How to save Social Security

By David Harris | Winchester Sun

Recent news reports indi­cate that the Social Security sys­tem is on pace to be insol­vent by 2032.

Contrary to what some have said, Social Security isn’t a Ponzi scheme or a scam. It’s a prime exam­ple of gov­ern­ment doing a good thing the wrong way, which sad­ly the gov­ern­ment has a real­ly bad habit of doing.

Little his­to­ry les­son: The Social Security sys­tem was found­ed in 1935; the work­er-to-ben­e­fi­cia­ry ratio was 159.4 to 1. By 1945, the ratio was 41.9 to 1. In 1950, the ratio was 16.5 to 1. By 1960, the ratio was 5.1 to 1. By 1970, the ratio was 3.7 to 1, and in 1980 the ratio was 3.2 to 1.

In 1983, President Reagan and Speaker Tip O’Neill were star­ing down Social Security insol­ven­cy. They formed a bipar­ti­san com-mis­sion and craft­ed a deal to increase pay­roll tax­es, reduce the increase in ben­e­fits, and grad­u­al­ly delay the retire­ment age. The agree­ment saved the pro­gram for 75 years.

Since then, the coun­try’s demo­graph­ics have con­tin­ued to change. Birth rates con­tin­ue to decline, mean­ing few­er and few­er peo­ple are con­tribut­ing to the sys­tem. The baby boomer gen­er­a­tion start­ed to retire en masse. Also, due to advances in mod­ern med­i­cine, Americans are liv­ing sig­nif­i­cant­ly longer than pre­vi­ous gen­er­a­tions. In 2010, the trust fund spent more on ben­e­fits than it received from taxpayers.

Making mat­ters worse, Congress has bor­rowed from the trust fund more than $2 tril­lion to cov­er cur­rent oper­a­tions and only paid inter­est back to SSA. Similar to a gov­ern­ment bond, but minus a key dif­fer­ence, there’s no matu­ri­ty date on the prin­ci­pal bal­ance. The bill is com­ing due start­ing in 2032.

Congress could learn from Kentucky’s expe­ri­ence. In the ear­ly 2000s, the Kentucky State Employee Retirement System was one of the low­est-fund­ed sys­tems in the coun­try; at one point, it had enough assets to cov­er 30.2 per­cent of its lia­bil­i­ties. In 2013, Republicans and Democrats came togeth­er. They adopt­ed sig­nif­i­cant reforms, includ­ing chang­ing the actu­ar­i­al assump­tions to account for few­er work­ers due to increased effi­cien­cy, adding a cash bal­ance for new employ­ees that blend­ed pen­sion and 401(k), and com-mit­ting to fund the actu­ar­i­al­ly required con­tri­bu­tion fully.

I rec­om­mend that Congress con­sid­er the fol­low­ing reforms:

First and fore­most, Congress needs to com­mit to aggres­sive­ly repay­ing the $2 tril­lion bor­rowed and set a 20-year schedule.

My con­ser­v­a­tive friends won’t like this idea, but remove the pay­roll tax cap to align with income and Medicare tax­es. It’s the tax­pay­er’s mon­ey for a very spe­cif­ic, defined pur­pose-for the tax­pay­er’s direct benefit.

Restructure the pro­gram for long-term sus­tain­abil­i­ty and finan­cial sta­bil­i­ty for tax­pay­ers. Total pay­roll tax is 12.4%. Enrollees’ con­tri­bu­tions to date remain in the pen­sion sys­tem. Disability ben­e­fits are fund­ed at 1.8%, the cur­rent pen­sion plan is fund­ed at 4.24%, and a new cash bal­ance is imple­ment­ed using the remain­ing 6.36% to be invest­ed sim­i­lar­ly to the Federal Employee Thrift Savings Plan.