Financially Social Security is a bad return on investment… but

Now that we have temporarily moved on from a major restructure of health care perhaps there will be time for Social Security. 🤢

Part of the debate, although I doubt seriously, will include privatization of the program. The fact is a mandatory savings and investment program would provide individuals a greater return on their savings than the Social Security payroll tax for people who work a lifetime and live into retirement, but there are other issues to deal with. Let’s not discuss all that now. 

The following clip from the Wall Street Journal is part of the debate about fixing Social Security. 

It simply is not accurate, but even more important such a change would destroy the very concept of Social Security. In addition, the argument made is one-sided at best. 

Social Security calculations are skewed to lower income Americans. The percentage of income paid in taxes is proportional to the benefits received. For example: a person earning $40,000 a year can expect about $14,616 in benefits or 36% of earnings. The millionaire on the other hand can expect a benefit equal to 3.3% of earnings while paying three times as much in taxes. The arguments such as that below never give the full story. 

In addition, as you can see below even making such a change does not eliminate the shortfall and does not provide extra money for benefit improvements. 

Over 75 years, eliminating the taxable maximum – imposing a 12.4 percent tax increase on high earners (who currently face a top rate of about 44 percent) – would close more than two-thirds of Social Security’s solvency gap. This would be an important contribution to solvency, but importantly it would occur largely by creating surpluses in the near-term and crediting more benefits that would actually increase future spending. Cash deficits would return within 10 years and continue to grow over time. As a result, this change would close just over one-third of Social Security’s structural gap by 2090. In other words, a substantial portion of the fix defers the problem, but does not fix it.

To improve the structural impact of this change, policymakers could reduce the size of benefits which would be paid out as a result of this new higher income being subject to the tax. In the most extreme case, if policymakers severed the link between contributions above the current taxable maximum and benefits altogether, eliminating the taxable maximum could close over 85 percent of the program’s solvency gap and over 55 percent of its structural gap. SOURCE: The Committee for a Responsible Federal Budget

QC Note: Eliminating the link between taxes and benefits essentially turns what was supposed to be a self-sustaining social insurance program into a welfare program. 


  1. Dying with average debt of $62k , where on average $50 of that is mortgage debt. Sounds ominous. Until, that is you factor in average assets (probably in excess of $200,000when you include home equity).

    I wonder to what extent that $50,000 of average mortgage debt has been growing due to reverse mortgages. A salesman for Epcot retirement condo communities told me that over 50 percent of his 2016 sales used reverse mortgages.

    Anyway, remember that averages can be deceiving. An old salt actuary friend told me this joke 30+ years ago. Averages can be very deceiving. Take a guy, put his head in the oven, his feet in the freezer. His average temp is 98.6, but he’s still dead!


    1. Still without mortgage debt. $12,875, if unsecured credit card debt is quite a bit for the banks to write off. I have $9,000 in credit card debt and if I die before it is paid off the banks will have to eat it. There are no assets for my wife to sell to pay the banks and she is not on any of the accounts. I do plan on having it down to zero in 15 months. The $700 per month that I am paying is reducing it very fast.


  2. It is time to just figure what the tax rate needs to be to fund the program for the next 90 years. Slowly raise the tax each year over the next 15 to 20 years, funding problem solved. I think I read a report a few years ago that said a 5% increase in tax rate will fix the problem. With the cost of everything going up, do people really think that the SS tax rate would stay the same.


    1. The problem with just raising rates is that nothing happens in a vacuum. In economics there are no solutions, only trade-offs. Government policies create problems which government feels obligated to correct but only causes new and sometimes greater problems. Raising SS rates will have the same effect on employment that minimum wages have. From an employer’s point of view, a rate rise will increase his price of labor. All things being equal, when prices go up, demand goes down. On the employee side of the equation, he will have less money to spend on consumption which has a negative effect on the economy as a whole and may further reduce employment.


      1. We have record corporate profits, in the billions. I know plenty of small business owners who are doing very well and they tell me that they do not know why the government is not fixing the problem with SS.


      2. Government is not fixing it because they don’t tell people the truth about the problem and have pushed it down the road for years with no accountability for their actions. Many people don’t believe the truth when they hear it anyway. The truth is simply that taxes to fund the promises made to each generation are insufficient and have been for decades.


      3. If the rates had very gradually been increased on a regular basis over many years I suspect that would not be an issue. Now we are in a bind because the problem was ignored for decades. As a result, people want to change the system so that only the “wealthy” pay more rather than the bulk of beneficiaries of the program.


  3. Sorry, one more time. Freeze benefit formula, freeze current “social” subsidies (flat rate tax, earnings cap, regressive benefits formula,etc.) then, using existing burden allocation, offer each individual (worker and beneficiary) a choice on how she / he will fill funding gap. Annually, iteratively adjust price tags to auto-correct for variances in results from assumptions. Any future tax increase or change in benefits must be approved by 2/3 votes of current taxpayers. Congress remains free to introduce a new or supplemental program to resume vote buying.


      1. A fully accurate and well documented fact. Americans cannot plan, save or manage their money. Those who do are the exception and more power to them. The majority however are headed for trouble. If that were not true, then the majority of seniors would not be depending on SS for all or the majority of their income. And yes, except for the poorest among us, everybody can afford to save.


      2. RD, We are a debtor nation. From a recent article.-

        You’re probably going to die with some debt to your name. Most people do. In fact, 73% of consumers had outstanding debt when they were reported as dead, according to December 2016 data provided to by credit bureau Experian. Those consumers carried an average total balance of $61,554, including mortgage debt. Without home loans, the average balance was $12,875.

        No wonder credit card interest rates have stayed high in these low interest rate years.
        73% having outstanding debt, no wonder the average family cannot or will not save for retirement.
        Something is really wrong when people still have a mortgage payment in retirement.
        I will be completely debt free at age 62 in August 2018.
        I plan on paying cash for everything in retirement, even used cars.


      3. Yes, something is wrong. People can’t live within their means and many must upgrade their home every few years thus assuring they will always have a mortgage.


      4. Yes, because the default is always the same option a higher tax rate. You must force the individual to voluntarily and affirmatively select any reduction in benefits or any forebearance – like agreeing not to claim SS prior to SSNRA. I can confirm that had I the chance 20+ years ago when Clinton was searching for a solution and Monica with blue dress and cigar, I would have waived SS commencement at age 62 to fill my personal funding gap – I was age 45 then.


      5. How does waiting past 62 save SS anything? You get the bigger check so it cost SS more. If I draw a reduced benefit at 62 and live to 85, I will receive $66,000 less. Not counting the reduced cola, because the increases will be on a smaller monthly benefit. The only think it might save is the people who die before reaching SSNRA. I will be starting SS benefits at age 62, because I can enjoy the extra money in my 60’s and 70’s. Why should I wait for the bigger SS check for the nursing home to get a bigger payment in my 80’s. I will manage just fine on the reduced amount. Since there are few companies offering pensions, why not have them pay a little more in SS taxes to support future retirees.


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