How to Reform Social Security—Part 1

Both of the two leading presidential candidates have promised not to touch Social Security. That’s too bad. In just nine years (2033), the Social Security Trust Fund will be exhausted and benefit checks will have to be cut by 23 percent. In just seven years (2031), the Medicare Part A trust fund will be exhausted and hospital payments will have to be cut by 11 percent. These required spending cuts are part of current law.

Beyond those watershed moments, things get progressively worse through time. Looking indefinitely into the future, the Social Security and Medicare Trustees tell us that the two programs combined have an unfunded liability of $163 trillion, in current dollars. That’s the difference between the present value of future promises we have made and the future taxes dedicated to meet those promises. It is almost seven times the size of our economy.

In a sound retirement system, we would have $163 trillion in the bank earning interest—so that the funds would be there to pay the unfunded bills as they arise. In fact, no money has been saved or invested for future expenses.

These two programs have overpromised relative to our means, and our politicians have not found any politically acceptable way to solve the dilemma.

The political problem is not hard to understand. Every proposal for reform contains cuts in someone’s benefits, at least to some degree. Opponents of reform find it easy to demagogue those benefits cuts by scaring the elderly. Even if the reform only raises the retirement age, say, for 20-year-olds, the demagogues will tell senior voters that once that type of change is begins, cuts in benefits for today’s seniors won’t be far behind.

The Sine Qua Non of Reform

The answer to this problem is to make today’s retirees positive beneficiaries of reform.

A golden opportunity to do so exists for two reasons: (1) the current system is abusing senior retirees in myriad ways, and (2) many of these abuses can be eliminated without any cost to the Treasury. In other words, some aspects of responsible reform are a free lunch.

All evidence suggests that senior voters are very self-interested. A reform that increases their benefits is likely to be quite popular among seniors, even if it raises the retirement age (or even partially privatizes retirement accounts) for young people.

I believe that Goodman Institute economists are the only ones who have discovered this key to making reform politically possible. Prof. Laurence Kotlikoff, for example, has created an accurate online Social Security calculator that does something the Social Security Administration does not do. It shows visitors the consequences of claiming benefits in different ways and shows them how to claim in a way that maximizes their benefits.

Prof. Kotlikoff also has created an online portal where seniors can report their individual horror stories. (See below.) He has written with Terry Savage Social Security Horror Stories: Protect Yourself from the System—and Avoid Clawbacks. Every member of Congress should read this book.

Robbery by Red Tape

The Social Security Administration admits that seniors face extraordinary delays when they try to contact Social Security by phone. When they finally get through, the advice is often incorrect. When seniors claim benefits by acting on that bad advice, they are not allowed to correct the mistakes. But if Social Security makes a mistake and overpays, it demands its money back. If the senior can’t pay, Social Security stops sending monthly checks.

It is not surprising that Social Security personnel make so many mistakes. The system has 2728 rules and hundreds of thousands of pages explaining the rules, governing just 13 basic benefits. Most employees of Social Security do not understand the system they are supposed to be administering.

Bad Advice on Choosing a Retirement Date

Seniors can “retire” and start claiming benefits as early as age 62. But if they delay that decision, they get a larger monthly benefit check as a result. In fact, if they delay claiming benefits until age 70, their monthly benefit check will be 76% higher (in real terms) than what they would receive claiming benefits at age 62.

Delaying retirement is one of the best investments anyone can make. The investment is inflation-proofed, guaranteed by the government, and pays a 3% real rate of return. If you have a normal expected life span (are not terminally ill) and are not cash-constrained (can live on wages or other retirement savings), you are foolish not to wait until age 70. Yet only 2% of seniors actually do that. One reason is that Social Security personnel actually encourage early retirement and do not carefully explain the benefits of delay.

Kotlikoff and his colleagues estimate that the typical retiree is leaving $182,370 (in present-value terms) on the table by claiming benefits too soon.

Bad Advice to Widows and Widowers

Social Security’s own Inspector General estimates that more than 13,000 widows and widowers collectively have lost $130 million in Social Security benefits because of mistakes in claiming spousal benefits. Surviving spouses are entitled to a spouse’s benefit (based on their partner’s Social Security contributions) and to benefits in their own right (based on their own contributions) But they can’t have both benefits at the same time. By law, Social Security personnel are supposed to advise the surviving spouse on how to make benefit claims in a way that maximizes their lifetime income. But apparently this almost never happens.

In one recent case, had a widow would have lost $400,000 in lifetime income had she followed the Social Security personnel’s instructions.

Demanding Refunds for Past Mistakes

When Social Security discovers it has made a past mistake, it can be ruthless in demanding the money back. For example, it can claw back a senior’s monthly benefit check based on errors that are sometimes decades old and for amounts totaling tens of thousands of dollars.

Last year, Social Security sent 2 million beneficiaries “clawback letters.” Here are some particularly disturbing examples of past clawbacks:

• Social Security Sues 32-Year-Old for Benefits He Received 21 Years Ago, at Age 11
• Social Security Demands Widow Repay $300,000 for Its Own Mistakes
• Social Security Claws Back an 81-Year-Old Widow for Benefits Allegedly Received 45 Years Ago
• Social Security Demands $24,436.60 from Retiree. Cuts Off Monthly Benefits When He Doesn’t Pay

Every single Social Security beneficiary is a potential recipient of a clawback letter, even if they have already received one.