Social Security has undergone quite a few changes over the years since the federal program was established in 1935. For decades, most of these changes involved expanding the program to cover more people and offer more benefits. However, some changes negatively affected some Social Security beneficiaries, including tax benefits in some cases and increasing retirement age.
All of these pre-Social Security reviews essentially constituted adjustments to the program. The underlying premise of a government program that guarantees that almost all Americans will receive some level of benefits at retirement has not been altered at all. But Social Security may be reserved for some drastic changes in a presidential candidate’s plan.
Image source: Getty Images.
The 6.2% solution
Libertarian Party presidential candidate Jo Jorgensen says politicians “have spent every penny in the Social Security Trust Fund on other expenses, leaving behind worthless promissory notes.” Jorgensen proposes a plan that he believes will stabilize Social Security and help ensure that politicians do not break their promises. His idea is to make changes to Social Security along the lines of the “6.2% solution” of the Cato Institute.
So what is this 6.2% solution? The most critical and controversial component of the plan is that any American could choose not to receive Social Security. Anyone taking this route could invest 6.2% of their payroll taxes in individual retirement accounts, but would not receive Social Security benefits upon retirement.
When people who choose to retire from Social Security retire, they are given the option of buying a family annuity or receiving withdrawals at specific intervals to provide income at a defined level. Any fund above the amount needed to provide this minimum income could be withdrawn in one lump sum.
Jorgensen notes that “other countries have successfully replaced their government-run systems with individual retirement accounts safe from greedy politicians.” Australia, for example, has had an established pension plan since 1992 that is somewhat similar to the Cato Institute’s 6.2% plan.
Key questions
A question with Jorgensen’s proposal that immediately comes to mind is: “Will everyone be forced to opt for Social Security?” The answer is no. “Each person will make their own decision about staying in the traditional Social Security program or choosing not to participate.
It seems likely that older Americans would prefer to stick with Social Security, since it is under Jorgensen’s plan. But younger workers may be better off investing in IRAs. Cato Institute chief academic Michael Tanner said in an interview in December 2019 that some estimates project that young Americans will receive an average annual return of only about 1% of their contributions to Social Security. However, Tanner added, “The reality is that for many of them, they will get a negative return.”
Image source: Getty Images.
What about all the money people could have previously contributed to Social Security? The United States government would issue zero coupon bonds based on your prior contributions to Social Security. These bonds do not pay interest, but are awarded at a strong discount and are profitable if they are held to maturity.
Currently, employees pay 6.2% of their wages in Social Security payroll taxes, and employers contribute another 6.2%. Where would the employer contribution go under the Jorgensen plan? The Cato Institute says those taxes would be “used to pay for transition costs and to finance survivor and disability benefits.” The organization also states that “far into the future” after transition costs are fully paid, this part of the payroll tax could be reduced to the level necessary to fund survivors and disability benefits.
Will the 6.2% plan really stabilize Social Security as promised? The Social Security Administration (SSA) has said it would. In 2005, SSA rated a version of the Cato Institute’s plan and determined that it would eliminate the long-range Social Security deficit and restore the program to “sustainable solvency.”
One last question: is there a catch? Yes. Cato says Social Security would need “to be restored to a solvent pay-as-you-go basis before the development of individual accounts.” After that point, anyone who joins Social Security would receive “any level of benefits that Social Security” could pay.
Big change, little chance
Jo Jorgensen is advocating for the most substantial change to Social Security since the start of the program. Proponents would argue that her plan would save Social Security while allowing workers the freedom to manage their own pensions and potentially end up with a much higher level of income. Critics might respond that Jorgensen would cut Social Security benefits and jeopardize retirement funds for those who chose to exit the system if the stock market collapsed.
Regardless of which argument is more persuasive, there is a small chance that the 6.2% plan will be enacted in the short term.
The last Libertarian Party presidential candidate, former New Mexico Governor Gary Johnson received only about 3% of the total vote and no vote from the Electoral College. Even if Jorgensen significantly improves that performance, the probability that he will win the presidency is low. And if he somehow won, he would face a decidedly uphill battle that would convince the United States Congress to implement drastic changes in Social Security.
