RE: We might not have enough people
Social Security is solvent today, but the trust fund is decreasing because more is being paid out in benefits that is coming in in taxes. This is being driven by three factors: 1) people are living longer, so benefits are increasing; 2) related, with the large baby boom hutting retirement age, the demographics are such that we now have far fewer wage earners per beneficiary than when the program was conceived; and 3) the SS funds are invested in government securities that yield a very low ROI, so the invested trust funds grows very slowly over time. As a result, CBO estimates that the trust fund will be depleted by around 2030 and that in 75 years the shortfall could be as much as 1.75% of GDP, requiring a massive reduction in benefits to remain solvent. The Social Security Administration projects the depletion to come later, around 2038, and the 75-year shortfall to be smaller, 1.02% of GDP, but I'll go with the CBO projection.
Here's what I'd do with Social Security:
1) Legally recognize that it is in fact a trust fund and that SS contributions do create a contractual right to be paid benefits; this would overturn a court ruling in Flemming v. Nestor (1960) and commits the government to something more than a Ponzi scheme; I think a statute would be sufficient as the SCt did not really decide the case on constitutional grounds; this should be very popular with existing SS recipients, because it means that SS benefits cannot be taken away
2) Based upon 1), make SS benefits non-taxable; this impacts us later
3) Remove the earnings cap on taxable wages; the SS tax is the most regressive tax we have because of the cap (per CBO, this reduces the 75-year shortfall by 0.59% of GDP and pushes the trust fund exhaustion date by about a decade to 2039 based on a 10-year phase-in, or longer if the phase-in is faster).
4) Gradually increase the full retirement age (FRA), 1 month per year (so 66 years for people born in 1953, 66 years and one month for people born in 1954, and so forth), until it reaches 70 in 48 years; this gradually adjusts for the fact that life expectancies are far longer now than when the program was conceived; depending how life expectancy progresses, further adjustment may be necessary in the future (per CBO, this reduces the 75-year shortfall by 0.40% of GDP)
5) Put a kink point in the calculation of benefits, so that initial benefits at the higher end are reduced; this can be done in part because those with benefits at the higher end made more money in their lifetimes and therefore presumably have more retirement income from other sources, and therefore the tax exemption will give them more money than the slowing of inflation growth will cost them (this reduces the 75-year shortfall by 0.48% of GDP, per CBO).
These policies would reduce the expected 75-year shortfall by about 1.47%, turning the shortfall into a 0.45% of GDP surplus per the SSA projections and reducing it to 0.28% of GDP per the CBO projections. The go broke date for the fund was also extended out a decade or more, giving much more time to address the issue. With the long-term projections indicating solvency, borrowing to cover a short-term cash crunch would also be possible.
Now, I'll get a bit more radical. The key factor to me is the low ROI of invested SS trust funds. Here is what I would propose. The federal government has a number of functions that could be fully supported by user fees, and that some or many other governments have privatized. Suppose those were transferred to the SS trust fund, and set up as enterprises to earn a 5% ROI. I'm talking about things like the post office, the interstate highway system (which would become a national toll road system), TSA and air traffic control system, TVA and the western water and power authorities, and such. The transactions could be treated as paying off debt owed by the federal government to the SS trust fund, and the income could go to grow the trust fund balance much more quickly. These enterprises could then borrow funds against their asset values as needed.
Then I would do like Sweden and add a privatized component, basically a super 401k for each person. Initially the private portion could purchase stock in those user-fee-supported enterprises listed above, giving the trust fund cash to pay benefits. Say up to $100,000 per individual trust account would be invested in this way. Then up to a second $100,000 per individual trust account could be invested in very safe funds--something like a DJI index fund. Then above $200,000 per individual could be directed by the individual. This would have an added benefit in that each citizen would then own a piece of capital investment in the country. There is probably nothing that would do more faster to reduce wealth inequality than this.
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