Thursday, July 9, 2015

What's Wrong with Bernie Sanders' Plan on Social Security and How to Fix it

Presidential candidate Bernie Sanders has done an outstanding job of highlighting the current retirement crisis. He's put forth a fairly credible plan for expanding Social Security, currently threatened with insolvency by 2033. The full text of Senator Sanders' plan, as presented to a Senate hearing in 2011, can be found here and in the Senator's Social Security Expansion Act submitted to Congress in 2015.

Senator Sander's plan is now gaining media attention and a loyal following by Social Security advocacy groups. It relies on promoting the continuing availability of Social Security funding, almost exclusively, through lifting the cap on annual wages subject to the FICA payroll tax, (currently $118,000). US Treasury Secretary Jack Lew actually has a plan to divert a greater portion of the existing FICA tax, in order to fund the disability portion of the Social Security Trust Fund, or OASDI (with the disability program expected to reach insolvency by next year).

As the Senator claims, it is true that a vast amount of wage income passes through private incomes that is not subject to the FICA tax. In fact, IRS data for 2012 shows just under 21 million individual tax returns, or 22% of the total taxable returns filed, with adjusted gross incomes greater than $200,000. A total of 392,850 returns filed showed AGI of greater than $1 million. For these individuals, upwards of 90% of their income is exempt from the FICA tax.

But research indicates that removing the cap on wages subject to the payroll tax would only delay the date of insolvency of the Social Security Trust Fund by a few years. Moreover, by 2035, the Trust Fund would still only be able to pay 85% of projected benefits (rather than the 75% that the Social Security Administration currently estimates).

This brings us to the first point about the projected insolvency of Social Security. Many are now arguing, including Senator Sanders, that in 2033, Social Security won't be bankrupt or insolvent, but rather, that the fund will only be able to pay 75% of projected retiree benefits. Sorry folks, but it's the same thing. When a corporation, government or private individual files for bankruptcy it doesn't mean that they have zero in the bank. Rather, it means that the company's debts or payment obligations exceed their assets or ability to pay their liabilities as they come due. The company is thus considered insolvent. Let's not needlessly confuse the issue with semantics.

That being said, the Senator is entirely correct in his premise that something must be done now given the current level of personal retirement savings, the dramatic abandonment of defined benefit pension plans by Corporate America and the fact that 35% of Americans in retirement rely solely upon Social Security for their income. Like it or not, reforming Social Security is the only place for America to take such remedial action.

But here's what Bernie Sanders has left out of his plan. First, in order to achieve long term stability for Social Security in the face of highly unfavorable demographics, we need to delink Social Security from the payroll tax. Americans need to begin to realize that they haven't paid into a pension plan, for which everyone will receive proportionate dividends in their retirement. In other words, Social Security needs to be means tested. There's no reason why the government needs to pay retirement benefits to Bill Gates. He's fairly well prepared for the expenses of retirement.

Second, while lifting the payroll cap is a good start, ultimately Social Security will also need to be delinked from the tax and the idea that the program can be self-funded. Many nations around the world, including Australia, operate pension plans that are general budget items. Australia's Age Pension System has operated this way for many years and is consistently ranked as one of the world's most successful retirement systems. These and other changes to the Senator's plan can and should be made now, to provide an approach that will restore the solvency of Social Security for future generations.

If you'd like to read more about the retirement crisis and the way to solve it, please check out my new book, "Up in Smoke: How the Retirement Crisis Shattered the American Dream", now available on Amazon, iTunes, Barnes and Noble and other ebook retailers.