Horse and Buggy Program in the Age of the Internet

This article appeared on Asbury Park Press on August 6, 2015.
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Will Social Security be around when millennials retire? Certainly. Will it be able to pay them anything close to what they have been promised? Certainly not.

According to the report issued recently by Social Security’s trustees, the program spent $73.1 billion more last year than it took in through non‐​interest income. By 2020 this gap will grow to $108.7 billion, and surge to almost $200 billion by 2024. Overall, Social Security’s unfunded liabilities now approach $26 trillion.

Of course, some will say that there’s no reason to worry because the Social Security Trust Fund will keep the program afloat until 2034. 2034? That should be great comfort to millennials.

But even that is misleading. Any annual Social Security surpluses, when it has them, are used to purchase special issue government bonds, which became so‐​called Trust Funds to pay future benefits. Of course, once a bond was purchased, the money used to buy it became general revenue and was spent by the government. So the Trust Funds are simply an accounting measure of how much money the Social Security system is owed by the federal government. The bonds are basically IOUs.

That’s not to say that the government won’t make good on that debt. It always has and likely always will. But the money needed to redeem the $2.7 trillion in assets currently in the Trust Funds comes from the government’s general revenue — that is, the taxes being paid by today’s workers. There’s no free lunch.

And, as noted, the Trust Fund will be empty by 2034. That’s the point at which Social Security will have to make do with only the tax revenue it brings in, meaning it will either have to raise payroll taxes by 30 percent or cut benefits by 21 percent, with even larger changes in later years. Welcome to retirement millennials.

Moreover, even if Social Security could pay every penny in promised benefits, it would still be a bad deal for millennials. Taxes are already so high relative to benefits that they will receive a return far below what they could have earned from investing their money privately. The tax increases or benefit cuts needed to keep Social Security solvent will just make that bad deal worse.

There is only one other answer to Social Security’s growing crisis: Let young workers who wish to get out of this pyramid scheme do so, and save a portion of their taxes for their own retirement through personal accounts. Allow that money to be invested in assets that earn a return, such as stocks, bonds, annuities and so forth.

Social Security is a horse and buggy program in an Internet era. It is time to bring it up to date. If not, one hopes millennials have a very large piggy bank.