A Real Fix for Social Security

The return on Social Security is truly terrible because of the way it is structured.  It is in fact set up exactly like a Ponzi scheme (but without the great returns for the initial investors).  As time passes and the government is running out of the ability to even borrow money, it is looking more and more like the system will need to cut payouts and those who are under 55 will not even get the paltry returns it currently provides.

Unfortunately, all of the “fixes” suggested by our representatives just keep the same, bad system going by increasing taxes but still provide the same, poverty-level income each month to retirees.  We already raised Social Security taxes in the 1980’s to get ready for the retirement of the baby Boomers today.  All that happened was the government spent all of the extra tax money.  We still have no lock-box full of money ready to support today’s seniors.

The other plan to fix Social Security is to make the retirement age higher for people entering the workforce today.  That means they will be working longer and paying in more, but receive less than today’s retirees  since they’ll collect fewer payments.  Plus, how exactly will cutting benefits for someone retiring in 40 years help pay for a deficit today?!  Can someone explain the logic here?

Given my criticism, a fair question would be, “So what is your plan?”  Well, here it is.

To develop a good plan, the first step is to look at the issues with the current system.  These are:

1.  The return on Social Security currently  is absolutely terrible.  Even though individuals put away enough to fully fund their retirement under the system, the amount they get back would not even pay for basic expenses, let alone medications and enjoying life.  This is largely because the trustees spend the money as it comes in instead of investing and letting it grow.

2.  There are individuals who are currently depending on social security, at least to some extent.

3.  Those 55 and older are expecting Social Security and feel entitled to it since they have paid in for all of these years.  Never mind that they could have done the math and seen that the system was going insolvent.  And never mind that they have “enjoyed” the results of that spending (it was spent by the government for various things, appropriate and not).  And never mind that they could have demanded that the system be changed to a private system (remember the push by George W. Bush for privatization and the cheers by the Democrats when it didn’t pass?)  Their mindset is that they paid in and therefore they should get what was promised (although there never really is a promise since it can be changed at any time).

4.  We need something since people do not tend to save for retirement and will become a burden on society or die in the streets without some mandatory savings requirement.

So, here is my plan:

1.  For those 65 and older, there would be no changes.  Yes, this is spending money we don’t have, but this is technically already debt-on-the-books (in a business, this would be listed as an obligation).

2.  The retirement age for everyone not 65 or older would immediately be set at 70 years old.  Most politicians would only raise the age for younger workers, but we are broke now, there is a large number of older workers who will overwhelm the system, and people are living into their eighties routinely.  We just can’t afford to start paying at 65 for everyone currently in this age group.  Plus, many of these people have not saved enough to retire and therefore will probably go on working anyway.  Fair, no, but here again, they had 40+ years to change things.  And is it fair to have younger workers work longer and pay extra while this group gets a pass?

3.  For those 60-65, private accounts would be established and every dollar currently going into Social Security would be put into bank CDs.  This group does not have enough years to invest in stocks, but at least they could stash away the money they already contribute.  These funds would be used first when they reach 70, paid out at the current rate for Social Security with the government taking over once those funds are depleted.  This would provide 5-10 years of funding.  Note that this would reduce collections, which would drive up the debt, but here again, that money is really an obligation currently – it is just off-the-books.  By putting the money in private accounts, this would ensure the money is there when needed and not spent on food and drinks on a Congressional flight or something.

4.  For those 16-60, a portion of their money would be diverted into private accounts invested in mutual funds.  These funds would be locked away and invested in a wide range of stocks and bonds, appropriate by age.  A portion of the funds each year would be sent into the current system to pay current retirees, with younger workers paying in a greater percentage.  Note that this would allow for some of the obligations to paid from growth rather than just payroll taxes.  This portion would decrease with age, and would be phased out for everyone as time passes and the number of those collecting traditional benefits decreases.  None of the people in this group would ever receive traditional benefits, but I doubt they would mind since they would do far better investing in private accounts(see my analysis in this post).  Those who are 40 or under today in this group could start drawing on the money once they reach 65 (there would be plenty), while the retirement age for older individuals would be phased from 70 to 65 as appropriate to ensure adequate income for their entire retirement.  Funds left in their account on their deaths would go to their heirs.

We need to accept that a time of change is needed.  That change will not be pleasant, but should be as fair as possible.  Once we shift to private accounts, invested in a wide range of stocks and bonds which gradually shift to income investments and cash as one nears retirement age, we will actually have a system that will  let individuals retire with dignity, even if they have not saved otherwise.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.comor leave in a comment.

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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. Your article struggles with facts. A typical 67 year-old expects to outlive full benefits – so one has to ask what tax increases are you proposing. Mind you, we can only take care of a typical 68 year-old if the 16-60 year-olds pay 12.4% of their wages into the existing system. The cost to implement a system of private accounts – which isn’t a very good idea – might cost as much as $30 trillion. These are SSA estimates. CBO believes that SSA is too optimistic, and thinks that the costs might be double.

    I think you have lost touch with the size of the problem.

    • On paying for the 68 year-olds, I would start to recognize this as what it is – an unsecured debt, and add it to the existing $18T debt we have. It would be partially paid by the monies paid in by the younger workers, and partially by general funds, perhaps by cutting a lot of the things the government currently does. Some of it may not be paid. That’s what happens when you run out of money, as social programs always do. I don’t think it is reasonable to assume someone who is 20 years-old will agree to pay for today’s 68 year-olds just because the 68 year-old failed to change things over the 48 years he/she was paying into the system. He also failed to insist funds were kept aside (like in private accounts).

      Now on your off-handed comment that having private accounts isn’t a very good idea. How is that worse than the current pay-as-we-go system?

      • How is what you have different from today. Younger people eat the cost of SS whether it is payroll taxes or general fund taxes. That is the status quo with different names. The only material difference is that people who contributed payroll taxes now claim that they are owed something. The people who contribute through general taxes would be owed nothing.

        Social Security is broken. Throwing money at it from the general fund doesn’t change that fact. It only changes upon whom the consequences fall. Re-packaging the revenue as investments doesn’t change the past. You still have promises for which there is no cash. That isn’t better or worse.

        Social Security is theoretically old-age insurance. Insurance manages risk. Investments profit from taking risk. They tend to go together rather than have one replace the other.

        Mathematically, insurance is a better way to manage risk. If that weren’t the case we would have personal auto-wreck accounts. With savings everyone has to save enough to cover how long a retirement MIGHT last. With insurance the pool has to save enough to cover how long the collective retirement DOES last.

        I have personal retirement accounts. They aren’t a bad thing. They serve a different purpose than insurance though.

        Here is my article.

        moneytips (dot)

      • The current SS system is not insurance – it is a Ponzi scheme, where any money collected in excess of payouts to current retirees is spent on things not related to retirement. (Note, when I say that it’s a Ponzi scheme, I don’t mean anything illegal is going on. I just mean that it is structured exactly the way that a Ponzi scheme is structured.) This would be equivalent to one of the insurance companies taking the money that they collect each year for hurricanes and earthquakes and spending it during the many years they do not see a significant event. A good insurance company stores (and invests) the money during years when nothing happens so the money will be there when the tragedy occurs. In fact, SS is even worse than an insurance company spending excess premiums then getting caught by a storm off-guard because they knew exactly when they would need the money, yet failed to plan anyway. With private accounts, that money would be stored for when people retire – a very predictable event. If you wanted to take a portion of the money left over in those private accounts when someone dies young to pay for those who live to be extremely old, we can talk. To act like a system that spends the extra money is just like insurance is disingenuous.

        Now on what to do with those currently in the system. From your article, “Until you have $10 trillion, or the willingness to tell existing retirees to pound sand, the issue of privatization of Social Security is simply a distraction.” My solution would be a combination of the two. We’ll have had deficit spending of $12T by the time the current officeholder leaves the White House. Certainly we can take a portion of that $10T needed to fund SS, the portion that supports those who truly have no other option – no family, no savings, no pension – and pay it off over long periods of time with the rest of the debt. (Or maybe we default on it with the rest of the debt in ten years or so since that looks like we’re heading.) Those in retirement who have the means will just need to accept less or except nothing. They had years to change the system and collectively did nothing. They sat by and allowed their money to be spent on things that they approved of, or at least made no great fuss about. They continued to elect leaders who failed to save and invest the money, so they are now where they are. Carpe diem can leave you in a bad place sometimes. That’s where they find themselves.

        The point is, why keep doing dumb things? Why do we need to correct the damage caused by a bad system before we can go to a good system? Why do people born in 1990 need to pay for the retirement of those born in 1960 just because they made bad decisions? Sometimes you just need to cut your losses and start doing smart tings rather than trying to make a bad system work.

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