Find a way out of the Social Security mess

Social Security will go bankrupt within the next 15 years. Politicians say this is incorrect because Social Security will be able to continue paying a “significant portion” of benefits. In the real world, “solvent” means you can pay for everything, not just a portion, of what you promised to pay. By extending the life of Social Security, the problem is passed on to future generations. We don’t need a Social Security solution. We need a way out.

The average worker today, adjusted for inflation, will pay about $270,000 in Social Security taxes and receive $290,000 in retirement benefits for a one-third return of 1% above inflation. In perspective, the safest corporate bonds historically yield about 3% more than inflation, while stocks yield 7% more than inflation. The usual response is that stocks and bonds are risky, while Social Security benefits are guaranteed. But Social Security administrators estimate that a permanent 20% cut in benefits is needed to keep the program solvent. What looks more risky now?

Social Security’s return on investment is so poor that the average worker would be better off paying to Social Security at age 40 and then walking out at age 41 – paying no further Social Security taxes or receiving retirement benefits . That sad fact forms the basis of a phase-out plan that could rid us of these albatross and make sure no one slips through the cracks.

Workers aged 41 or older when the phase-out begins would continue to collapse under current rules and receive Social Security benefits until death do us part. Workers 40 and under when the phase-out begins, including future generations of workers, would continue to pay 12.4% of Social Security payroll taxes, but only until age 40. Those payments would go into private retirement accounts from age 41. In return, these workers would lose all Social Security retirement benefits.

By investing in a private account that is 5% above inflation, the average worker can expect to retire at $340,000 in current dollars. Savings of that magnitude can yield more monthly retirement income than the Social Security benefits the person forfeited.

The good news doesn’t stop there. Social Security retirement benefits stop with the person’s (or spouse’s) death. But with a private retirement account, the average person who dies at age 85 would leave nearly a quarter of a million dollars to heirs in today’s dollars.

The proposed phase-out is good news for workers, but what about the government?

If phased out were introduced today, payroll tax revenues would steadily decline as younger workers reach the age of 41 and stop paying the system. By the year 26, Social Security (in today’s dollars) would collect about $650 billion less annually in payroll taxes than it collects today. But from the year 26, the first group of workers to leave Social Security would retire. And because they quit, Social Security wouldn’t pay them retirement benefits. Social security spending will therefore gradually decrease.

By AD 59, everyone on the old system will be dead. From then on, the government will be $400 billion better off each year, as the savings from not paying out retirement benefits would exceed the lost earnings of workers 41 and older who don’t pay payroll taxes.

It would take 90 years for the phase-out to fully pay for itself. But it took Social Security nearly 90 years to dig the hole we are in now.

What’s notable is that a plan that makes retirees better off, makes more money than it costs, and cuts out Social Security without reducing benefits for existing retirees or increasing payroll taxes on existing employees.

Antony Davies is an associate professor of economics at Duquesne University. This column was provided by InsideSources.

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