have a devastating effect on the spirit and initiative of the American people.
  • \In testimony before a Congressional Committee, C.A. Hathaway, a member of the Communist Party, claimed that the law was not designed to create social security for the majority of the people. We believe this legislation’s real purpose is to safeguard the country’s ruling elite.

A “Right Earned” or a Government Giveaway?

According to Robert S. McElvaine, author of “The Great Depression: America, 1929-1941,” Americans are raised with the idea that work with meaning is essential to a fulfilled existence. Every individual is responsible for establishing and improving their own niche in society.

Something is wrong with a man who can’t maintain his family, the thinking went among the Depression’s employed classes. Contributors referred to those seeking aid as human parasites, pampered poverty pigs, thieves, and lazy, immoral people. Those citizens in greatest need often considered suicide or starved themselves rather than beg for assistance for fear of social stigma.

The authors of the Act, aware of the societal hurdles that the relief program must overcome, crafted it so that employees would view their benefits as a right earned by payments over years, rather than as a dole handed by the government. 

Historian W. Andrew Achenbaum claims their efforts bore fruit. He praised the achievement of a Social Security program that plays a key role in providing security to American families they invariably encounter in modern society in a 50th Anniversary information paper presented for a Senate Sub-Committee of the 99th Congress.

As more and more Americans have been included in the program’s protections since the Act’s adoption, it has undergone various revisions. 

Among the changes made were:

  • Dependents and survivor’s benefits in 1939
  • Early retirement for women in 1956
  • Benefits for dependents of disabled beneficiaries
  • Early retirement benefits for men in 1961
  • Widow(er)s benefits in 1968
  • Annual cost-of-living adjustments (COLA) in 1972

From 1950 through 1975, increases in benefit payments occurred only sporadically. Concerns about the program’s long-term viability led to Congress reducing payouts in 1977 and 1980 and tightening eligibility standards in 1980.

The Foundations of Social Security

Congress passed the Social Security Act in 1935 with the goal of making the program sustainable.

The Initiative Must Be Self-Sustained

President Roosevelt was adamant that the program be funded exclusively through payroll taxes rather than general government revenue. He was concerned that using general government funding would give Congress a blank check that would be tempting to lawmakers looking to be re-elected. 

Therefore, the Act set up a payroll tax of 1% for both employers and employees, with a cap of $3,000 in taxable income. In 2016, the top rate was 6.2%, and it applied to all income over $118,000. The Social Security system relies on these contributions to maintain two separate trust funds the Old Age and Survivors Insurance Trust Fund (OASI) and the Disability Insurance Trust Fund (DI).

Early on in the program’s existence, tax receipts surpassed benefit payments, resulting in a surplus that was deposited into reserves. In 1940, for instance, $368 million in tax revenue was collected, while $62 million was spent on benefits. This created a $2.03 billion reserve. 

Eventually, by 2016, annual receipts and benefits had risen to $957.4 billion and $922.2 billion, respectively, leaving a total reserve of $2.8 trillion. From its start until 2007, the reserve grew steadily; since then, the annual surplus of income over payments has decreased, from $190 billion to $35 billion. 

According to projections made in the 2016 Report of the Trustees of the Social Security Trust Fund, program revenue inflows to the funds will balance out expenditures in 2019. Benefit payments from the trust funds are expected to continue into the future, up until 2034.

Some politicians and economists have, in recent years, attempted to classify payroll taxes together with other forms of government taxation and to portray the benefits granted to recipients as an undeserved government entitlement.

 They simply ignore the Act’s architects’ stated intention that payroll taxes be used exclusively to fund the social insurance program. A few years after the Act’s passage, FDR said, We put those payroll contributions there so as to provide the contributors a legal, moral, and political right to claim their pensions and unemployment compensation.

The assertion that the government’s trust funds OASI and DI funds aren’t like trust funds in the real world is a common line of attack from Social Security’s detractors, and it is echoed by Veronique de Rugy. 

Unlike their real-world counterparts, government trust funds essentially only hold the government’s IOUs rather than any actual assets. Put another way, this means that the government will have to take on even more debt in order to cover the cost of Social Security, and this trend will only accelerate in the future. 

U.S. Government IOUs, such as Treasury Bills, are probably not considered real assets in the upside-down world of Washington. California Representative Xavier Becerra spoke for the majority of Americans when he said in a 2012 Hearing of the Sub-Committee on Social Security, I do not see the reasoning behind people who suggest Social Security’s investment in Treasury bonds is not real money. 

True monetary contributions were made by Americans. Treasury bonds, the safest form of paper money in existence, backed the loan. In the 77 years that Social Security has existed, you, I, and everyone who has ever worked have put in roughly $14 trillion through payroll taxes and FICA payments, and we have paid out about $13 trillion in benefits. 

After subtracting the amount of money Americans have paid into Social Security for the past 14 years from the amount paid in for the previous 13 years, we find that there are a cool trillion dollars left over. Because the reserve has been invested in Treasury bonds for decades, it has accrued interest and grown by $1.6 trillion, bringing the total amount in the trust funds to $4.0 trillion.

Beneficiaries Should be Provided with Economic Security Via Benefits.

Since the beginning of the program, policymakers have struggled to agree on what constitutes a sufficient benefit, particularly in light of the need to strike a balance between the interests of those who pay the tax and those who get the benefits.

The replacement ratio is one typical criterion for sufficiency; it is the percentage of pre-retirement income that will be replaced once the retiree begins receiving their retirement income. Inconsistent assumptions regarding beneficiary demographics and the purpose of Social Security make it challenging to arrive at a consensus on the appropriate ratio.

The overall cost of the program in 1940 was $35 million, but just 1% of retirees (222,488) received benefits, as reported in a 1987 Social Security report; additionally, 20% of those seniors received Supplemental Security Income to supplement their already meager payments. Most elderly people in the United States still depend on supplemental income from part-time jobs, family and friends, and private donations.

In that same year, the median monthly pension payment was $21.97, totaling $263.64 a year for a retiree. The replacement ratio in 1940 was 19.3 percent, while the average mean income across the country was $1,368. 

According to evidence given by Social Security Board Chairman Arthur J. Altmeyer before the Senate Sub-Committee on Wartime Health & Education on January 28, 1944, Social Security benefits constituted the sole source of income for 11% of the recipients.

The elderly population in the United States has relied heavily on Social Security benefits since the program’s inception in 1940. The New York Times reports that for 36% of recipients, the benefit accounts for 90% or more of income, and for 2/3 of beneficiaries, the benefit accounts for more than 50% of income. 

In 2015, the average payment was $1,332.35 per month, which is $15,988 per year and just slightly over the 2016 U.S. poverty level of $12,060. That is to say, half of the recipients got more than $1,332 a month, while the other half got less. 

2015 median household income in the United States was $28,851, which is equivalent to a replacement ratio of 55.4%. According to the SSA, about 64.2 million people got benefits for a total of $904.7 billion in 2017.

Benefit Amounts Must Correspond to Contribution Amounts

The program is structured to reward those who make the highest contributions with greater benefits as the benefits were funded by the efforts of current and future recipients. The Primary Insurance Amount (PIA) is the monthly benefit and it is determined by the following factors:

  • Required Course Completion and Credits Earned. To qualify for retirement benefits, 40 credits are required. Covered earnings of $1,260 since 1978 are equivalent to one credit. In any given year, whether work was performed for less than or the whole 12 months, a maximum of four credits and $5,040 in covered wages are allowed. Therefore, in order to qualify for a benefit, you need to have ten years of covered earnings during your working life. A different amount of Social Security credits is needed to qualify for disability or survivor payments.
  • Earnings from Prior Years Were Revised. Expenses and incomes from the past are revalued to account for inflation that has taken place throughout the lifespan of the worker. The Social Security Administration states that a person’s earnings are adjusted to the average salary level two years before the age at which benefits are first payable.
  • Indexed Monthly Wages on Average (AIME). The AIME is calculated by taking the highest 35 years of salary and dividing it by 420 (35 years x 12 months). Any years that are less than 35 in the calculation are represented by 0. Therefore, if two people have the same average earnings but labor for different lengths of time, they will receive different benefits.
  • The Formula for Determining Benefits Under Social Security. The system is set up such that low-wage earners receive a larger share of their wages than high-wage earners. Benefits are calculated using one of three earnings ratios, each with its own maximum AIME cash amount. To account for price changes, these bend points are revised annually. In 2017, a retiree’s AIME will be distributed as follows: 90% of the first $885 (up to $796.50), 32% of the next $5,336 (up to $1,424.32), and 15% of the next $10,336 (up to $596.50). Benefits for retirees in 2016 are capped at $2,639 per month.
  • It’s Time to Hang it Up. According to one’s birth year, an employee’s FRA varies. (The FRA for people with birth years 1960 or later is 67.) Depending on whether payments are started upon retirement at age 62 or delayed until age 70, the PIA received over the course of a lifetime is affected. In the event that you decide to retire before you reach FRA, your monthly payment will be reduced by 5/9 of 1% for each month before FRA up to 36 months (25%), and 5/12 of 1% for each month over 36 months. In contrast, benefits will grow by 2/3 of 1% each month for every month benefits are delayed past FRA up to age 70.
  • Price Index Revision (COLA). Social Security benefits have been adjusted for inflation since 1975 when this law was first enacted. The change results from the Bureau of Labor Statistics’ evaluation of the Consumer Price Index for Urban Wage Earners and Clerical Workers.

Challenges to Closing the Projected Deficit

Reforms to Social Security have always been contentious. According to a poll conducted by Pew Research in 2015, a plurality of Americans (53%) blame “Big Government” for the country’s problems and favor a smaller government with fewer services.

A majority of respondents in the NASI survey also said they would be in favor of paying greater taxes in order to fund bigger Social Security payouts. Politicians attempting to address the funding/benefits gap face a political minefield because of this seeming difference.

Public Backlash Against Program Changes

Even fewer politicians have supported reducing benefits, although Bernie Sanders is an outlier in calling for an increase. A majority of Democratic and Republican voters (71%) are also strongly opposed to any reduction in benefits, as shown by a 2016 Pew Research Poll.

As a result, it should come as no surprise that politicians on both sides of the aisle see the program as a threat to their careers.

  • In a letter to his brother Edgar from 1954, then-President Dwight Eisenhower warned, Should any political party attempt to destroy Social Security. That political faction would never again be mentioned in the annals of American politics.
  • Social Security is the third rail of American politics, was reportedly said in 1981 by a member of Speaker Tip O’Neill’s staff, a Democrat. If you touch it, you’ll die.
  • Despite the fact that Social Security was going bankrupt, Karl Rove, an adviser to President George W. Bush, said in his 2010 book “Courage and Consequence” that there was an iron law of politics that even though Social Security was going bankrupt, Republicans couldn’t talk about change and win.
  • Despite Republican efforts to reduce payments, President Trump campaigned on a promise to leave it as it is and preserve Social Security in 2016.

A majority of Americans, including those who automatically associate large government programs with socialism, support keeping Social Security in place. A poll published by The New York Times in 2010 found that Tea Party members mostly agree that Social Security is worth the costs the Tea Party conservatives truly believe that they have earned their Social Security benefits through years of hard labor, as do the majority of Americans.

Dedicated Advocacy Organizations

In an interview with CNBC in 2015, former Arkansas governor and Republican presidential candidate Mike Huckabee stated that “Washington is like a strip club.” Lots of folks are dancing and throwing around cash. Ex-super lobbyist and convicted crook Jack Abramoff agrees in an article for The Atlantic.

Congressional representatives have been quoted as saying, I will not sell my vote for any amount of money. Contrary to what they believe, you are right. Even though they don’t want to admit it, they’re willing to sell their votes. 

There is a debt incurred by a public worker every time a lobbyist or special interest makes a political contribution to that person. In order to pay off their debts of gratitude, legislators who accept money from lobbyists and special interests are selling out the nation.

While influential groups like the American Association of Retired Persons (AARP) and the Campaign for America’s Future advocate for maintaining and expanding Social Security, there are also powerful groups that seek to cut back on benefits and do away with payroll taxes altogether (U.S. Chamber of Commerce, Business Roundtable). 

When it comes to elections, these groups can swing large numbers of voters and/or provide substantial funding for candidates. Because of the potential consequences of a single vote on Social Security’s future, elected officials have been hesitant to take a stance on the topic openly.

Declining Employment and Stable Wages

The 1940 ratio of workers to recipients was 159.4 to 1. In 1955, for every recipient, there were 8.6 workers who were covered. By 1980, it had dropped to 3.2, and by 2016, it stood at 2.8. 

Assuming the current pattern holds for the next 20 years, by 2035 there will be just two employees contributing to the program for every beneficiary. As more Baby Boomers start collecting benefits at a time when the workforce is growing more slowly, the ratio of workers to recipients of those benefits has decreased.

Fewer Employees

The Bureau of Labor Statistics predicts that from the year 2000 through the year 2050, the labor force will increase at a rate that is less than half as fast as the rate seen between the years 1950 and 1999. Growing outsourcing of work and increased use of technology to lessen the need for human workers are to blame for the decline in employment.

Flat Payrolls

The Economic Policy Institute found that from the conclusion of World War II until 1973, the earnings of the great majority of American employees increased at almost the same rate as productivity growth. 

Since then, even while productivity has improved, the actual earnings of 80% of U.S. employees have remained unchanged or fallen.

Fewer jobs and stagnant salaries, along with an increasing number of beneficiaries and automatic increases in benefits, worsen the funding situation and constrain politically acceptable options.

Prospective Economic Situation

Average annual real GDP growth was above 3% from 1964 to 2004. In the decade from 2004-2014, the rate averaged 1.6%, peaked at 2.2% in 2015, and then dropped back to 1.6% in 2016. 

CBO forecasters expect real GDP growth of 2% per year until 2025. Because of the reduced expected growth in the economy, lawmakers may be hesitant to increase payroll taxes by an amount necessary to make up for the shortfall in Social Security revenues.

Congress previously cut Social Security revenues in an effort to stimulate the economy following the Great Recession of 2008-2009. As a result of President Obama’s advocacy, Congress passed a “Temporary” Payroll Tax vacation that will be in force for 2011 and 2012, lowering the employee’s share of the tax from 6.2% to 4.2%. 

Payroll taxes (revenues for Social Security) fell drastically as a result. For the first time since the program’s inception, payroll taxes were not directly tied to benefit payments.

According to former SSA Deputy Commissioner Jason Fichtner, beneficiaries could no longer claim they ‘earned’ their Social Security payments after the relationship between taxes and benefits was severed. This kind of thinking would eventually kill support for this important initiative.

Making Tough Decisions to Address the Program’s Deficit

If payments are to be sustained only from current tax revenues, beneficiaries can expect an immediate reduction of 25% to 30% in benefits once the trust assets are depleted. The gap between revenues and benefits will continue to grow, resulting in a reduction in benefits over time. 

All recipients, including those presently getting benefits and those who may receive them in the future, will be impacted by the cuts. For the next 75 years, the program’s trustees predict a shortfall of around $11.6 trillion, or 2.66 percent of payroll. 

To put it another way, an immediate 2.66 percent payroll tax increase is needed to back the expected payments. The deficit can be reduced by reducing benefits by the same amount as the shortfall. 

Some experts advocate a mix of hikes and cutbacks to reduce the deficit, even if none of the options is very popular among voters. Read the Summary of Provisions That Would Change the Social Security Program for a complete rundown of the alterations being proposed to the Social Security system.

Many Americans Want to Maintain or Enhance Program Benefits

Preserving Social Security is a priority for the vast majority of voters, regardless of their political leanings. According to results from a NASI poll conducted in 2014,

  • Even if it means raising Social Security taxes, 71% of Americans believe it is important to protect future beneficiaries’ access to Social Security benefits.
  • Eighty-five percent of people who aren’t already receiving SS benefits feel that doing so will make a significant difference to their financial stability.
  • Sixty-seven percent of those surveyed believe they would have to make major sacrifices or go without necessities like food, clothing, and housing if they retired today.
  • Seventy-two percent of voters think future benefits should be increased to give working Americans more retirement security.

Attempts to Cut Future Benefits

Members of both the Republican and Democratic parties in government have been unable to reach a consensus on how to best address the looming financing situation.

As a rule, the former has advocated for benefit cuts, while the latter has proposed increasing taxes while putting income-based caps on welfare. The following are the most widely advocated options for reducing future beneficiaries’ benefits.

Make 70 the New Full Retirement Age

The Committee on Economic Security predicted that men who reach 65 still have on average 11 or 12 years of life before them; a woman, 15 years prior to the passage of the Social Security Act in 1935. 

A 65-year-old man now has a 19.3-year life expectancy, while a woman can anticipate 21.6 more years. The Federal Retirement Age was increased by Congress in 1983 from 65 to 67, with the increase taking effect at different times depending on the year of birth.

Even if seventy-five percent of people who took the NASI poll are against making 70 the new retirement age, doing so would greatly increase the program’s long-term viability. 

According to projections made by the Social Security Trustees in 2016, reducing benefits by the equivalent of 1.43 percent in payroll taxes would eliminate 54 percent of the projected shortfall if the NRA were raised to age 70 by 2032, the early eligibility age was raised to 64, and future NRA levels were indexed to increase longevity.

COLA Calculation Adjustment

The expected savings from switching the COLA formula to a chained version of the CPI-W amounts to 0.41 percentage points or a thirteen percent reduction in the deficit. For the first time, the new methodology will take into account consumers’ willingness to switch to less expensive products in reaction to inflation. 

This change is likely to have an impact on the polls because the majority of the public agrees with the NASI’s assessment that the present increases do not reflect the increased costs experienced by senior Americans.

The Personal Insurance Amount (PIA) Benefit Should be Decreased

There have been a number of proposals made to cut future benefits, such as:

  • Earnings From Previous Years Will Be Revalued. If initial Social Security payouts were calculated using inflation instead of the average wage index, the deficit would be eliminated, saving an amount equal to 2.77 percent of payroll, or 104.0 percent.
  • Modifying the AIME Calculation to Include More Years. The estimated gap in payroll earnings would be reduced by 0.44 percent, or 15 percent if the retirement age was gradually raised from 35 years to 40 years. The 2017 budget proposes a 5% cut in monthly benefits for those who qualify. Saving 0.61 percentage points would prevent losing 19 percent of the deficit.
  • Limiting Compensation for the Highly Paid. To ensure that benefits went to those who truly needed them, the Social Security Act of 1935 instituted a means test on recipients’ past income. The test has undergone several revisions since its inception; they include the addition of age-based exemptions, an increase in the maximum permissible earnings, and a reduction in the reduction in benefits for those who earn too much. When a person reaches their full retirement age, they are no longer subject to a maximum income requirement. If your annual earnings are over the threshold ($16,920 in 2017), the government will take $1 out of your benefits. While conservatives have worked to get rid of the Social Security earnings test, at least one member of their own party has proposed cutting payments for high earners by as much as 30 percent for those making $80,000 a year and eliminating them altogether for those making $200,000. Do we really believe that the wealthiest Americans need to take from younger, hard-working Americans in order to receive what is, for the vast majority of them, a tiny monthly Social Security check? Christie wonders. The Social Security Board Trustees estimate that 10% of the estimated deficit (0.31% of payroll) might be covered by cutting benefits by up to 50% for persons with a MAGI of $60,000 or more.

Initiatives to Raise Program Revenues

Reformers have recommended a range of reforms to generate revenues in order to offset future predicted deficits in Social Security since two-thirds of Americans are opposed to decreasing benefits. 

Those who are at or near the retirement age are more likely to support tax increases, whereas those who would actually have to pay the higher rates are less enthused.

Enhance Payroll Tax Rate

Supporters have proposed several ways to increase the 12.4% payroll tax rate, some of which would take effect immediately and others of which would be phased in over the course of several years. The estimated deficit of 2.66% would be completely eliminated with an immediate rise to 15.2%, while the deficit could be reduced by 55% with a phased-in increase to 14.4%, to 1.21%.

A further proposal is to immediately apply a 6% payroll tax on earnings in excess of the present taxable earnings cap of $127,200. (2017). In addition, under this scenario, benefit credit for earnings in excess of the statutory cap would be eliminated entirely. 

Since fewer workers would be impacted, the additional money would suffice to close the payroll tax gap by around 1.19 percent. Before these reforms are enforced, there will be considerable political negotiation over the appropriate distribution of the tax increase between employees and employers.

Elevate the Taxable Wage Base

Several alternatives have been proposed to raise the taxable salary base, such as:

  • Getting rid of Taxable Income Limits. Without changing the current benefit calculation formula, applying the full 12.4% payroll tax on all incomes would recoup a sum equal to 2.38% of payroll (89% of the shortfall).
  • This Increase will be Phased in so that 90% of income is eventually taxed. Over a decade, if wages were raised to 90% of earnings without any increase in benefits, the deficit would be reduced by 0.98% of payroll, leaving a net deficit of 1.68% of payroll.

Additional Ideas to Cut the Deficit

While retirees would undoubtedly object to any reduction in benefits, younger workers would likely react negatively to any increase in the payroll tax or the threshold at which the tax is applied. So, those in political power have come up with alternative plans to close the looming deficit.

Privatization

In his 2005 State of the Union address, President George W. Bush proposed a partial privatization scheme called Private Investment Accounts for Social Security.

Conservative organizations like the Heritage Foundation and the Cato Institute support reforming the current system, but liberal organizations like the AARP and the National Committee to Preserve Social Security and Medicare have fought against it. 

They worry that the Republican plan to undermine Social Security by significantly reducing future payouts for employees includes allowing private accounts as a first step.

Economist and Center for Economic and Policy Research co-founder Dean Baker predict that a fifteen-year-old today in 2005 who retires in 2055 will lose more than 35% ($160,000) of his already scheduled payout throughout the term of his retirement” if the Bush plan is implemented.

When faced with the unpalatable choice of raising taxes or slashing services, politicians often turn to privatization, the outsourcing of previously government-provided goods and services to the private sector. Therefore, many responsibilities once held by government workers are now carried out by private contractors. 

The government today relies on private sector workers to conduct military operations, house convicts, collect garbage, construct infrastructure, and teach our children. Nevertheless, as we saw in a previous Money Crashers article, the push to privatize Social Security continues 

to divide opinion.

If Social Security were privatized, it would change from a Defined Benefit (DB) plan to a Defined Contribution (DC) plan, a change that most firms have made to decrease their financial costs, typically as a result of lower-than-expected investment returns. 

Pension Benefit Guaranty Corporation found that there were 112,000 single-employer pension plans in 1985, but that number has dropped to under 23,000 by 2014.

Retirement benefits under a DB plan are guaranteed for life by the employer, but those under a DC plan are uncertain and the company can make only restricted contributions. The latter’s worth is determined by two factors: the total amount of employer contributions and the investment return on those funds.

In other words, a participant in a DB plan like Social Security receives a fixed monthly distribution for life in exchange for their contributions, whereas a participant in a Defined Contribution plan receives an unguaranteed payout for the same amount of contributions. 

National Institute on Retirement Security research concludes that “DB plans are advantageous for employees; They offer the best opportunity for retirement security.

According to Bush’s proposal, the government would only be able to fund Social Security through payroll taxes, and people’s benefits would vary based on their individual investment returns. The gap between revenues and benefits would close if the system transitioned to a true pay-as-you-go model.

Value-Added Tax Should Take the Place of Payroll Tax.

Republicans Ted Cruz and Rand Paul, along with conservative and business groups, have advocated a Value-Added Tax (VAT) to replace the current payroll tax system and the corporate income tax. 

Though many European nations have used a value-added tax (VAT) system for decades, Congress has repeatedly debated and ultimately decided against implementing one (including the Fair Tax Act of 2011).

According to projections made by Social Security actuaries, lowering the corporate income tax rate from 35% to 27% while simultaneously instituting a VAT of 3.0% in 2018 and 6.5% in 2019 would increase the deficit by a negligible amount (0.02%). Critics of a VAT replacement for the payroll tax argue that it would destroy the Social Security program’s fundamental link between payroll contributions and benefit payouts.

Reduce Waste and Fraud

Once in a while, you’ll hear a critic of government or Social Security say that cutting waste and fraud would be enough to balance the budget. I’m going to retain Social Security without alteration, except I’m going to get rid of the waste, fraud, and abuse, Trump has declared.

Mike Huckabee told a CNBC interviewer, so many cheats are misusing the Social Security. Many voters (49 percent in a 2013 Gallup Poll) lack faith in the ability of federal agencies and departments to carry out their duties, thus politicians who want to avoid making tough decisions often claim to combat fraud, abuse, and waste instead.

According to the Committee for a Responsible Federal Budget, a non-profit, bipartisan public policy organization, the magnitude of fraud and waste in the Social Security program is overstated due to the enormous sums involved. 

Based on an examination of several recent reports from the Social Security Administration’s Office of the Inspector General, they came to the following conclusion removing all incorrect payments would result in a savings of less than the equivalent of 0.2% of payroll.

  • Over 1,500 people who had already passed away got incorrect payments totaling $15 million, according to a report from 2013. Over 56.7 million people received benefits that year, totaling $682 billion from the Social Security OASI Fund.
  • In 2015, researchers discovered 6.5 million usable Social Security numbers for adults aged 112 and up, although only 13 of those numbers were actually utilized to obtain benefits. (With the exception of a few hundred thousand, all were granted before 1972, when records were kept on paper.) Even though it’s a huge sum, it’s just roughly 2% of all numbers still outstanding. Since 2010, all U.S. citizens have been issued a Social Security number at the time of their birth. That means at the very least 322 million people currently have valid Social Security cards. It’s hardly shocking that an additional 67,000 numbers are being used to pay payroll taxes into the Social Security system given the necessity of having a valid Social Security number in order to work. Even though it’s illegal, the extra $3.1 billion in payroll tax revenue is a boon to honest taxpayers.

Bottom Line

In a Newsweek piece from 2008, Robert J. Samuelson accurately foretold the crisis the United States would face in the future. The closer the economy gets to stagnation, the more likely Americans are to succumb to distributional problems. 

These conflicts will arise not only between the rich and the poor, but also between the young and the old, and between immigrants and natives. Get in touch with the government first. It has pledged to do more than it can reasonably do. Retirement expenses are by far the most significant of them.

Maintaining an equilibrium between past hopes and future necessities is our greatest obstacle. Any changes made to the Social Security system will have long-lasting effects on the lives of all Americans, whether they are members of the Baby Boomer generation, the Millennial generation, or Generation Z. 

Do we want to keep our word to the elderly even if it means shortchanging future generations? Should we increase taxes on present and future workers or diminish Social Security benefits? Although cutting benefits and increasing taxes is an unpleasant approach, it is fair and reasonable.

Your thoughts? Should all advanced societies have mandatory social security systems? Would you rather fend for yourself without the safety net of Social Security and be OK with whatever results this decision may bring? Do you see a different way out of the Social Security predicament?

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