Social Security, Medicare/Medicaid and National Defense consume two-thirds of all federal spending and are responsible for most of the annual spending increases.
That leaves Americans with a choice. We must either cut spending on these three programs or pay much higher taxes to cover the ever-increasing costs of the programs.
Last week, I looked at the realities of military spending and will focus on Social Security this week.
The president’s budget projects that this one program alone will cost $944 billion in the coming year and grow by more than $50 billion a year every year. The automatic increases result from the growing number of Social Security recipients as the Baby Boomers retire, the benefits formula and inflation.
Looking long-term is a bit scary. There is a huge projected shortfall because promised benefits greatly exceed future tax collections. Estimates of the shortfall vary, but it’s clear that the unfunded liability is in the tens of TRILLIONS of dollars.
To put that into perspective, it’s bigger than the entire $18 trillion federal debt.
That’s why financial planners advise workers to prepare for retirement without counting on Social Security. It’s unnerving for workers to pay a huge portion of their paycheck into a system that they fear may not be around when they retire.
At the same time, talk of change scares retirees who depend upon Social Security to pay their daily bills. They obviously need to be fully protected. Still, doing nothing is not an option. We need to make Social Security work as well for young people today as it did for their parents and grandparents.
There’s only one obstacle standing in the way of accomplishing that goal — Congress. More precisely, it’s the fact that nobody trusts Congress. Nobody would be comfortable letting Congress tinker with retirement ages, taxes and benefits. Everybody would expect to get burned by the fine print (a reasonable explanation).
On top of that, even if we could trust Congress, there’s no magical right mix of retirement age and tax benefits. Different people have different preferences and that should be acknowledged.
So Congress should get out of the way and let workers pick their own retirement age. Those who want to retire earlier could pay more in taxes. Others might prefer lower taxes and a later retirement. Whatever they decide, letting people decide on their own with advice from family and friends will build trust in the system. The value of building trust in today’s political environment cannot be overstated.
Since most people would likely opt for lower taxes and a deferred retirement, it would dramatically reduce the long-term cost of Social Security. And as detailed in my book, “The People’s Money,” the trade-offs can easily be structured to eliminate the unfunded liabilities and make sure the program is around for generations to come.
The reason this can work so well is that it brings the basic budgetary problems home to everyone’s kitchen table. Rather than having Congress make a one-size fits all decision on how much to raise taxes or the retirement age, every working American could make the decision on their own.
That’s the best way to gain the consent of the governed.