I’m not just the first economist to run for President. I’m also a long-time student of our Social Security System. Part of my PhD dissertation focused on Social Security’s macroeconomic effects on the economy as well as its impact on private saving decisions. Over the years I’ve written books and articles covering Social Security and how it should be reformed. I believe all generations within a cohort should be treated fairly, which is why I’ve spent so much time and energy making sure Joe, who is say 63, doesn’t get more than Sally, who is also 63, because Joe knows the rules and Sally doesn’t. But I’m also terribly concerned about fairness across generations, which is why I’m pushing for a major overhaul of Social Security starting immediately.
Last year I co-authored a New York Times best seller called Get What’s Yours — the Revised Secrets to Maxing Out Your Social Security Benefits. I also have a software company that markets the top-ranked Social Security software at www.maximizemysocialsecurity.com.
So I don’t just understand Social Security at the 30,000-foot level. I know its details perhaps as well as anyone in the country. Indeed, I’ve been writing my Ask Larry column for the past four years. This column, which answers households’ questions about Social Security, was first hosted by PBS NewsHour. It’s now hosted on Forbes and PBS’ Next Avenue. (I answer different questions on each site.)
In short, when it comes to Social Security, I know the good, the bad, the ugly, and the truly horrific.
Where Do Trump and Clinton Stand on Social Security?
Trump’s website doesn’t appear to mention Social Security. Check out Trump’s Issues page. Social Security is not one of them. But he has publicly stated, “We’re gonna save your Social Security without making any cuts. Mark my words.”
Clinton says she will expand Social Security and support it financially with higher taxes on the rich. Specifically, she means to raise the ceiling (now $118,500) on Social-Security taxable earnings and make 100, not 85 (now the case) percent of Social Security benefits taxable in the case of those with high incomes. Clinton also wants to expand survivor benefits to address the significant number of very poor elderly widows. And she wants to provide higher benefits to those helping their older parents because such people can’t contribute as much to the system. Clinton believes “Social Security must remain what it has always been: a rock-solid benefit that seniors can always count on.”
Critiquing Trump’s and Clinton’s Positions
The most important thing about Trump’s and Clinton’s Social Security positions is not what they say, but what they don’t say. What they don’t say is that Social Security is dead broke — not in 75 years or 50 years or 19 years. It’s broke today. In fact, according to Social Security’s own actuaries, the system is now $32 trillion (almost two years’ GDP) in the red! The $32 trillion is the present value difference between all the system’s projected future benefit payments less the sum of a) all its projected future taxes and b) its current almost $3 trillion trust fund.
We economists call this measure Social Security’s infinite horizon fiscal gap. Last year, the Trustees reported a fiscal gap of $26 trillion. So the system’s fiscal gap grew by $6 trillion over the past year, i.e., Social Security ran a $6 trillion deficit!
The system is 32 percent underfunded. (The coincidence of the two 32 numbers is just a coincidence.) In other words, Social Security’s 12.4 percentage point payroll tax rate must be raised immediately and permanently by 32 percent, which is 4 cents out of every dollar we earn (up to Social Security’s covered earnings ceiling, which is now $118,500). The longer we wait, the higher the tax hike will have to be, which means the larger the fiscal burden our children will face.
Social Security’s fiscal child abuse is only a small part of a far bigger and far more alarming overall fiscal expropriation of today’s and tomorrow’s children. Last year, based on the Congressional Budget Office’s long-term alternative fiscal scenario, the nation’s overall fiscal gap was $199 trillion, making our entire fiscal enterprise 53 percent underfunded. Consequently, while Social Security is in horrific fiscal shape, the rest of the fiscal system cannot bail it out, because it’s in even worse shape.
Trump has proposed no tax hikes to cover Social Security’s $32 trillion shortfall. His tax reform will reduce personal income tax revenues and includes no increases in payroll tax revenues. Consequently, stating that “We’re gonna save your Social Security.” is simply hot air.
Clinton is also spewing hot air, but not quite as hot when she suggests that raising payroll taxes on the rich and making them pay income taxes on all their benefits will sure up the system. It represents more of Washington’s standard practice of doing too little, too late. My estimate is that Clinton’s Social Security revenue plans will produce at most one third of the funds needed to close Social Security’s fiscal gap. This will get us through her second term of office, but still leave our kids with an enormous problem to handle.
It’s time to fix Social Security from the ground up without sacrificing its key objectives. If we are going to ask younger generations to pay most, if not all, of the current system’s unfunded liability, let’s give them a modern Social Security system that is simple, transparent, fair, efficient and fully-funded. In conjunction with my tax and healthcare reforms, my Purple Social Security Plan eliminates our nation’s overall fiscal gap.
My plan deals with the retirement portion of Social Security. Here are its 11 provisions:
1. Grandfather in current Social Security beneficiaries. That is, pay them the Social Security benefits they’ve already earned over time. Finance these payments from Social Security FICA tax proceeds, which will be expanded under my tax plan. Over time, these revenues will be added to general revenues as the accrued liabilities of the existing system decline relative to the size of the economy.
2. Freeze the current Social Security system by filling zeros in workers’ earnings records for years after the reform begins. This means just consider the earnings records of workers during the year before the reform.
3. Require all workers under 60 to contribute 10 per-cent of their wages to Personal Security Accounts (PSAs). This 10 percent compulsory personal saving contribution is in addition to the 12.4 percent FICA tax.
4. Allocate each worker’s contribution 50-50 to his/her own PSA and to his/her spouse/legal partner’s PSA.
5. Government contributes to the PSAs of low-income workers, the unemployed and the disabled.
6. All PSA balances are invested in a global market-weighted index fund of stocks, government bonds, corporate bonds and real estate trusts.
7. From ages 61 to 70, all PSA balances for each cohort (defined by year of birth) are gradually sold to purchase TIPS (Treasury Inflation Protected Securities).
8. All investing, sales, purchase of TIPs and provision of benefits is done by a single government computer at zero cost. Wall Street plays no role and collects no fees.
9. The government guarantees that PSA balances when they are sold and converted to TIPS equal at least what was contributed adjusted for inflation. I.e., the government guarantees PSA participants against real losses.
10. PSA participants who die prior to age 70 bequeath unconverted balances to their heirs.
11. Starting at 62, each cohort-specific pool of TIPs is used to make payments to surviving PSA participants in proportion to their share of PSA assets used to purchase that pool of TIPS.
My plan’s system of Personal Security Accounts, progressive government contribution-matching, contribution sharing among spouses/legal partners, uniform investment returns, a government guarantee of a zero real return minimum and collective cohort-specific annuitization represents a modern Social Security system. It is, I believe, what we would choose to establish if we could start Social Security from scratch today. But while we can’t start Social Security from scratch, we can freeze the existing system, pay off all benefits owed as they come due and run the PSA system in parallel.
How will this reform help reduce the country’s fiscal gap? First, payroll tax revenues will continue over time even though the old Social Security system is being phased out. Indeed, since I eliminate the payroll tax ceiling as part of my tax reform, payroll tax revenues will be substantially higher. Second, no one will accrue additional benefits under the old system. Hence, the government will only need to pay Social Security’s accrued benefit liabilities, not its projected benefit liabilities. Its accrued liabilities are, I understand from speaking to Social Security actuaries, roughly $60 trillion less than its projected liabilities.
Some might view the 10 percent compulsory contribution to PSA accounts as a disguised tax. That’s not my view. The PSA accounts are the private property of each account owner. Yes, the government will be forcing us to save 10 percent of our wages. But it won’t be handing that money to others. It will be investing our money in a fully diversified global portfolio, plus providing a guarantee against experiencing any losses on a cumulative basis. That’s an investment anyone would want. And it will pay out our money to us in the form of real annuity payments that depend on our cohort’s realized mortality.
Furthermore, we should all be saving at least 10 percent of our pay for our retirements anyway. We Americans are very poor savers. Our decades-long experiment with tax-favored retirement accounts makes that clear. Far too many of us chose not to contribute to retirement accounts or not to contribute very much. That’s, in part, why the Baby Boom generation, of which I’m a member, is so poorly prepared for retirement. Having the government force us to save is what Social Security is in large part about. The PSA system forces us to save for ourselves. What it doesn’t do is force our kids to pay for our benefits and leave their own retirements at grave financial risk.