THE ROAD TAKEN · IN MY OWN WORDS
Legacy System Flaws
Social Security's national retirement system is dysfunctional. Here is what went wrong — in my words.
About this page
The dollar figures here are mine, worked out in my own research files over thirty years. Four numbers on this page are not mine — each of those carries a gold mark and the source it was checked against. Everything else you read here, I wrote.
One thing to keep in mind as you read: the fix I want is one pooled Supercharged Social Security Trust Fund, invested the wisest way, accumulating assets for YOU — with no privatized or individually managed accounts. “Supercharged Social Security” is my shorthand for Supercharged Social Security.
Want the arithmetic this site can prove? Run your own numbers, or read my full proposal in The Proposal.
WHERE THE FLAWS CAME FROM
Old ideas, thrown together in 1935.
“Old ideas” thrown together quickly in 1935 made Social Security dysfunctional. The world’s first old-age social insurance program, designed by Germany’s Chancellor Otto von Bismarck in 1881, was Social Security’s model.
The inevitable flaws?
As a result of these flaws, our national retirement system:
- is exorbitantly expensive, so it's hard for many young workers to save for retirement
- has pathetically weak benefits, which forces many seniors to retire with income at or below poverty level, and to rely on tax-based federal and state welfare to survive
- excludes many seniors from receiving ANY benefits
- helped keep poverty ABOVE 8.3% for seniors and ALL age groups since at least 1959
“Innovation is not about new ideas, it’s about getting rid of old ideas.”
FLAW ONE · PAY-AS-YOU-GO
Procrastination funding.
Today's workers' taxes pay today's retirees. Nothing is saved up to grow.
With pay-as-you-go legacy (today’s) funding, YOU get ZERO benefit from your FICA (the Social Security tax taken out of every paycheck). Instead, your FICA pays weak benefits to your parents’ and grandparents’ generations.
Think your FICA will pay for YOUR future benefits? Fuggedaboudit!
A pay-as-you-go FICA benefit funding scheme, also called the inter-generational transfer system (one generation paying for the one before it), made it inevitable costs would exceed benefits. From each FICA dollar paid in, beneficiaries can expect less than $1.00 in benefits. And it places a heavy tax burden on low- and middle-income workers.
That’s a backwards idea. Because “time is money,” it would have been much smarter to do a reverse inter-generational compact. Parents should fund benefits for their newborns. Grandparents could help. With Supercharged Social Security, parents would pay a tiny amount at their children’s birth to pre-fund benefits.
Congress already knew.
“When lawmakers enacted ERISA in 1974, they kept Social Security’s vesting period at 10 years, but required private pensions to vest quicker. Why? They also outlawed pay-as-you-go funding for private pensions, but continued it for Social Security. Why?”
ERISA is the Employee Retirement Income Security Act, the 1974 law that governs company pensions.
FLAW TWO · GOVERNMENT BONDS ONLY
NOT true bonds. NOT true investments. NOT safe.
By law the fund may hold only Treasury IOUs, which don't grow.
Calling Social Security’s trust fund assets “government bonds” is like calling a dog’s tail a leg. Those so-called bonds are equivalent to U.S. Treasury Department IOUs. They’re not marketable — they cannot be sold to anyone, the way a real bond can — so they can’t be sold to pay benefits or expenses.
The law limits Social Security investment to no-growth government bonds only. FICA not used immediately to pay benefits or for expenses goes into those bonds. Money that goes into them is not truly invested. It is lent to the U.S. Treasury. But the purchasing power of those bonds, when they are cashed in, has ALWAYS shrunk due to inflation.
Also, those bonds are “investments” in name only. By definition, an investment has potential to grow in value. A “good” investment, when cashed in, would protect you against inflation. But these have lost value to inflation. ALWAYS! If the $2.7 Trillion the fund had lent to the Treasury and not yet been repaid had been paid back at the end of 2022, the LOSS of value due to inflation would have been $1.76 Trillion — 65% of what was lent.
Think you stop paying into Social Security when FICA stops? Fuggedaboudit! There’s no Treasury-bond interest fairy. Bond interest comes from YOUR taxes. So if you live past age 100 and never stop paying taxes during your retirement, some of the benefits from bond interest that go into your proverbial right pocket will come from your own left pocket.
“Four, because calling a tail a leg does not make it a leg.”
It didn’t have to be that way.
Social Security’s founders could have borrowed just one single plank from the Supercharged Social Security platform — let the fund invest spare cash in “the stock market” instead of lending it to the Treasury. Nothing in the Constitution prevented that. Assume it had used an S&P 500 Index as a stand-in for the market. Its Trust Fund could have been sitting on $90 TRILLION (before fees and expenses) in securities it could actually sell! More than three times the U.S. economy’s $27 Trillion for 2023!
Could have held
$90 Tr.
instead of Treasury IOUs
FLAW THREE · NOT EVERYONE IS COVERED
Work ten years, or get nothing.
Pay in for nine and three quarter years and the system owes you nothing at all.
With our legacy retirement system, you must pay at least a minimum amount of FICA for 10 or more years. Otherwise, you won’t qualify for a penny of regular Social Security retirement benefits.
Let’s say you and your employers had paid maximum FICA for nine and three quarter years, but then you could no longer work. You’d never collect ANY regular retirement benefits.
If ten-year vesting seems unfair, it is. ERISA states that the maximum period for private-sector plans to vest is five years. And employers can choose to vest sooner. Social Security should do even better.
To add insult to injury, the legacy system totally excludes some seniors from benefit eligibility. It has NO minimum-benefit guarantee, and many seniors get LESS than poverty-level retirement benefits.
So the stool has a fourth leg nobody counts.
Seniors who receive ZERO Social Security benefits must rely on the costly, unacknowledged “fourth leg” of our national retirement system: federal and state taxpayer-funded elder welfare.
- Social Securitycounted
- Pensionscounted
- Savings & investmentcounted
- Welfarenever counted
THE NUMBERS, 1937–2023
How bad is the dysfunction?
Really BAD! Here is what his own sums of Social Security's published table show.
| What came in | |
|---|---|
| Total income — all of it out of our pockets | $24 Trillion |
| of that, FICA payroll taxes | $20.7 Trillion |
| of that, no-growth government bonds | $2.6 Trillion |
| What it cost to run | |
| Administrative expenses | $125 Billion |
| Left to pay gross benefits | $21.1 Trillion |
| What retirees could actually spend | |
| Taken out of gross benefits to prop up Medicare | $691 Billion |
| NET benefits — what beneficiaries got to spend | $20.4 Trillion |
Our cost for each $1.00 they got to spend
$1.18
His totals, from the fund’s own table at ssa.gov (opens in a new tab). In any single year the money coming in and the money going out do not match. The difference builds up the reserve, and later spends it back down.
Cost per spendable dollar
$1.18
That’s no way to run a retirement plan.
But WAIT! It gets worse!
If you think beneficiaries got to spend that $20.4 Trillion as they pleased, think again. From it, the IRS took income taxes estimated at about $2.2 Trillion on workers’ “phantom FICA income” (pay you never see, but still pay income tax on), and $1.3 Trillion more in income taxes on retirees’ gross benefits.
For 1937–2023, our nation paid an estimated $27.5 TRILLION so the retirement fund could dole out NET benefits of just $20.4 Trillion. So estimated costs exceeded benefits by more than $7 TRILLION!
THIS SITE’S OWN ARITHMETIC
We checked his sums.
He tells you to download the table and add up the columns yourself. So we did.
| Line item | His figure | This site’s sum |
|---|---|---|
| Total income | $24 Trillion | $24.05 Trillion |
| FICA payroll taxes | $20.7 Trillion | $20.70 Trillion |
| Gross benefits | $21.1 Trillion | $21.11 Trillion |
| Administrative expenses | $125 Billion | $125 Billion |
| The $691 Billion line | $691 Billion | $691 Billion |
| Net benefits | $20.4 Trillion | $20.42 Trillion |
| Cost per spendable dollar | $1.18 | $1.18 |
| The government-bond linethe money parked in the bonds, not the interest they paid — see below | $2.6 Trillion | $2.64 Trillion held in bonds |
All eight of his lines come back the same. The last one takes a moment to explain.
Start with what holds. What came in, $24,045,104 million, minus what the fund spent, $21,403,614 million, is $2,641,490 million. That is the reserve the fund reports at the end of 2023, to the dollar. So the gap between what the country paid in and what retirees were paid is not money that vanished. It is the balance still sitting in those Treasury IOUs — which is his point about the bonds, made in the fund’s own numbers.
Now the eighth line. He lists $2.6 Trillion as the cost of the no-growth government bonds. That is the money parked in those bonds, not the interest they paid, and his own pages settle it. He puts the interest at $2.3 Trillion through 2021 and $2.4 Trillion through 2022. He puts the money lent to the Treasury at $2.7 Trillion at the end of 2022. Carry that last one forward one year and it is $2.64 Trillion — his $2.6 Trillion. The interest column through 2023 comes to $2.43 Trillion, which is a different quantity and never was his figure.
One more note on his $691 Billion. In the fund’s table that money is income from taxing benefits — tax that beneficiaries paid back into the retirement fund — rather than a transfer out to Medicare. Taking it off to see what retirees could really spend is still right, and his $1.18 per spendable dollar comes out the same for us. Measured against gross benefits, before that tax, it is $1.14.
Our sums cover the same years he does, 1937 through 2023, taken from the fund’s own table at ssa.gov. That table lists every year on its own. It carries no column totals.
Why not? “I believe those totals are among ‘the best-kept secrets of Washington.’ Social Security would be embarrassed to publish those totals.”
Three more ways the system is dysfunctional
Dysfunctional?
For 1937–2023, I estimate we paid $26.2 TRILLION to provide spendable benefits of just $20.4 Trillion, or $1.28 for each dollar beneficiaries got to keep. But it’s worse: that cost does NOT include income taxes on benefits, which we have no easy way to estimate.
Dysfunctional?
Just from FICA alone, the pay-as-you-go funding scheme sucked $20.7 TRILLION from workers’ and employers’ income thru 2023. Taking that high-cost FICA from disposable income contributed to a poverty rate for workers of 9.9% on average since record keeping began.
Dysfunctional?
Benefits are so weak, they’re less than poverty level for millions of seniors. Thru 2023, weak retirement benefits contributed to an average poverty rate of 12.1% for seniors.
Don’t take his word for it.
President Ronald Reagan said, “Trust, but verify.” Just download the retirement fund’s own table (opens in a new tab) and add up the columns.
WHAT IT COST US
It helps keep U.S. poverty above 8%.
Politicians and pundits tell you Social Security reduces poverty. Nonsense!
Since at least 1959, Social Security has exacerbated poverty. The poverty rate has never been less than 8.7% for seniors, and never below 8.3% for the FICA-paying age group.
Those two floors are his claim, and they hold: this site checked both against the Census Bureau numbers it already publishes. The rate for Americans 65 and over fell a long way — 35.2% in 1959 to 10.2% in 2022. And in more than six decades it has never once gone below 8.7%. That floor is what he is pointing at.
Why has Social Security exacerbated poverty?
- its high cost during the years people work (mostly due to FICA)
- weak benefits it pays during retirement
- exclusion of some retirees from benefit eligibility, which raises the cost of welfare
- lawmakers squandered the eight-plus decades they had to fix system flaws
And the benefits themselves?
Social Security defines “near poor” as having income between 100% and 200% of the poverty threshold. Well, in 18 of the 27 years since 1997, MAXIMUM retirement benefits provided “near poor” income to retirees. The average benefit averaged 125% of the poverty threshold, and it never exceeded 139% of poverty income.
See the full series on the data room.
THE HIDDEN COSTS
Phantom FICA income.
Pay you never see, but still pay income tax on.
FICA is your biggest Social Security cost. But if you think it’s your only Social Security cost, think again.
Let’s say you’re employed with gross pay of $60,000 a year. “Phantom FICA income” is what you earn but can’t spend. The government taxes it if you have any taxable income. And when you’re taxed on a tax, that’s double taxation.
From Social Security’s birth thru 2023, workers’ phantom FICA income totaled $10.35 TRILLION! (Employers paid the same amount.)
In reality, your phantom FICA income is IRS revenue. You receive it in your gross pay, but the IRS takes it to help fund the government’s budget. So it never gets into your net pay, and it provides no direct benefit to Social Security beneficiaries.
FICA is included in your gross income, but you don’t get to spend a penny of it. And the IRS taxes it as if you had received it as spending money.
| Line item | OASI | DI | HI | Total |
|---|---|---|---|---|
| FICA tax rate | 5.30% | 0.90% | 1.45% | 7.65% |
| Phantom income cost | $3,180 | $540 | $870 | $4,590 |
| Federal income tax on it, at a 15% rate | $477 | $81 | $131 | $689 |
OASI is the retirement part of Social Security, DI is Disability, HI is Medicare Hospital Insurance. State income tax varies.
WHY IT HAS STAYED THIS WAY
What's kept it that way?
Politicians could have fixed this long ago. Instead they enlisted help to convince you nothing was wrong.
Politicians could have Supercharged Social Security-ed Social Security long ago. Instead, they enlisted pundits, bureaucrats, and even a Social Security website to help them convince their constituents our retirement system is strong.
SO WHAT NOW?
Preserve it? Or fix it?
YOU decide.
Why “preserve” a national retirement system that paid out only 83¢ in benefits for each dollar it took in from Social Security’s birth to 2020? Why not replace it with Supercharged Social Security, which could give us $1,000+ for each dollar contributed? The answer should be obvious.
Not all of the legacy system’s ideas need fixing. Supercharged Social Security would keep the good ones, like the defined-benefit pension (a promised monthly check for life) and the annual Cost Of Living Adjustment. But it would replace the really dumb ideas: the inter-generational compact, government-bond-only investment, using bond interest to pay benefits, and excluding the neediest American seniors from benefit eligibility.
“Modest changes” won’t fix a system designed so more benefits require even greater costs.
Two things this page does not mean.
First: the fix is NOT privatization. Every dollar would go into one pooled Supercharged Social Security Trust Fund, professionally managed, accumulating assets for YOU — with no privatized or individually managed accounts. Second: today’s Social Security is not about to vanish.
A cut is expected around then, and that is reason enough to fix the design. It is not reason to believe the checks stop. None of this is privatization.
“Some leader you are. With your plan we plod. With Supercharged Social Security, we could SOAR!”
My own drawingPencil on paper, from his own files.
Now you know what went wrong.
See what the fix would have been worth.