In the 2013 Annual Report to Congress, the Trustees announced:

• The combined trust fund reserves are still growing and will continue to do so through 2020. Beginning with 2021, the cost of the program is projected to exceed income.
   
• The projected point at which the combined trust fund reserves will become depleted, if Congress does not act before then, comes in 2033 – the same as projected last year. At that time, there will be sufficient income coming in to pay 77 percent of scheduled benefits.
   
• The projected actuarial deficit over the 75-year long-range period is 2.72 percent of taxable payroll -- 0.05 percentage point larger than in last year’s report..
   
• Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period.

The debate about Social Security reform isn’t serious.  It is noise filled with statistics that paint a picture of convenience.  This piece comes from testimony in a hearing about Social Security reform before the Ways And Means Sub-Committee.

Despite Social Security’s great success, its growth in lifetime benefits over time has been decreasingly targeted at its major goals. Even while programs for children and working families are being cut, combined lifetime benefits for couples turning 65 rise by an average of about $20,000 every year, so that couples in their mid-40s today are scheduled to get about $1.4 million in lifetime benefits, of which $700,000 is in Social Security.

What Are The Major Goals Of Social Security?

Social Security is suppose to be old-age insurance, and has virtually nothing to do with other programs for the children and working families.  What is really meant here is that the system does not serve the major goals of the person testifying.

What About The Growth Of Benefits?

In all honesty, this couple does not expect to collect $700,000 or anything close to it.

1. When he says ‘scheduled’ he ignores the fact that this couple expects to retire after the Trust Fund is exhausted which means that they will be subjected to benefit cuts. 
2. These people would likely trigger means-testing that would claw back benefits at more than 10% per year  
3. These people may die before collecting a penny

But the number sounds impressive.  Well, until you consider how much this couple has contributed.  In all honesty, the couple depicted probably deserves more than $700,000.  Someone born in 1970, making 2/3rds of median income (roughly 34K in 2010) will lose about $600,000 in savings to Social Security.  In case of this couple, two people were contributing, and both made more than median income.

If fixing Social Security were easy, it would already be done.  Politicians are paid to hide problems, not solutions from the electorate. 

Nonetheless, the mainstream media continues to say that Social Security is an easy fix.  Typically the line runs something like “Social Security has become the focal point of entitlement debate because it's so easy to find different ways to address its funding problems.”  Basically, the hardest part of fixing Social Security is choosing from so many different options. 

A lot of the ease comes from changing the meaning of words.  The first word to lose its meaning is the word ‘fixed’.  Normally, the word ‘fixed’ means that there is no problem. In the Social Security debate, the word fixed means solvent, or the cost to make our problem a problem for our children.  Solvent and fixed are about 12 trillion dollars apart.  So, saying that fixing Social Security is easy, essentially is comparable to saying it is easy to run a 4 minute mile without telling anyone that the mile is actually only a 100 yards long.

The debate about fixing Social Security isn’t about fixing the system.  It is about paying for it.  The discussion is entirely about increasing revenue or decreasing expense.  The best example of this false dichotomy is the discussion of the COLA change to Chain-CPI.  Social Security is intended to be old-age insurance.  Yet, we are looking at a ‘fix’ which progressively reduces benefits as one gets older.  In all honesty, this is no different than fixing a broken refrigerator by calling it a doorstop.

If we are going to increase revenue, we have to understand that there are three kinds of revenue in Social Security.  The Social Security Trust Fund is funded money.  Contributions are revenue financed with the promise of future benefits.  Finally there are taxes, or the part of the part of payroll taxes on which there is no economic return.  In terms of a house, the word ‘funded’ means that you own the house.  Financed revenue is the loan from the bank.  Tax revenue means that the bank bought the house for you out of the goodness of its heart.

None of these revenue sources provides a stable solution.  Today, the Trust Fund provides about a nickel or a dime per dollar of benefits, but that contribution will go away as the Trust Fund is depleted.  Increasing the level of contributions - say immigration reform - only creates the promise of larger benefits in the future.  This enables us to postpone our problem, but creates an even larger problem for our children. 

The only other type of money in the system is taxes which is a dangerous game for old-age insurance because taxes are a political priority.  FDR rejected this model.  In 1941, he said that the contributions were vital as a means to ensure workers ‘a legal, moral, and political’ right to benefits.  He understood that taxes are dependent upon shifting political priorities.  FDR saw that contributions were the only way to make sure that ‘no damn politician could ever scrap' his program.[1] 

The other problem with increasing tax revenue for Social Security is that it makes it more difficult to raising taxes to control the debt.  We aren't raising taxes as much as we are shifting the taxbase away from debt control to Social Security.  This strategy preserves the debt load for the future generations on whom Social Security depends.

Decreasing benefits is possible, but it is difficult to sell.  The reality of decreasing benefits is that politicians would have to explain to voters that they never made a contribution on which they can expect to collect benefits.  They actually paid a tax on which they collect nothing.  This alternative is very difficult because these same politicians are the ones who have said for years that there is no problem in Social Security.

Every easy solution has a loser, and trying to convince that person that losing is winning is never easy.  So how does the media get back to easy.  We cut the benefits of future generations, and raise taxes on future generations.  It is easy to say that future generations will pay taxes that we will not.  It is easy to say future generations will accept benefit cuts that we will not.  In that context, it is very easy to say that Social Security is easy to fix. 

1 :  The exact quote is : "(Contributions) are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” (source)

None of the privatization pieces that we have read talk about "Adverse Selection", and it should be a signficant concern to supporters of this concept.  What happens if the only people to leave the Social Security system are contributors. 

"Adverse Selection" is picking customers that you don't want.  It happens at banks for example who offer no-fee checking.  The majority of the people who reply to these invitations are low-balance, high activity account on which the bank loses money.  This is why you see a "minimum balance" in conjunction with the free offer.

In terms of Social Security, adverse selection is picking high-wage earners and people with shorter life spans.  These people are net contributors to Social Security.  They will exit the system, but there is no incentive in the system to get people who drain the system to leave.  According to the SSA, there are groups of individuals who make 9% real rates of return.  It is unlikely that they will match that level of return in the private sector.  So many of those people will stay in the system. 

Here is the bottom line: if Social Security is an unstable failure with all of the people participating, how will it survive once the contributors leave?

We admit our concern about the privatization plans that we have read.  Unquestionably the questions we have about privatizing the system, have shaped our plan.  To the untrained eye, privatization looks like a bigger and more complicated version of Social Security.  The government is famous for taking failed programs and making them bigger - we rarely believe it makes those programs work.

How Can You Protect Private Retirement Accounts From A Collapse Of Social Security?

Most privatization plans allow people to opt-out of Social Security into a personal account.  Separating the national retirement system into two - where one is privatized and the other is nationalized - opens the question about what happens when one of them fails.  If Social Security fails, and we believe that it will if it is not changed, how will the nation resolve the difference between the retirement systems.  We assume that the losers will blame the collapse on the winners.  In a world where taxes decide who wins and who loses, a divided retirement system would invite political mischief.

How Do You Fix Social Security By Making It Bigger?

First, privatization creates a new benefit, one that is pretty expensive.  It adds ownership to the existing benefits package.  Ownership is more expensive because it gives workers benefits sooner in life.  Our plan creates new benefits, but these are cheaper to deliver than benefits in the traditional Social Security system.  When we add benefits, the system saves money.  When you add privatization, the system losses money.  We doubt that the answer to Social Security problems is to make the system bigger.

Are The Expect Returns Realistic?

Supporters of privatization will tell you that the changes will pay for themselves as money is invested more productively.  We agree that it will help pay for the system, but we remain skeptical about assumed returns on the stock market that we have seen.

• According to Cresmont Reasearch, the real returns of the S&P have averaged 5-6% since 1901.  No year through 2010, averaged more than 6.5%. 
• This return assumes 100% stocks exposure which few investors will actually use. 
• Beyond a question of asset concentration, investments which cycle against wages will under-perform market averages.  Wages and employment peak at market tops, and tend to lag at market bottoms.  In my personal case, 30% of my FICA contributions were made within 18 months of market tops.  0% of my FICA contributions were made at market bottoms because I was unemployed in both 2002 and 2009 when I should have been buying equities.

This doesn't say that privatization is wrong, but we need to look closely at the economic assumptions and doubt any plan which expects real returns to exceed 5.5% for the aggressive investor.

How Do You Fix Social Security By Making It More Complicated?

Running a retirement plan is much more complicated than running an insurance business.  Insurance is a matter of managing pools of people where as retirement systems are individualized.  This is a good thing - but it is much more complicated.  We see no reason to believe that the government is able to run a retirement system when it can't run an insurance company.  The outcome of Freddie and Fannie are sufficient for us to decline the endorsement of any plan which increases the role of the government in Social Security. 

If privatization would work, why hasn't retirement savings accounts already worked?

The United States has incentivized retirement savings for 30 years.  401Ks, IRAs, Roth-IRAs, and the like have enjoyed government subsidies to get people to save for retirement.  There is 16.6 trillion dollars in these systems, and yet no generation has arrived at retirement less able to retire than Baby Boomers.  We are concerned that shifting to a privatized system is simply re-inventing a wheel that has already failed.  Supporters may well say that these accounts have done considerably better than Social Security - but less failure isn't necessarily success.