Social Security is not Secure, but it Can be Fixed

By Alden L. Benton

Editor’s Note: When this post was originally published on February 21, 2012, it contained an error of fact. The error has been corrected and additional information included in this updated version.

Social Security is NOT secure!

The program will fail if systemic changes are not implemented soon, endangering millions of retirees.

The Social Security Administration (SSA) reported the number of people receiving Social Security, Supplemental Security Income, or both, in January 2012 at 60,945,000.  The SSA paid a total of $66,954,000,000 in January 2012.  By the end of 2012, Social Security will spend $803,448,000,000 — $803.5 trillion!

This year, Social Security is running a negative cash flow — spending more than it takes in.

The average Social Security retirement benefit in January was $1,124.40.  The average Supplemental Security Income benefit in January was $517.30.

Congress, we have a problem.

Many of the proposals to “fix” Social Security revolve around allowing workers to invest at least part of their “contribution.” 

Invariably, this raises the ire of the big government folks who think government is the answer to every human problem.  Through this lens they demagogue reality into a Pollyanna fantasy that everything is alright; it is nothing that more taxes can’t fix.  This while they sing the same tired song about how you can’t trust those evil capitalists, those one per centers.

They are wrong!

According to a Cato Institute Policy Analysis, published February 13, 2012, privatization helps future retirees and the public retirement system.

According to the Cato Institute Policy Analysis (CIPA),

“…private capital investment remains remarkably safe over the long term.  Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds.” 

Even 2.44 per cent beats the average return for Social Security that the CIPA pegs at 2.2 per cent for the middle class in 2012.

Life is risky.

Opening your eyes and taking a breath every morning involves risk.  There is no perfect system in this life, so we must manage risk.  This is what being careful and responsible is all about, concepts foreign to Leftists and other doubters of American values. 

If we leave the solution to the big government devotees, taxes would have to be increased at least 42 per cent or benefits cut by at least 24 per cent, or both, to maintain Social Security.  That would throw everyone, including any economic recovery, under the bus.

The system described by the CIPA does not sound risky to me, rather it sounds, well, conservative.  The average of the three investment returns is 4.25 per cent, surpassing the 2011 annual inflation rate of 3.2 per cent as well as the January 2012 monthly inflation rate of 2.9 per cent. (Source: U.S. Inflation Calculator)

To put these numbers in perspective, the average annual inflation rate in the United States from 1914 through 2011 was 3.35 per cent and for the past 25 years (1986-2011), it has been 2.9 per cent.

The CIPA continues, stating,

“If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security.  Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.”

Privatizing public pension systems works.  It is good for workers and it is good for taxpayers.  For proof that it works we need only to look at Chile.

In a 1996 essay titled Empowering Workers: The Privatization of Social Security in Chile (Cato Journal), former Chilean Minister of Labor and Social Security José Piñera wrote,

“In 1980, the government of Chile decided to take the bull by the horns.  A government-run pension system was replaced with a revolutionary innovation: a privately administered, national system of Pension Savings Accounts.

“After 15 years of operation, the results speak for themselves.  Pensions in the new private system already are 50 to 100 percent higher–depending on whether they are old-age, disability, or survivor pensions–than they were in the pay-as-you-go system.  The resources administered by the private pension funds amount to $25 billion, or around 40 percent of GNP as of 1995.  By improving the functioning of both the capital and the labor markets, pension privatization has been one of the key reforms that has pushed the growth rate of the economy upwards from the historical 3 percent a year to 6.5 percent on average during the last 12 years.  It is also a fact that the Chilean savings rate has increased to 27 percent of GNP and the unemployment rate has decreased to 5.0 percent since the reform was undertaken.”

Most importantly for the United States is the fact that privatizing public pensions would, according to Piñera,

…mean a massive redistribution of power from the state to individuals, thus enhancing personal freedom, promoting faster economic growth, and alleviating poverty, especially in old age.”  [emphasis added]

More power to individuals, more personal freedom, more, and faster economic growth. This should be the first plank in the 2012 Republican Party platform.

The clock is ticking. 

The problems of Social Security will not go away just because Congress and the president choose to ignore them.  The last proposal to fix Social Security was put forth by President Bush in 2004. It failed.

As the 76.9 million baby boomers start retiring, they light the fuse that leads to financial implosion if Congress keeps burying their collective heads in the sand.

Note: The U. S. Census Bureau defines “baby boomers” as those born between 1946 and 1966.
(Source: Population Reference Bureau)

The question becomes what is more risky:

  • Ignoring the problem, 
  • An investment whose return meets or exceeds inflation, or 
  • A government-controlled Ponzi scheme with negative cash-flow and a $21 trillion short fall?

The answer is so simple even a Democrat should understand.  Privatization of public pensions has a proven, positive history over the last three decades. 

A promising future awaits us all. What are we waiting for?

© 2012 Alden L. Benton/Independence Creek Enterprises
All rights reserved.


2 responses to “Social Security is not Secure, but it Can be Fixed

  1. Alden, Your commentary does not explain how you plan to pay for benefits to existing beneficiaries. Cato for example has a plan, which pushes the cost on the general taxpayer.

    I get emails from people who see your approach as shifting the burden of legacy costs to the general taxpayer. Many of them see this is getting a government-run 401k that will not cover the future costs of paying off the system. They see that their ‘private-account’ will be nothing but cash with which they will pay taxes.

    What do you say to the 35 year-old who asks : what is the difference between paying for Social Security with payroll taxes and one which pays for Social Security with higher income taxes.

  2. “Even 2.44 per cent beats the average return for Social Security that the CIPA pegs at 2.2 per cent for the middle class in 2012.”

    The problem is that average return for Social Security isn’t terribly meaningful. The reports I have seen say that the return is between 1 and 2%, but that includes people who die without collecting anything.

    The larger problem is that Social Security is loaded with welfare payments to lower-wage workers. The average worker gets 1-2%, but the extremes move away from that. A high-wage worker may get as little as $0.25 on the dollar contributed. A low-waged worker may get as much as 9% real returns – basically double or triple anything that they can get in the open market.

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