108 – Today, we’re fixing America’s current Social Security problems with a fresh approach.
In this episode, Jeremy Keil draws our attention to how we can fix America by addressing current problems with our Social Security system. He features a clip with Dr. Larry Kotlikoff about how the economist would approach the solution. Jeremy then unpacks how retirement age, life expectancy, and taxes all play significant roles in Dr. Kotlikoff’s solution.
- Dr. Larry Kotlikoff’s recommendation for a fresh approach to America’s Social Security
- How taxes on Social Security stop when income reaches a certain dollar amount
- Why both the number of Americans working and how long Americans are living need to be considered when fixing America’s Social Security problem
- What to expect next in this How To Fix America series
- And more
How To Fix America: Social Security
Fixing A Broken System
Currently, Social Security is indebted to 61 trillion dollars. We asked Dr. Laurence Kotlikoff, one of the top 25 economists in the world, how he would approach fixing America’s Social Security.
Dr. Kotlikoff said we are in terrible, horrid long-term fiscal shape and need a fresh approach. In his book, You’re Hired!, he suggested:
- Freezing the current Social Security system and paying off what we owe
- Contribute 10% of our income to a personal account and have the government match our contributions
- Investing in the global economy with a zero real return promise, adjusted for inflation
Americans deserve to get what they paid in over time, but our current system is broken. We need to come up with something new. Many countries have already created new Social Security systems, such as Italy, Germany, Sweden, Chili, Finland, New Zealand, and Canada.
It is important for political leaders to perform generational accounting, which identifies the overall imbalance in our finances and considers the consequences for future generations. It would shed light on potential burdens on them and then enable us to fix the issues so that we don’t leave them completely indebted.
Cover All Our Bases
We want to ensure that the poor, the unemployed, and the disabled receive assistance if we amend our Social Security system.
With no real return promised and government contributions to Social Security on these people’s behalf, they can invest in their personal Social Security account without fear of losing everything they have put into it.
Another concern we want to address is contribution sharing. When one spouse wants to stay home for childcare, we want to ensure they don’t end up without any Social Security if they divorce before 10 years, as they would right now.
Directly from the AARP Article, 9 Ways To Strengthen Social Security, we made changes to Social Security about 40 years ago, in 1983, and it was said that Social Security wouldn’t be a problem again until the year 2056.
Today, Social Security is estimated to become a problem in 2034, over 20 years earlier.
In light of its growing problem, Dr. Kotlikoff suggests the entire Social Security system be retired and replaced with a new one. The current system is clearly in need of reform.
There’s No Change That Will Make Everyone Happy
Social Security consists of benefits, taxes, and retirement age. We can’t fix it by adjusting only one of the three.
There’s a game by the American Academy of Actuaries called The Social Security Game where you can test fixing our Social Security system. You can adjust the full retirement age, payroll taxes, and benefits in the game, and it will give you thoughts on the possible changes you could make.
The conclusion from the game is that you can’t fix Social Security by only reducing benefits or by raising taxes; instead, you likely have to do a bit of each.
Every political party wants to focus on one or the other, but the truth is we need to adjust all of them, even though it means everyone won’t like at least one part of the change.
Jumping back to the AARP Article, 9 Ways To Strengthen Social Security, we highlight a few of their 9 different proposed solutions. One of which is to stop capping the taxes on Social Security when we reach a certain dollar amount. Currently in 2022, when someone makes $147,000 in wages, they stop paying into Social Security. So if they make a million dollars or 10 million dollars, they won’t pay any more taxes than they would for $147,000. Changing this is an opportunity to make Social Security more solvent.
Another part of the AARP article talks about the differences in Social Security over the past few years, and why those changes worked for that time period and need to be adjusted to meet our current needs.
Back in 1940, when Social Security was just starting, Americans’ lifespans were 7 years shorter than they are now, and yet that full retirement age only changed from 65 to 67. The full retirement age needs to be adjusted for the difference in life expectancy.
Additionally, back in WWII, there were eight workers for every one retired American. That means eight people were putting in 15% of their income to support one person. Now, we only have two and a half workers for every retiree, so that too, needs to be addressed.
In the end, everything comes together. Social Security is both a tax situation and a benefits situation and there are many components that need to be considered when making a change. Even though we can’t make everyone 100% happy about the changes that need to be made to benefit everyone, the sooner we make the needed changes, the better off we’ll be.
To learn more about fixing America’s Social Security, check out the resources below!
If you have any questions, feel free to contact us using the contact information provided below!
- Dr. Laurence Kotlikoff: Kotlikoff.net
- You’re Hired! By Laurence Kotlikoff
- Larry Kotlikoff’s Substack: LarryKotlikoff.substack.com/
- AARP Article: 9 Ways To Strengthen Social Security
- American Academy of Actuaries: The Social Security Game
- 101 – An Economist’s Secrets to More Money, Less Risk, and a Better Life with Dr. Laurence Kotlikoff
- 107 – How To Fix America: Our Tax System
- Free Retirement Planning Video Course: 5stepretirementplan.com
- 3 Things You Should Know Before Choosing A Financial Advisor
- 7 Questions That Could Make or Break Your Retirement
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