Social Security is the best and worst of public policies. Its goals are noble – give people retirement income and protection against disability, excessive longevity, premature death, and even divorce.
But Social Security's execution is horrendous. The system is possibly the most complicated and the least user-friendly public institution ever devised by man. It's also incredibly unfair, both within and across generations. (Trust me. I just co-authored a book to help people navigate the system.)
That's the bad news. But here's the really bad news: Social Security is flat broke. The just-released 2015 Trustees of the Social Security and Medicare trust funds report has a secret little table that apparently the political appointees, euphemistically called "trustees," haven't bothered to view. It's tucked deep inside the report in appendix table VI.F1. It says the system is $25.8 trillion in the red.
That's almost a year and a half of U.S. GDP. Detroit went bankrupt in large part because its pensions were some 20 percent underfunded. Social Security has that beat. It's 32 percent underfunded. We need to raise the system's 12.3 percent payroll tax by almost one third – by 4 cents on every dollar we earn – to pay, through time, all the system's promised benefits. And if we don't hike the system's tax by one third starting today and keep it there forever, we'll need to raise the tax by even more down the road.
Unfortunately, we don't have some other source of net revenue to cover Social Security's shortfall. The overall U.S. fiscal enterprise is, in fact, in worse shape than Social Security. It's not 32 percent, but 58 percent underfunded. And its red ink is 12 times GDP – $210 trillion at last count. This is our nation's fiscal gap – the present value difference between everything the government plans to make in expenditures and hopes to collect in taxes.
The hard truth, which not one of today's presidential candidates will admit is this ... our country is bankrupt. It's not bankrupt in 50 years or 30 years or 20 years or 10 years. It's bankrupt today. And the longer we wait to change policy, the more we let ourselves off the hook and the more we put our kids on it. This is the terrible zero-sum arithmetic of generational policy.
Sure, there are red and blue economic hucksters who think we can cut taxes or raise spending and bingo – the economy will grow enough not just to pay for these freebies, but also produce more revenue. You can also find "economists" who think we can just print money to pay our bills. But a who's who of economists realize that fiscal gap accounting is the only way to find our way.
How did we get into such terrible fiscal shape? Simple. Our politicians, Republicans and Democrats alike, have spent the last six decades running a massive Ponzi scheme.
I call it "Take As You Go." Uncle Sam takes money from young workers, calls it taxes, and gives it to old people to spend. "But don't worry," Uncle Sam says. "When you're old, I'll pay you back in spades. I'll just hit up your kids. Oh, and if you don't mind, let's keep this to ourselves. I'm not putting these I.O.U.s to you on the books. It would make our official debt explode and we wouldn't want that."
All Ponzi schemes involve fraudulent accounting. Uncle Sam's deficit accounting is the mother of such fraud. And all Ponzi schemes end badly. America's will be no exception.
So on Aug. 14, when Social Security celebrates its 80th birthday, don't look for me at the party. I'll celebrate when Social Security gets fixed right – by adopting the Purple Social Security Plan.
This plan, which I urge all the candidates to endorse, is simple. We freeze the current system and pay off, through time, all benefits owed.
All workers then contribute 8 percent of their pay to a personal security account. Contributions are shared between spouses. The government makes extra contributions for the poor.
All assets are invested in one way only – in a global market-weighted index of stocks and bonds, with the investment done by a single computer. Wall Street plays no role and earns not a penny.
At retirement age, all accumulated assets are bumped up if they don't exceed what was contributed so investments in the personal security account are protected against loss. Finally, when a cohort reaches retirement age, the account gradually sells off its share of the global portfolio and uses the funds to provide retiring workers inflation-protected pensions.
Adopting the Purple Social Security Plan as well as the other Purple Plans would eliminate our fiscal gap and provide our children with an economic future far different and far better than what they now face.
Commentary by Laurence Kotlikoff, an economist at Boston University and co-author of "Get What's Yours – the Secrets to Maxing Out Your Social Security Benefits." Follow him on Twitter @kotlikoff