Even The Government Thinks That Social Security Is A Bad Deal

Many times in this blog we have pointed out numerous studies which showed how bad of a financial and retirement deal Social security is, citing numerous sources:

1. In a December 30, 2010 Associated Press (AP) article, AP reported on a recently published Urban Institute Social Security analysis that showed, on average, the typical American pays more into the Social Security system during their lifetime than they receive back during their retirement years.
2. In 1998, the Heritage Foundation published a similar analysis. It showed an average married couple would have been rewarded with twice their Social Security payments if they had been allowed to keep the money that was contributed to the Social Security Administration in their name and been allowed to invest it tax free in a balanced bond stock mutual fund.
3. In a number of posts in this blog, I have shown how much better off I personally would have been if the government had allowed me to put all of the Social Security contributions that were made in my name over my lifetime into an IRA-type account decades ago

Reliable, non-partisan analyses that show how bad a deal Social Security is. However, these types of analyses are often largely ignored or ridiculed by the political class in favor of the myth that Social Security is a fantastic retirement vehicle that should be protected at all costs...and kept under their control.

By perpetuating this myth, the political class maintains control over a large part of our lives, our retirement standard of living. This control not only reduces our freedom and our standard of living but gives our politicians more power and a constant election issue to perpetuate their time in office.

However, it is not only non-government sources that debunk the Social Security myths. I recently came across a government analysis from the late 1990s that also proved how lousy a retirement program Social Security is. On November 12, 1999, the Federal Reserve Bank of San Francisco published an economic analysis of the system's financial rate of return. The highlights of their findings include:

• The average worker in the Social Security system attains a rate of return on their Social Security contributions that is less than 2% when adjusted for inflation.
• In 1999, an American could have gotten almost twice that rate of return by personally investing in Treasury bills that at that time were averaging about 3.5% on an inflation adjusted basis.
• Even with the low rate of return, the analysis concluded that this low rate of return should be viewed as "rosy" since the political class had not addressed the long term solvency issues facing the Social Security system and those issues would either result in higher Social Security taxes or lower Social Security pay outs in the future.
• The San Francisco Fed concluded in 1999 that failure to address the solvency issues would reduce the average rate of return on Social Security contributions to around 1%.
• Not mentioned in the study, but what is obvious, is that if the rate of return on Social Security is only between 1% and 2%, this pales in comparison to what an American could have gotten over a long term investment of their Social Security contributions in an average stock mutual fund.
• The study takes note that numerous ideas have been put forth but Congress, i.e. the political class, had not acted on any of them, and concluded with the warning that "continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future."

This analysis and these conclusions were not reached by a think tank or a blog writer, they were reached by the economists at the San Francisco Fed  TWELVE years ago. Thus, at least parts of the government knew what a lousy deal this program was, and is, long ago. And it correctly pointed out that the system would be put under increased financial strain if changes were not made when they did the analysis TWELVE years ago.

Sadly, they were correct and as a result of inaction, lack of leadership, and lack of courage from our politicians, the changes will be more painful. Recent news reports have stated that the Social Security system went cash negative this year. In other words, the system is now paying out more money than it collects in taxes, requiring the Treasury Department to incur more national debt to cover the current Social Security liabilities and negative cash flow.

Typical political class performance. Why address an issue in a coherent, strategic, and financially sound way ahead of time that might endanger a few votes? Better to protect their personal turf, protect a few votes, satisfy a few lobbyists, and enhance their re-election chances, regardless of the increased pain and increased cost it will cause down the road.

How typically shortsighted but totally consistent with their mode of operation:

• Decades after ignoring the oil shocks of the 1970s, the political class has still not come up with an effective energy strategy, a delay that has resulted in high energy costs, reliance on unreliable foreign sources of energy, and potential harm to the environment.
• Decades after implementing a weak and ineffective drug addiction strategy, the "war on drugs," we have allowed violent drug cartels to flourish and we have incarcerated millions of Americans at the cost of trillions of dollars with no discernible impact on drug usage or change in our approach since the Nixon era.
• Decades after identifying the threats from under educating our kids via an under performing public school system, the political class has still not come up with a coherent education strategy that would provide American kids with a world class education experience, despite spending trillions of dollars to get mediocre education results.

In all major facets and issues of our lives, the political class has failed us, making their personal gains and political careers higher priorities than service to America and its citizens. Fixing any of the the above problems should not be insurmountable, we just need leaders with a little focus.

For example, three steps from "Love My Country, Loathe my Government," would fix an ailing Social Security system in a fair, coherent manner:

• Step 10 - reduce the Social Security tax rate but uncap the maximum amount of income subject to the tax and include all forms of income in order to make the percentage taken out of a household's income consistent across all income levels.
• Step 11 - prohibit citizens with a net value of over $3 million (e.g. Bill Gates, Donald Trump, Warren Buffet) from drawing a Social Security retirement check in order preserve limited resources for the most needy.
• Step 12 - raise the retirement age to 70 years, with a hardship exception, in order to reflect the changed demographics in the country since the Social Security program was introduced.

There, that was not hard. That should not be not hard, assuming that we had politicians in office with a little backbone and vision. The government and the political class came up with this horrid retirement plan, we are unfortunately stuck with it. The least they can do is fix it, twelve years after the same government identified its pathetic returns and needed changes.

The actual conclusions from the San Francisco Federal Reserve's analysis are listed below:

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Social Security has evolved from humble beginnings in 1935 as a program of "forced saving" intended to ensure retirement income for the elderly into its present form: a complex, resource-intensive program that redistributes income across individuals and households based on a wide variety of characteristics. In general, Social Security favors low-wage earners over high-wage earners, older workers over younger workers, women over men, and immigrant workers over U.S.-born workers.

The "average" U.S. worker faces a rate of return on contributions that is quite low--less than 2% after adjusting for inflation. By comparison, the real yield on a 10-year inflation-indexed Treasury Bond is currently around 3.5%. In addition to being low, rates of return from Social Security must be viewed as risky because they are subject to change from future political actions that will be needed to ensure long-term solvency of the program.

Under intermediate demographic and economic assumptions, Gokhale (1998) reports that the OASI payroll tax rate must be increased by about 4 percentage points (from 10.7 to 14.6%) to pay for projected benefits on an ongoing basis, i.e., for 75 years and beyond. Alternatively, long-term solvency could be achieved by cutting benefits by 25%. Either action would reduce the real rate of return for the average U.S. worker to around 1%. A tax increase would be disproportionately borne by young workers (who are further from retirement) whereas a cut in benefits would penalize young and old workers in a more even-handed way.

While numerous ideas for reforming Social Security exist, none have yet to be formally proposed in the U.S. Congress. Continued delays in addressing Social Security's long-term financing problem will only lead to more painful adjustments in the future.



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