I am a retired independent pension consulting actuary.
Having worked for nearly 40 years in the pension industry, I decided to devote whtever years I may have left to saving Social Security. decided to enter the debate on how to fix it.
Social Security will not be fixed until we bite the bullet and make it a real defined benefit pension system.
Currently it has only one compenent of the three that all such systems in the private sector. Adding the other two will fix it. Nothing else will---especially not privatizing it by converting it into individual accounts.
The latter is one of those simplistic 'solutions' that not only would throw out the baby with the bath water---the social needs---but also bring with it enormous other problems that might even drwarf our seeming inability to figure out how to do a simple thing---provide pensions for pour people.
All defined benefit pension systems in the private sector have these three components, only the first of which is present in the current Social Secuirty system:
1. A defined benfit formula that can target benefits to precisly who we want them to go to---typically based on pay and service. Social Security has this one right, and amazingly the benefits are not too generous, and reasonable.
2. Advance funding of an actuarial nature. The process itself provides the discipline necessary, and the assets, together with the investment returns make it affordable and also provide great security. Pay-As-You-Go is simply not an actuarially sound approach for any pension system.
3. Laws with teeth in them to protect the system and the plan participants.
With respect to 2 and 3, it was Congress itself that passed ERISA (The employee Reterement Income Security Act) in 1974 that mandated that these things be done for all defined beenfit pension plans in the private sector.Unfortunately, they forgot why they did so and have neglected to do the sdame for the biggest and most important defined benefit pension plan of them all: Social Security.
Today, in tens of thousands of such plans in the privae sector, more than half the cost of the benefits are paid for by the investment returns. This stands in stark contrast with Social Security which has less than 5% paid for by investment returns---which makes it the most erxpensive possiboe way to pay for any pension system. Th elack of assets also cause all of the other well-known problems---from intergenerational inequity to the constant tinkering by politicians with either the benefits or the tax rates.
Apart from the Big Three---Stupidity, Politics, and Perfidy, the single biggest cause of the lack of our ability to come to grips with the nature of the problem has been accounting system that went out in the 20s---cash rather than accrual accounting.
The very idea that we call a system that has a multi-trillion dollar unfunded obligation, as measured by the same methods that are mandated to be used in the privat5e sector---and instead refer to the systema s having a 'surplus' is mute testimony on the vast gulf of misunderstanding that must be bridged before any serious debate can take place.
Do you wish to solve the problem or merely bifuracte it more?
The so-called surplus is in reaity merely the assets of the system---around 800 billion dollars, or about twice the current benefit payout. There is absolutely no mention or recognition of the actuarial obligations to compare the assets to.
This figure is roughly the same as most defined benefit pensions in the private sector also invested in treasuries. The difference is that there are also about 40-60 times as much assets also invested, thanks to the advance funding. About 50-70% of that has been invested for a very long time in stocks.
To talk of investing a part of our puny 2 times assets in Social Security is to play games with the numbers and the concepts and the language itself.
The very idea that 'cost' is the amount necessary to pay benefits for one year unbder a pension system is so falacious that it defies reason much less close analysis.
I will be happy to answer questions on how these systems work in the private sector and why Social Secuirty doesnt work because of their omission.
has it all in treasuries just like Social Security.
