The Social Security program that your parents once knew will be changing sometime in the next 18 years, whether we want it to or not.
What's wrong with Social Security?
The Old-Age, Survivors and Disability Insurance Trust, or OASDI, paid out monthly benefits to more than 59 million people in 2014, totaling more than $850 billion. But the balance of OASDI funding versus payouts to eligible beneficiaries is shifting at a rapid pace.
All working Americans pay a federal payroll tax that goes toward funding the OASDI. Currently, employers and employees split these taxes down the middle (6.2% each), while self-employed individuals are responsible for the full 12.4%. Until recently the program generated enough revenue to fully fund benefits for retirees and even build its cash reserves. However, that's changing.
As baby boomers begin leaving the workforce, the worker-to-beneficiary ratio is expected to fall from 2.8 as of 2014 to 2.1 by 2040. This means the OASDI will experience net cash outflows during the course of the year, as payroll taxes won't fully cover the benefits being paid out. Furthermore, life expectancies in the U.S. are higher than ever according to the CDC (nearly 79 years), meaning retirees are able to collect payments for an even longer period of time. Altogether, by 2033 the excess cash reserves in the OASDI will be depleted, and a 23% benefits cut will be needed (assuming Congress makes no changes to the current structures of the Social Security program) to ensure its survival for the next five-plus decades.
Presidential candidates sound off on Social Security
This dilemma for the Social Security program has been well documented, but few viable solutions have emerged from lawmakers in recent years. However, with the presidential election right around the corner, a few candidates have been offering their takes on how to best fix the program.
Some candidates, such as Republicans Jeb Bush and Chris Christie, would like to see a substantial boost to the full retirement age (FRA), or the point at which retirees qualify for 100% of their eligible benefits. Your FRA is determined by the year you were born, and currently it ranges between ages 65 and 67. Bush and Christie have suggested pushing the FRA gradually up to 68-70 and 69, respectively. Both candidates contend that rising life expectancies make this move something of a no-brainer.
Christie also had the somewhat controversial idea of pushing the minimum age at which Social Security benefits could be claimed from 62 to 64, and wants to remove Social Security benefits entirely for those retirees earning $200,000 or more per year, while limiting payments for those making in excess of $80,000 per year in retirement.
But one presidential candidate in the Republican field continues to shun the idea of cutting benefits or raising the retirement age -- two of the more popular paths by which lawmakers have tried to fix Social Security. Instead, Republican Mike Huckabee has offered a truly radical proposal.
One truly radical proposal
Mike Huckabee's approach to fixing Social Security is simple: he doesn't want people who've been "forced" to pay into the system to be denied their right to receive benefits come their golden years. In fact, Huckabee has only harsh criticism for the way in which the program is funded and managed:
"If you start telling [Social Security beneficiaries], by the way, we lied to you, we took the money all those years that you worked, you didn't have any say in it, we involuntarily extracted it from your pay and told you it was going to be there, but we didn't do a good job of taking care of it."
Huckabee's first objective would be to change the way Social Security is funded. There's nothing wrong, in Huckabee's eyes, with payroll taxes providing revenue for the fund, but he implied that a stronger economy would lead to new ways to generate revenue for the OASDI. Voters should expect to hear more details concerning revenue generation in future months.
But the really radical proposal in Huckabee's Social Security fix comes in the form of disbursements. Instead of signing up for Social Security sometime between the ages of 62 and 70, which is currently the only option for eligible Americans, and receiving a monthly benefits check, Huckabee wants to offer a one-time, lump-sum cash out benefit at age 65 to participants that would be completely free of taxation. Per Huckabee, it would remove the government's ongoing involvement in providing for seniors, and it would potentially allow seniors the opportunity to invest their lump-sum payment in order to achieve inflation-topping returns.
But could it actually work?
Arguably the greatest allure of Huckabee's plan is that it removes the uncertainty associated with rising life expectancies and pays out eligible Americans at a predefined time. Essentially there would be few surprises moving forward. The ability to invest for oneself could also give seniors the opportunity to live more comfortably during retirement.
Yet, Huckabee's "fix" has some flaws in it as well.
For starters, if Huckabee is staunchly opposed to raising the FRA or cutting benefits to current and future beneficiaries, then the only logical choice left is to boost taxes to generate more revenue. In all fairness, we can't really speculate with any certainty as to how Huckabee plans to raise additional funds, but any direct increases to payroll taxes would probably hurt the middle class, which is finally on the upswing following the Great Recession.
The bigger issue is the one-time lump-sum payment. Personally, the idea sounds great to me -- but I'm among a rare few who are knowledgeable when it comes to investing and managing my own money. The vast majority of working Americans lack the basic financial skills that would allow them to prudently manage a lump-sum payment. For instance, a Financial Industry Regulation Authority survey posed five questions to millennials on concepts such as inflation, interest, mortgages, and stocks. Less than a quarter of the participants passed the test by answering four or five questions correctly. How can we expect seniors, who may not understand basic financial concepts, to prudently manage a lump sum of money?
It's tough to say this early in the game whether or not seniors and working Americans would back Huckabee's proposal, but what we can say is that it's far from the slam-dunk fix that the American public and current retirees are hoping for.
Stay tuned, as we're likely to hear more on Huckabee's Social Security proposal in the coming weeks/months, as well as proposals from other presidential candidates, Republicans and Democrats, as we near the election.