Questions that Should Be Asked about Social Security Plans

With negotiations continuing over the expiring tax cuts and cuts to Federal spending dubbed the Fiscal Cliff, discussions about paying for Social Security and Medicare will no doubt ensue.  One proposal being championed by Republicans and Democrats alike to “preserve Social Security for future generations,” is to make the retirement age later and raise Social Security taxes, either outright or by increasing the cut-off above which taxes are no longer collected.

Those who are regular readers will know that I am no fan of Social Security, partly because the system is unsustainable with excess revenues robbed during flush times.  My main objection though is that, for the amount being put away, retirees should be getting $15,000 per month, not $1,500.  If directed to private accounts senior discounts would become a thing of the past because even the $15 per hour laborer would retire a millionaire.

The fact is that Social Security is going bankrupt and very soon.  It The trouble is, there are a lot more Baby Boomers than Generation X’ers and the excess revenue collected during the 1980’s and 1990’s was all spent.  This excess of collections has ended, and the amount being withdrawn by current retirees is already greater than the amount being collected from current workers and many more retirees are retiring every day.  There is also an explosion in the number of people going onto Social Security disability – which means they aren’t contributing and are collecting very early.  The cut in the worker’s portion of the payroll tax also isn’t helping.

It is true that if you add up the IOU’s, the system could last another 20 years or so.  But the IOUs are being paid by current tax collections and government borrowing.  If the government can’t continue to borrow and if revenues do not increase significantly, which is not likely given that taxes are getting ready to increase which will slow the economy, it will not be able to pay back the IOUs.  I predict this will happen within four years, which means there will be significant cuts in Social Security payments within about four years (unless other functions of the government, like roads, parks, education, and defense, are cut to almost nothing).

The current proposals for saving Social Security, however, don’t make logical sense.  Questions that constituents should ask their Congressmen are as follows:

1.  If the issue is that the system will not be able to pay for the current glut of retirees within four years, how will raising the retirement age for those who will  retire in 20 or 40 years help?

2.  Why do we want to preserve a system that provides less of a return that a savings account and that politicians have been unable to resist raiding for years?

3.  The standard argument is that private accounts invested in the stock market are too risky but the current system that is funded by taxes collected from current workers and businesses is safe.  Given that the health of the stock market is a direct reflection of the health of the economy, if the stock market collapsed as in 1929 what makes you think the economy would be healthy enough to collect enough taxes to fund Social Security payments?

4.  Why is it considered fair for those starting to work now to wait until they are 70 (and have paid into the system for 50 years) to collect benefits while those who are 64 now can retire next year and collect full benefits after working for only 45 years?  Given that the issue of paying benefits is now, why not raise the retirement age for everyone now?

And finally, a fair way to start unwinding the Social Security system and transitioning to private accounts:

Pass a law that allows anyone 67 or younger to exempt one person of their choosing from needing to pay into the public system, directing their payments into  a private account instead, in exchange for the elder person giving up all benefits.  This will strengthen the public system since there is about two people paying in for each person getting benefits.  If 1/2 of the people getting benefits used this option, there would then be 3 people  paying in for each receiving benefits and the public system would be stronger.  It would be fair because the people would receive something of value in exchange for giving up their benefits.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. I agree 100%. I am a libertarian and I don’t think it’s the governments job to take care of my retirement. They should take no deductions from people’s pay checks and let people invest as much as they want in whatever they want to plan for their own retirement.

    People would get a far better rate of return investing on their own and could retire earlier. If you didn’t set aside any money and chose not to learn about investing. Too bad.

  2. I am no economist (neither do I play one on the Internet). I simply lack the faith in Wall Street you seem to have (though I admit I distrust the government almost as much). My question is – what is the rate of future growth in capital based on? Past performance? Isn’t it possible that the next 50 years the economy will decline as much (or more) as it has grown in the past 50 years? There are so many factors I see that cause me to question the unlimited growth you describe. I’ll name just two. One, we live in a global economy and there are many indicators that we are no longer on top (perhaps barely in the middle). What happens when China cashes in their IOUs? And second, as expansive as the universe is, there are many signs that we’re using up natural resources quicker than they are being replaced. The idea that we can get more when we run out is quickly becoming thinking of the past.

    Thanks for the thoughtful post. It certainly raised many intriguing questions for me.

    • Thanks for reading and thanks especially for commenting. You make some valid points. The rate of growth for the US has slowed over the last several years. More disturbing is a change in the work ethic and a change in the attitude from “Anyone who is willing to put in the hard work and has the dream can improve his station and maybe become wealthy,” to “People who have become wealthy are evil and owe it to the people who are not wealthy.” But things could well change. We saw a long, slow period in the 1960’s and 1970’s, but then we had Paul Volcker and the Fed conquer inflation and Reagan drop tax rates, which set off a 20 year bull market.

      On resources, there is still a lot there, including a huge natural gas boom for the US. We have also hardly scratched the surface of nuclear (says a sad owner of shares of Cameco, a Canadian uranium miner). I agree we will eventually run out and should be focusing a lot of research on finding a renewable replacement such as an algea derived fuel, but there is time. We are also wasting a lot of money (which ultimately means wasting a lot of energy resources) trying to go large scale with technolgies that aren’t ready (see wind energy and Solyndra).

      I doubt the economy will actually decline to its 1960’s levels unless we decide to follow the Hugo Chavez model and give whole companies to people who have no clue how to run them, but certainly we might not see the 15% growth rates again soon. If the US economy doesn’t grow as fast, there is nothing to stop retirement funds from being invested in growing International markets as well. Given more investment capital provided by retirement funds and less regulation, we may also very well see a resurgance in the US economy as new technolgies and businesses are invented. At some point, of course, you run out of good places to put new capital and start seeing more waste (see the dot com boom of the late 1990’s).

      Still, even if we don’t grow by 12 or 15%, Social Security, as it currently exists, has paid something like 1%. It also looks like it will soon disappear since the funds have been raided instead of invested. Even if funds in private accounts only grow by 5%, however, one would still be far better off than with the current system.

Comments appreciated! What are your thoughts? Questions?

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