The Only Way That Social Security Pays Retirees Nothing

Pretending that Social Security will pay everyone if people want to opt-out will insure that it eventually pays no one.

I generally find that the only thing more worrisome about Social Security than the annual Trustees Report is the on-going commentary for the system’s future that I find in the media. These analytical Pollyannas reveal a disconcerting distance between public’s understanding of the system’s finances and reality.

In the latest Trustees Report, the experts confessed that the program mechanics has a nearly $20 trillion gap between the revenue it expects to collect and the cash it needs to mail out checks. Against this deficit, the program holds less than $3 trillion in reserves. That is about 15 cents of solution for every dollar of problem.

Another way to express this concept is: every American could direct each and every pay check to the Social Security Trust Fund for the next two years and the problem is still not fixed. This is not a worst case scenario. It is actually a warning about what might happen in a generally good economy; it is what we should expect.

Against, this backdrop I found an article titled “Let’s End the Myth About Social Security’s Looming Bankruptcy.” This proposition appears pretty frequently on the internet, but the reasoning in this piece is distinctive.

Typically, the argument is that Social Security can’t go bankrupt because seniors might get 75% of what they had been promised. This is the exact same logic that the financial community applied to Greek Bonds a decade ago which paid in full at $0.50 on the dollar.

Instead, this column goes in a different direction. The author argues that we could liquify the trust fund. He reasons that the financial community would welcome the opportunity to buy those “IOUs sitting in the lock boxes.” He is likely correct, but that sale still leaves us $16.9 trillion short of our goal – net of expenses. Mind you, workers would still have to contribute 12.4% of their wages if the program is going to pay existing retirees. This concept simply is marching in place.

While it is not explicitly stated, the author appears to support the concept of choice, where workers who want out of the program would be free to leave. The money held in the Trust Funds would stay put to provide support for those in the system, while those who quit the program would be left to their own devices. 

Let’s look at how this answer for Social Security works out.

As day follows night, younger, high-wage single workers would exit the system because Social Security offers these workers a terrible deal. For someone who has averaged $65,000 or so, $100 of payroll taxes buys an annuity of about $4 per year in retirement. So it is probably true that these workers would be better off.

After the cash-cows leave the barn, the program’s finances would worsen, chasing more people out of the system. Their exit would trigger more deterioration, and another cycle of flight. Every round of exodus would worsen the forecast, triggering more flight. It never stops until every worker is done: everyone leaves a burning house.

After the stampede clears, lawmakers would face the $30 trillion question: what to do with existing retirees? There would be no payroll tax revenue available to pay the bills.

Regardless of form, the existing reserves of the Trust Fund would be exhausted in a matter of years. At that point, seniors would face a 100% reduction in benefits.  

The resulting visible deficit would leave the government two choices. Lawmakers could tell seniors to pound sand, or they could tax the people who thought that they had exited the system.

Instead of paying for the Social Security benefits of others in exchange for the commitment of future benefits, younger workers would be paying for the benefits of others in exchange for nothing. In that case, the only choice afforded younger workers would be what to call the new tax.

Social Security is not forced savings. The size of the trust fund ably shows that the program has little savings forced or voluntary. The program collects revenue in exchange for the promise of benefits in the future. That is closer to a bank loan than forced savings. For every dollar ever collected, the program has created roughly $2 of promises that no one expects it to keep. Yes, this system can fail.

Unfortunately, the program’s future has drifted far from the public’s eye. Many have bought into the idea that the solution is relatively easy and requires little more than for our elected officials to behave like grown-ups, so there is no sense of urgency to ask questions, much less vet answers. In the meantime, the size of the crisis grows.

About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes,, MarketWatch,, and regional media like The Denver Post.