Is a Hybrid Plan for Social Security a Good Idea?Trevor Gerszt
Anyone who has been paying attention to Social Security’s fiscal problems knows that the system is woefully underfunded. Years of surpluses and interest income have lulled everyone into a false sense of security. But now total Social Security tax receipts plus interest income on the trust fund are not enough to pay the total amount of Social Security payments due to retirees. The current estimate is that Social Security’s trust fund will be exhausted by 2035.
At that point total Social Security tax receipts will only be enough to pay about 80% or so of expected Social Security benefits. For those already receiving Social Security payments, they may experience a sudden drop in their benefits. And for those expecting to start receiving Social Security, they may get paid a lot less than they had expected.
Is There a Fix for Social Security?
Even worse than Social Security’s precarious financial situation is the fact that no one in Washington seems to be taking the problem seriously. Here we are only about 15 years away from a crisis that everyone knows is going to occur, yet no one is taking any steps to improve the situation. Given the current political climate in Washington, you have to wonder if Russian hackers will get the blame once 2035 rolls around and no fix is in place.
Fixing Social Security will require one or more potential options: 1.) reducing benefits; 2.) increasing Social Security payroll taxes; or 3.) raising the Social Security retirement age. Each of those fixes imposes a new cost onto taxpayers and Social Security recipients that is deemed right now to be politically unfeasible. None of those fixes are therefore particularly palatable to the Congressmen who want to continue being reelected, which is why the Social Security can keeps on being kicked down the road. Yet unless something is done to fix the problem, it will just get worse and worse.
Despite the major problems that already exist with Social Security, there has been an increasing amount of discussion about creating a hybrid Social Security program, with one part being the existing Social Security program and another part being a 401(k)-type retirement savings program. There has been an incredible amount of misconception about Social Security over the years, with many Americans believing that they have a Social Security account into which their money had been deposited over the years, and that they are owed that money in retirement. This new hybrid plan would put an account-type system into place. But is it really a viable solution?
How Will the System Be Funded?
The first question that anyone will have about a new hybrid Social Security system concerns its funding. With Social Security taxes already at over 6% of workers’ paychecks and likely to rise in order to keep the existing system solvent, a new hybrid program would most likely tack on extra payroll taxes to fund the new 401(k)-type option. Would those extra taxes be paid only by employees, or would employers be forced to pay half of it as they do with Social Security taxes?
If employees have to foot the whole bill, that could easily result in an extra 4-5% or more of their paychecks disappearing before they even see it. That reduces the amount of money that they can spend on food and housing, not to mention the amount of money that they can invest in an IRA or brokerage account.
If employers are expected to chip in, that’s an extra business expense that increases the cost of labor and will lead to less hiring. And for those employers who already offer a 401(k) or other retirement plan option, it may lead them to drop those existing benefits in favor of letting their employees rely on the government.
What Options Will Investors Have?
Once a hybrid system goes into effect, who will run the system? Over time the amount of money paid into such a system will likely be in the tens of trillions of dollars. That’s more than the federal government can deal with, and would likely require an agreement with existing Wall Street firms. You can guarantee that financial firms will be lined up waiting to get a piece of the action in managing that amount of money and gaining the management fees that will inevitably result.
Then there’s the question of investment options. Better privately-run 401(k) plans can offer their investors dozens of different options from many different fund providers. But if the government were to offer a Thrift Savings Plan-type (TSP) system then investors could be left with fewer options from which to choose. More importantly, they would likely be deprived of options to safeguard their wealth through investing in assets such as gold and silver.
Would investors be allowed to move any assets held in this hybrid Social Security program? Investors today can perform 401(k) to IRA rollovers, allowing them to roll over existing assets from a 401(k) plan into a gold IRA. If their assets under a hybrid Social Security program weren’t able to moved around in this way, then such a program would be far less flexible and far less beneficial for their retirement savings than existing 401(k) and IRA retirement accounts.
Finally, would investors be able to increase the amount of money they contribute to such a program, or would they be limited to a certain percentage of their salary or a certain maximum amount per year? That also could hurt them in retirement, keeping their retirement savings dispersed among multiple accounts and hindering them from maximizing their returns through compound interest.
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While those who advocate for a hybrid Social Security system are obviously well-meaning, the solution to the current retirement savings crisis isn’t to create another government retirement program that people will come to rely on. The solution is to impress upon people that only they are ultimately responsible for their own retirement. Then the government needs to get any roadblocks out of their way so that investors are able to start saving and investing as much as they can.