How to Fix Social Security Once and For All

Much has been written about the ills of our Social Security system as it stands today.  There has been considerable banter about how the system is a Ponzi scheme (it’s not), how it will go bankrupt soon (it can’t), and how we’ve got to do something about it soon (we do) like abolishing it completely (we can’t).

The above issues have already taken up a lot of cyber-paper, as many other writers have covered them far more completely than I will attempt here.

Briefly, the Ponzi concern is out of the question, as the Social Security system isn’t a savings plan, it’s an insurance plan.  And, like all insurance plans since many receivers of benefits have put little if anything into the plan (dependents and survivors of participants, for example), many participants will receive less from the plan than they put into it.  The Social Security system was never intended to pay you back what you put into it – it’s a social insurance system, so many pay into it with little return.  Like it or not, that’s what we’ve put in place, and that fact is not likely to change.

The bankruptcy question is resolved by the fact that the system always has new money coming into it from tax rolls, which means it cannot be bankrupted.  The system could become insolvent, meaning more is going out than is coming in, but since the amounts paid out to new recipients can (and will) be adjusted, this insolvency won’t happen either.  Of course this means that the people paying into the system will receive fewer and fewer benefits as time goes on, which leads us to the next point.

We’ve got to do something to repair the system, but abolishing it isn’t the answer – it’s not even among the viable answers.  I’ve seen it written elsewhere that we could just shut down the system and give all current participants (those who have paid in) an account equal to the amount that they’ve put in, since there’s a trust fund holding non-marketable bonds already.  However, with so many folks relying on the system to provide benefits when they didn’t put anything into it, or didn’t put as much into it as they are receiving in benefits (such as folks on disability), abolishing the system altogether would leave these folks out in the cold.

What may work

Means testing is one of the matters that must be addressed.  As it relates to all forms of benefits, presently the only means test results in ordinary income tax on up to 85% of the benefits received.  This doesn’t go far enough – being a social insurance program, benefits are guaranteed to all eligible persons, including those who have no need for the funds in any way, such as the über-rich. I’d suggest that the means testing should go even farther than that, to include those not-so-über-rich, with incomes that far encompass the need for this additional social insurance.

Another area to resolve problems with our current system is in the complexity of the way it works and how benefits are paid to people.  There is a tremendous amount of bureaucracy involved with administering, responding to questions, and working through complaints with the way the system currently works.  If the system were changed to force folks to only file for retirement benefits at Full Retirement Age (FRA) and not before or after, much of this complexity would be removed.  Along with the removal of the complexity, much of the bureaucracy could be eliminated, reducing the overhead and costs, making the system more efficient.

By setting one specific age for retirement benefits, we would also have much better control over outflows from the system, and adjusting FRA would have an immediate and calculable impact on the system.  Granted, the impact on recipients would also be immediate under this proposal.

Don’t get me wrong, I’m not suggesting that this will fix everything.  We’ll have to get the actuaries involved to figure out how much of an impact these changes could have.  The end result is probably going to be that current drags on the system will require further reduction in benefits than I’ve proposed and/or additional taxation in order to keep the benefits flowing.  But taking a few steps right now can help to forestall the presently inevitable outcome.

If you’re looking for more on how the Social Security system works today, check out my new book – A Social Security Owner’s Manual. The book provides a well-rounded look at how your benefits work – you’re bound to find something you didn’t know.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

An IRA Owner's Manual
A Social Security Owner's Manual

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