The Planning-to-Fail Plan
The little-recognized implication of this year's election is that we are never going to fix Social Security.
The unsustainability of the crown jewel of the middle-class welfare state is well known. As the Baby Boomers get old, there are fewer younger workers paying taxes to support them. The program's reserves are being spent down and will be thoroughly exhausted some time around 2035, at which point Social Security will only be able to pay out 79 cents of every dollar it has promised in benefits.
We've been talking about basic reforms and long-term solutions for decades, and we've gone back and forth, and I'm starting to resign myself to the fact that we're never going to do it. George W. Bush made the last big effort in 2005. He ended up getting sold out by congressional Republicans, burning up a lot of political capital from his re-election and getting nothing in return. All the more credit to him for trying, but realistically, he's likely to be the last. Most of this year's presidential candidates either want to expand the program (Bernie Sanders) or are indifferent or hostile to reform (Hillary Clinton and Donald Trump). And between those three, they represent the overwhelming majority of this year's primary voters.
So we're at the point where we have to start contemplating the possibility: what if we don't fix Social Security? What if 2035 closes in on us, and we've done nothing to reform it? What if we just let it break?
Well, if we think this through, we find out that letting Social Security break is a kind of reform, by default.
That's an intriguing suggestion I recently came across: that allowing the system to run out of money and simply cutting benefits by 21% across the board, as would be required to make benefits match the program's tax revenues, would constitute a de facto reform. My only real quibble is that the article refers to this as the "most hated Social Security fix," based on polls in which people say they don't want it to happen. But there is frequently a big difference between what people say they want and what they actually vote for. It's like how they all hate Congress but keep re-electing their own congressman, over and over again.
Judging from the way people actually vote, doing nothing about Social Security is in fact the overwhelmingly popular option, ratified in dozens of elections over the past three decades. It is the verdict of the vox populi.
Yet just running out of money would actually achieve a lot of the reforms we've been talking about, without anyone ever having to vote for them—which is precisely what everyone wants, right?
For example, it is widely agreed that we will have to push back the official retirement age at which people become eligible for Social Security benefits. When the program was first created, average life expectancy was not much longer than 65 years. It was only supposed to provide support for the last few years of the average person's life. Today, life expectancy is more than ten years longer, and it will probably be longer still by 2035. So it makes sense that Social Security shouldn't be paying for the last decades of everybody's lives. We should move the retirement age back a few years.
By doing nothing, we create a strong natural incentive to do just that. Current Social Security rules allow you to increase your Social Security payment by putting off retirement for a few more years. The longer you wait, the greater the increase, in accordance with this chart. So to make up for a 21% cut, you will need to delay your retirement by a little more than three years. Which is exactly the kind of reform we would have pushed for.
Here's another example. To make up for Social Security's shortfall, we should be pushing people to become less dependent on it by funding more of their retirement with tax-free private savings. Well, it looks like they're going to have to do that, like it or not. A big across-the-board cut in Social Security benefits will induce millions of panicked Millennials to frantically max out their 401(k)s and IRAs just as they're entering their prime earning years. Which is exactly what we need them to do.
But what about people who don't have time to save and plan—people like me who will reach retirement age just as the Social Security money runs out? Well, we've had plenty of warning. All of the people immediately affected by this future cut in Social Security will have heard for at least four decades that the program is in crisis, that it is running out of money, that it is going to go bankrupt. So when the thing we were told for our entire lives was going to happen actually happens, there's really no reason to have any sympathy for us.
But there are certainly some sympathetic cases, the people at the bottom getting the lowest levels of Social Security benefits, who will be least able to compensate for a 21% cut. But if your concern is about the elderly poor, a lot of us have been asking: why not put your money where your mouth is? Why not donate some of your own income and time to a charity that helps those for whom you say you have so much compassion? Letting Social Security break and then having private charities take up the slack—which they generally do much better and more efficiently than government—is one of the big reforms free-marketers have advocated all along.
And if you insist on having government do something about the poor, does it makes any sense to pour more money into entitlements for the middle class? My own proposal for reforming Social security is to make it into a straight welfare program for the poor. Letting the program break would go a long way toward accomplishing that. It would cut benefits across the board, but those at the bottom, who are hit worst, would be able to seek help from other means-tested welfare programs, like food stamps or housing subsidies, that could be ramped up to accommodate the influx, probably at much less expense than trying to keep the entire Social Security system operating unchanged.
The only thing that would not be accomplished by doing nothing about Social Security is to raise taxes, which is excellent. Raising taxes to pay for Social Security has already been tried once, and it didn't solve the problem. The new Social Security payroll taxes imposed in 1983, in the program's last attempt to tax its way to solvency, are already enormous. They are far greater than the program's tax burden was ever supposed to be, and I would argue that those payroll taxes have significantly decreased the ability of the average family to save their own money for retirement, making them more dependent on Social Security and therefore making the problem worse. Raising those taxes further is likely to be counteracted by their drag on economic growth, income, and employment. Doing nothing looks like a much better option.
So doing nothing about Social Security ends up doing an awful lot. And isn't that the standard solution we're starting to adopt for dealing with failing government programs? Voters clearly aren't in a mood to think things through, question the basic priorities of our government, and implement orderly solutions. They've decided, at least for a while, that it's easier to vote their emotions and lash out at the DC establishment, or billionaires, or immigrants, or whoever. So when we have a failing program—and ObamaCare is on track to fail well before Social Security—we aren't likely to button it up in an orderly way, learn our lessons, and implement a better solution. We will just let it break and cobble together the pieces in as much order as we can manage.
If you don't like this approach, then you're free to back some better reform proposal. There's not much time left, but we've been telling you that for years. And the fact is, if you're supporting the front-runner of either party, then you don't really want us to do anything about Social Security for most of the years we have left. Sure, when the system's collapse is imminent, you will then frantically demand that somebody do something, but it will be too late.
As they say, if you fail to plan, you plan to fail. Right now, America is planning for its middle-class welfare state to fail—which turns out to be a kind of haphazard plan of its own.