Yet Another Social Security Fix

Contrary to popular belief, fixing Social Security is rather easy. At least, from an economic and financial standpoint it is. From a political viewpoint, not so much.

Many methods have been proposed in the past through means such as modification of age rules and many, just many other methods. In this article I will outline one more way to fix Social Security.

This is an important matter for public policy as well. The blog recently released an article entitled, “Where Does Your Tax Money Go?” The article finds that about 33.2% of spending is on “Social Security, Unemployment and Labor.” Unfortunate that they lump these numbers together, but it gets the point across. It’s a large portion of spending. In dollar terms, rather than % terms, we can break out Social Security specifically with this article, which puts Old Age Survivor Insurance at about $750 Billion for 2014.

The way we can save billions each year, either to pay down debt or to reallocate for better use, is through a savings mandate coupled with an insurance program. While this system is far from the ideal – a pure market system – it is highly effective and potentially more politically pragmatic.

  1. Mandate saving money. In a regulated way. Privately managed funds with real, private-sector securities, but only low-risk funds. You will probably observe crowding at the highest allowable risk section due to moral hazard, but the program will still work with a sufficient maximum acceptable risk. Ideally, you would not want any regulation, but ideally you wouldn’t have anything like Social Security at all. The insurance will create a moral hazard and an unusual propensity to accept risk which must be corrected for by this regulation. If you are going to have any kind of an insurance component, you need a counterbalancing regulation.
  2. Create a federal insurance program to guard against investment risk or devaluation. It does not protect against 100% devaluation. Rather, it protects against devaluation so severe that the investment is less than what it would have been under social security. As of 2010 that would have been a -8% return. As of 2030, that will be a -16% return. (P.S. Social Security is a Ponzi Scheme.)┬áThis is not applied on a yearly basis, but at the time of “cashing out.” In other words, if an investment doubles in the first year and suffers a -20% return the second year, the loss is not insured. If an investment has a -20% return per year on average across all years, the loss is ensured.

Problem solved. What you would see is that in the short run the insurance is tapped somewhat frequently. However, in the long run the fund will be rarely tapped at all, freeing up lots of public money for a variety of purposes.

The issue, of course, is once again the political process. We have policy solutions for that as well, but policy solutions must first be passed through the system. Which is not going to happen at this point. The political system has already stratified, and the political class is now happily entrenched.


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