Privatize Social Security…Before It’s Too Late

The overwhelming majority of Americans believes that the Social Security Trust Fund has the cash it needs to pay its obligations to current and future retirees. They also think that they are legally entitled to it. Nothing could be further from the truth.


In a recent report, the Trustees for the Social Security Trust Fund—a Trust Fund in name only—calculated the present value of the System’s unfunded future obligations for both an infinite horizon and a 75-year horizon as of 2015. They found that over a 75 year horizon the System is underfunded by $10.7 trillion; over an infinite horizon the shortfall is $25.8 trillion, all in constant dollars. And that number is not included in standard budget deficit figures. It is “off-budget”.


To put this in perspective, U.S. GDP for 2015 amounted to $17.9 trillion; federal tax receipts were about $3.25 trillion (a record) and total federal spending clocked in at $3.8 trillion (also a record). Which means that the present value of unfunded Social Security obligations is about 60% of the entirety of U.S. GDP. It is 2.82 times all federal spending for 2015, and 3.29 times all federal tax receipts. In short, not only is the system grossly underfunded, there is no conceivable way that the System can be re-structured so that it can meet its obligations under current law.


In short, the Social Security System is barreling ahead toward default. The money is just not there. Promised obligations will be cut and the retirement age at which benefits can be collected will be raised. In the parlance of the bond market, prospective beneficiaries (de facto bond holders) will have to take a “haircut” and the maturity of the debt (the retirement age) will be extended. There is no way around it; the Social System as currently structured is not sustainable.


Social Security beneficiaries (and potential beneficiaries) would be the equivalent of bondholders if they had a contractual right to the promised payment stream of retirement benefits. But they don’t. The Social Security Administration’s website clearly says that Congress had no intention of creating a legal contractual entitlement when it crafted the law establishing Social Security. Moreover, the Supreme Court ruled in 1960 in the case of Fleming v. Nestor that workers have no legally binding contractual rights to Social Security benefits.


No matter. Barrack Obama, (see video below), Hillary Clinton and Bernie Sanders want to expand Social Security benefits. So for that matter does Senator Elizabeth Warren. To no one’s surprise, Donald Trump has joined in a variation of this gravity-defying act of financial fraud. At last count, he claims he will maintain Social Security without cutting benefits; he has not yet gotten around to promising increased benefits. Give him time.



When the matter of financing comes up President Obama just dusts off his 3-card Monty skills and claims that he will finance his latest foray into financial never-never land by simply “asking” the “rich” to pay a little more. That is deliberate obfuscation. When President Obama’s words are translated into English, ask becomes demand, and rich refers to anyone making over $250, 000 in a given year. But there isn’t even close to enough money there (or anywhere for that matter) to pay for existing promises, much less an expansion of them.


Consider the latest year (2014) for which figures are available. Individuals filing the 2.7% of returns with incomes of $250,000 or more paid 51.6% of all U.S. federal income taxes. Which is another way of saying that the most productive members of society paid (and continues to pay) the majority of income taxes. And President Obama wants to further tax this small minority that drives growth, innovation and investment in order to purchase more votes from low information voters. In so doing he would guaranty slower economic growth and a worsening of public finances, which seems to be a specialty of his.


What’s worse is that Social Security disadvantages the less well to do. It is well established that life expectancy, income and education are highly correlated. Granted, there are many confounding influences, including behavioral ones. For example, highly educated people are likely to have higher incomes and they also are much less likely to smoke compared to poorly educated people. And the fact remains that a high school graduate will likely begin working and contributing payroll taxes many years before a college graduate. But retirement eligibility for both the high school graduate and the college graduate remains the same. Which means that that the high school graduate with the lower life expectancy will likely pay into the system earlier, work longer and collect fewer benefits. Which implies that lower-income blue-collar workers will be taxed to support middle class white-collar workers.


On top of that, Social Security transfers money to the relatively well off (retired people with assets) at the expense of people who are less well off (young workers with few assets). In so doing, it discourages savings and investment by young people, setting the stage for an even more pressing retirement crisis in the years ahead.


Because Social Security is structured as a pay-as-you-go system where beneficiaries have no legal claim on their promised benefits, the system will never be on a sound financial footing. Politicians will always respond to political rather than economic incentives, and will resist anything remotely close to true reform. Champions of paternalistic command-and-control (Obama, Clinton, Sanders, Trump and Warren among others) will resist change that transfers power from the mighty Administrative State (and themselves) to individuals.


The only way to truly reform the system is to establish the legal right of beneficiaries to control the funds that have been taxed from them for the express purpose of financing retirement. The effect would be to free up massive amounts of money for productive investment by putting those funds back into private hands where they belong. And it would force transparency on a source of public finance that is no more than a Ponzi scheme that would make Bernie Maddoff blush.


Libertarian think tanks like CATO have been making the reform case for years. They should be heeded before it’s too late.



Please follow and like us:
This entry was posted in Policy, Public Finance. Bookmark the permalink.