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Would You Settle Your Claims on Social Security for 80 Cents on the Dollar? (I Would)

Thursday, April 26, 2012

Creditors of an insolvent debtor can agree to settle their claims for less than 100 cents on the dollar. So why not the American people when it comes to Social Security?

Current headlines read: “Social Security’s Financial Forecast Gets Darker”; “Stress Rises on Social Security.”

Well, yes: but who is surprised?

Certainly not young people, who are rightly skeptical about whether Social Security in the future will be able to give them back the money it takes from them today.

The problem is pretty basic: According to the new calculations of the Social Security Trustees’ 2012 Report, Social Security’s future costs are a lot bigger than its future income.

Consider Old Age and Survivors Insurance (“OASI”), the basic pension plan that comprises the majority of Social Security. The present value of its future costs is $48.8 trillion, but the present value of its future income is only $38.9 trillion (Table IV.B5. of the Trustees’ Report, p. 64). Thus, liabilities exceed assets, for a deficit of about $10 trillion. In other words, the Trustees figure that assets are worth about 80 percent of liabilities.

Many observers, considering this insolvency, quickly conclude that you must force Americans to either pay more in Social Security taxes or mandate a cut in their benefits.

But there is another, voluntary alternative. Give people a choice? Imagine that!

The Trustees figure that assets are worth about 80 percent of liabilities.

I have previously asked, “Would you settle your claims on Social Security for 83 cents on the dollar?”—and answered, “I would—in a heartbeat.” By a purely voluntary action, Americans should be able to opt out of their personal Social Security payments and their claims at a discount, just as creditors of an insolvent debtor can agree to settle their claims for less than 100 cents on the dollar. Every time someone did this, the $10 trillion deficit would shrink, since Social Security’s future costs would be going down by significantly more than its income—this would be a win-win outcome. (For more details on how this could work, see my article, “How to Fix Social Security.”)

In light of Social Security’s numbers just having been updated by its Trustees, as explained earlier, the fair settlement price is now 80 cents on the dollar.

So the updated question is: “Would you settle your claims on Social Security for 80 cents on the dollar?” For me and, I am certain, many other Americans, especially young ones, the answer is “Absolutely!” In the Land of the Free, we should have that choice.

Alex J. Pollock is a resident fellow at the American Enterprise Institute.

FURTHER READING: Pollock also writes “How Much Have House Prices Really Fallen?” “Fearful Symmetry: Six Decades of Treasury Yields,” and “Fixing Student Loans: Let’s Give Colleges Some ‘Skin in the Game’.” Christopher J. Conover contributes “When Medicare Wipes Out Social Security: Healthcare Fact of the Week.” Andrew G. Biggs explains “From Ponzi to Perry: The Truth about Social Security.” Alan D. Viard contributes “Let's Make Social Security Pay its Own Way.”

Image by Rob Green / Bergman Group

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