Everything You Need To Know About Social Security “Reform”

The parade of Republicans has begun on CNBC, and one of the bells they were ringing was “Social Security Reform” dogma. Before things get too deep in New York City, there are important things you need to know.

Social Security is not now, nor has it ever been, a savings plan. Remind yourself of this anytime anybody starts talking about the “return” on your payroll taxes. There is no return, because the dollars you pay in today go directly to your grandparents, who in turn paid years ago to support their elders. Yes, there is currently a surplus, but that will vanish in a few years (the exact number of years depends on which analyst is speaking and the nature of his/her agenda).

Social Security has worked for this long because more people are working than are retired, but that is changing. Before, say, 1964 this was always true. There were always more able-bodied working people than retired people. The baby boom and subsequent advances in contraception changed this. Now experts say there will come a time when Social Security taxes collected from Generation X and younger will simply not cover Social Security payments to the Baby Boomers and The Greatest Generation.

When somebody like Alan Greenspan talks about Social Security Reform he means raising the retirement age, raising the Social Security tax paid by younger workers, and/or lowering benefits to be paid to retirees. Greenspan has been singing this tune on and off for over 20 years now, and many people either agree with him, or think he’s painting the picture as too rosy.

When today’s Conservatives talk about Social Security Reform they are talking about something completely different. They are talking about allowing Personal Retirement Accounts which would allow workers to “control” and “own” their retirement funds. The idea is that workers would be able to take some of the money that would have gone into the Social Security Trust Fund, put it into a special brokerage account, and invest in stocks and bonds.

When Conservatives say “own” and “control” they mean “pay for” and “be responsible for.” Of course “owning” and “paying for” have always gone together, but it is important to remember this point. Simply put, this system will mean that any returns you generate on your PRA will be yours and yours alone, a sort of “eat what you kill” system.

There are at least two problems with this approach.

Most people are really lousy at investing. That’s one of the reasons Social Security was put together the way it was in the first place. People didn’t have much in the way of savings, let alone investments, and what investments there were blew up in the Great Depression. As for the modern day, look real closely at your IRA and 401k statements and be honest with yourself. If you are like the overwhelming majority of Americans, you haven’t done as well as you would like. Even if you invested in nice, well managed mutual funds. Even if you took the Motley Fool’s long term advice of using index funds. Frankly, I can’t understand how anybody can look at a 5 year chart of the S&P 500 or the NASDAQ and really think investing in stocks is going to save Social Security.

If the problem is that there will not be enough money for retirees, taking in less money does not solve the problem. There is no way around this. If people are investing their money instead of sending it to the Social Security Trust Fund, there will be no money whatsoever for existing retirees. You can’t have it both ways. That is why we are hearing very few specifics about this program. If we were to hear the specifics, everyone would recognize that things do not add up at all.