Social Security is America's most cherished public policy program and one of the most successful. Today, and for several decades before, Social Security accounts for 55% of the annual income of U.S. households headed by adults ages 65 and older. The improved financial strength of our seniors has helped preserve a viable standard of living for many of them. In addition, it has reduced the financial and emotional stress of families trying to support multiple generations.
But past success is a poor yardstick for measuring the current viability of a social insurance program. Moreover, failure to identify current issues with Social Security and offer solutions can leave Congress under-informed and under pressure to produce a “quick fix.” No good can come of that.
Here’s my take on the Social Security issues we need to own, some well-known, others not. The Social Security system is in grave financial trouble — in worse financial shape now than in 1983 when the Greenspan Commission "fixed" the system's finances. It’s also in worse shape than Detroit’s two pension systems, taken together. According to the Social Security Trustees (Table IV.B6, “Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon, Based on Intermediate Assumptions,” in the 2013 Trustees Report), the system is 32% underfunded, notwithstanding its $2.7 trillion Trust Fund.
In short, an immediate and permanent 32% hike in the Social Security payroll tax rate (from 12.4% to 16.4%, forever) is needed to pay the existing benefits. Alternatively, an immediate and permanent 23% cut in all OASDI benefits would provide long-term solvency.
Either of these options — or any combination — would be extremely painful if executed with simple broad strokes, as an ill-informed Congress might do. But dialogue and research by experts over a reasonable period can produce better results — provided the experts are willing to recognize the complete set of problems in the existing program!
In fact, Social Security's problems extend far beyond its finances. The system is incredibly complex. Its Handbook has 2,728 complex rules, and its Program Operating Manual has thousands of even more complex rules to explain the Handbook's rules. As a result, many of the system's key features are virtually incomprehensible. This enormous complexity and the opaque and growing (thanks to lack of inflation indexation) federal income taxation of Social Security benefits leave millions of workers ignorant of their true purchasing power in retirement. They may seriously overestimate their retirement income and save far too little for retirement. And millions of retirees may take the wrong benefits at the wrong age, ending up with a much lower living standard in retirement than they should because they didn't understand the rules.
Our Social Security system was designed for a different era. Today we strive for “transparency” — a worthy goal for both the financial industry and for the Social Security system.
It’s not enough just to clarify the current program because it also produces major inequities and inefficiencies. Thanks to the system's spousal and survivor benefits, millions of workers pay Social Security taxes year after year and end up with no extra benefits. Indeed, a working spouse can end up with lower benefits than a spouse who never worked. And when people do not understand what they are getting back for their extra Social Security taxes, public support for the system will erode. We know where that leads.
It's time for the social insurance experts — that’s us — to suggest ways to fix Social Security. We are in the best position to suggest the actions that do not sacrifice the program’s key objectives. The process begins by recognizing the program’s flaws. If we are going to ask younger generations to pay most, if not all, of the current system's unfunded liability, let's give them a modern Social Security system that is simple, transparent, fair, efficient, and financially sound.
To that end, I seek your review, comment and endorsement of The Purple Social Security Plan. "Purple" reflects my belief that both sides of the political aisle can agree to this plan. And please send the URL (www.thepurplesocialsecurityplan.org) to other economists, social insurance experts, and concerned citizens you know.
Larry Kotlikoff is a long-time Academy member and a professor of economics at Boston University. He developed Generational Accounting, a method of measuring fiscal burdens across generations. His books include The Clash of Generations (2012), Jimmy Stewart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking (2010), and Spend ‘Til the End – The Revolutionary Guide to Raising Your Living Standard, Today and When You Retire (with Scott Burns, 2008).