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A Fiduciary Solution to the Social Security Problem

A Fiduciary Solution to the Social Security Problem
September 09
01:17 2015

It’s often said the first step to curing yourself from a behavioral problem is to admit you have a problem in the first place. Unfortunately, it’s difficult for people to admit to a problem, even as the symptoms clearly expose themselves. Indeed, chances pyramid-1468682-1280x960_freeimages_royalty_free_300are some of you reading this piece right now probably don’t see Social Security for the problem that it is. It’s hard to admit something that you’ve grown up with is fatally flawed. The blunt reality is Social Security has been, and always will be, a Ponzi Scheme. We’ve already discussed the issues and problems attendant to Social Security and how they can be dealt with in planning for retirement (see “How Should a Fiduciary Treat Social Security in Retirement Planning – A Generational Overview,”, August 25, 2015). The challenge, though, is to come up with a way to “fix” the popular benefits program without punishing its victims.

Few question the need for changes. That we’ve been down this road before suggests there’s a problem at the very core of the program. “Social Security has always been a Ponzi Scheme, and the difference today vs. 1935 is that we have fewer workers supporting each beneficiary and that circumstance today is that we are revisiting the same scenario that existed in 1983,” says John F. Tubridy, an independent financial planner located in Rochester, New York.

For many, the realism of the numbers, and the questionable mathematical ethics of the scheme in general demands action be taken. “Social Security was created out of an honorable effort, to care in some way for the least of our society,” says Joshua E. Self, Senior Wealth Planner at Envision Wealth Planning in Nashville, Tennessee and Raleigh, North Carolina. “There is nothing wrong with that, except when the program has grown beyond what it was originally intended, and now we can’t afford to keep those promises.”

While its initial purpose was laudable, change will come. It’s only a matter of how that change will take place. We’ve already seen the false promise of the 1983 “reform” fade into the grim reality of a depleted trust fund. But patchwork reform is but one alternative. There are many more. “Social Security should survive, but it should only do so with some common sense changes,” says Peter Lazaroff, Wealth Manager at Plancorp, LLC in St. Louis, Missouri. “There are a plethora of ideas on how to solve the retirement crisis, but all of them rely on Social Security existing in some form to make any changes more palatable for individuals and employers.” While true, could the outside-the-box thinking of the fiduciary kind offer more interesting possibilities?

From a fiduciary perspective, it’s always good to start by asking “what is in the best interests of the beneficiaries.” The answer to this question might begin to establish guidelines or constraints of any proposed solution. The first and most evident parameter must address at what age any beneficiary will be grandfathered in to the existing benefits. This is important, as, as fraudulent as it was, Social Security was a promise made and, for some, reneging on that problem so late in life represents an unrecoverable harm.

On way to determine this is to determine how close to retirement a beneficiary must be before it’s too late to make up for any change in Social Security benefits. “If someone is within 10 years of claiming benefits, they should be exempt for changes,” says Gregory J. Kurinec of Bentron Financial Group, Inc. located in Naperville, Illinois.

Douglas Sheahan, President of ICCF Wealth Management in Winter Park, Florida, agrees with Kurinec. He says “10 years before eligibility” represents a good cut off. Ten years may seem like a long time, but if we think of it in terms of age, that places the age somewhere in the mid 50s.

Offering a more precise demarcation line, Robert R. Johnson, President and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, says, “It makes sense from a planning standpoint to exempt people from Social Security changes at some age. Changing the rules right before someone is eligible to draw Social Security is not fair to individuals. Age 55 seems like a reasonable age to freeze any changes to Social Security from a planning standpoint.”

Indeed, in a very stark sense, simply ending Social Security with the Baby Boomer generation ends the problem of Social Security. Self says, “It has been shown that if we leave the benefits alone for Boomers and cut the benefits for Gen -Xers and Millennials, that we could make SS solvent almost overnight. Most Gen Xers and Millennials don’t believe that it will be there for us anyway, so taking a lower benefit is better than reciting no benefit at all.”

While the Millennials have plenty of time to recover from losing Social Security, the issue is more problematic for Gen Xers. “The first thing Gen-Xers and Millennials need to understand is that they need to save more,” says Lazaroff. “The earlier you start, the less you will need to save as the power of compounding has more time to take effect. Secondly, both generations need to start viewing their careers to age 70 or longer. That means emphasizing education and learning throughout your career. Is your current job something that you will be able to handle in your late 60s? If not, then start thinking of ways to make yourself valuable later in life. Never stop learning. Finally, Gen-Xers and Millennials need to derive a strategy to max out all tax deferred savings vehicles.”

Once we’ve identified who’s exempt from changes (in this case, the baby boomers), then it becomes incumbent to identify which part of the program we’re talking about reforming. Social security today is vastly different than what it was when it was created during the Depression. At that time, it was meant to be a short-term payout for the few years retirees had on this Earth before passing. Today, it represents a major – if not the bulk of – one’s retirement income as well as a form of life insurance for one’s dependents and a form of disability insurance for the beneficiaries.

For our purposes, we will set aside the insurance portion of the program and address only the changes that should be made with the retirement side of the equation. “There are several changes that should be made,” says Kurinec. The first and easiest is to raise the maximum taxable earnings or eliminate this all together. The next would be to continue to raise the Full Retirement Age. It is currently on a rising scale to reach age 67. There is no reason this cannot be extended to go to age 70 or beyond. The last and probably most painful would be to raise the actual Social Security tax.”

We repeatedly hear this idea of benefits reduction through means testing and raising the retirement age. “Means testing is the only change that can be done equally because it’s an easy measurement based on income/tax returns,” says Sheahan. “Also, based on the fact we are living longer then we should peg the full retirement age on some ratio to life expectancy but that might discriminate against those with genetic propensity to disease.”

Of the two, it seems like raising the retirement age would be a more natural solution and perhaps a more palatable one.  “I think the eligible age for retirement will likely increase,” says Johnson. “Whether this should happen is another question. Longevity has increased and people are able and willing to work longer. This is a politically charged issue – as many elements of social security are – but, I believe that retirement ages will increase.”

Another approach would be to make the Cost of Living Adjustment (COLA) less generous. “Since adjusting the COLA is perhaps less obvious and more politically passable, I think this will be the most frequently used tool,” says Kevin Prendergast, Chief Investment Officer of EFG Advisors, LLC in Schaumburg, Illinois. “A less generous COLA will affect Millennials the most as the gap between the COLA and the actual inflation Millennials experience in their daily lives compounds over time and will be very wide by the time this generation is eligible to receive benefits. Accordingly, Millennials cannot count on Social Security to be more than a (small) supplement to retirement income, incentivizing Millennials to start saving for retirement now if they intend to preserve their standard of living in retirement.”

Perhaps the real question isn’t “How do we fix Social Security,” but “How do we address the significant retirement funding gap that has come from greater life expectancy?” Lazaroff feels “strengthening the 401k system to improve participation and contribution levels would be more effective.” “In addition,” he says, “we need to expand the coverage and availability of such systems to people who don’t work for companies with such options.”

What if we look at Social Security’s approach in a wholly different light? It’s possible to create a hybrid system that addresses the two parts of the program’s retirement benefit. “Similar systems exist in a number of countries,” says Chris Chen, Wealth Strategist at Insight Financial Strategists LLC in Waltham, Massachusetts. “Supplementing Social Security as a defined benefit plan with defined contribution plan could have some merits. To start with, Social Security was a safety net program geared to help destitute seniors. It has evolved into what it is today, a safety net, plus the bedrock of American retirement for most retired people. Unbundling the two functions could result in an increase in retirement savings for the middle chunk of Americans who don’t save nearly enough, a marginally better standard of living for the low income end that survives on barely anything more than SS, and no change for the higher incomes who have other options.”

Another way to look at this is to strip out the safety net benefit entirely and place it in the same government budgetary category that we already use for similar “need-based” programs. Tubridy says, “Ultimately in our society, we would have to provide a safety net for those people who are in need, and that could be funded out of a general tax fund.”

While Social security would retain its existing structure for the Baby Boomers, it’s becoming increasingly evident that, for Gen-Xers and, more especially, for Millennials some form of inclusion of a defined contribution element should be considered. Saul Simon of the Simon Financial Group in Edison, New Jersey, says, “At some point I do think that people will be contributing some percentage of their Social Security allocation to a private type/personal account similar to an IRA.”

Let’s view this option for the moment as something that might be available only to those in their 20s, (i.e., Millennials with little or nothing already invested into the Social Security program). What have we learned from the 401k experience that might shed some light on creating a defined contribution Social Security program? Perhaps some of the issues we’ve seen in that realm can help create a better solution for Social Security. “I think many Americans would elect not to contribute as they may be living paycheck-to-paycheck,” says Prendergast. “Moreover, if the IRA owner has access to the funds, I fear that many Americans would spend them pre-retirement, despite any early withdrawal penalties that may apply. Lastly, investment options would have to be carefully selected as cash equivalents lose purchasing power over time, particularly in this interest rate environment, however many Americans may not know how to build a proper allocation of risk assets.”

Tubridy sees two issues. “People don’t have the discipline to save at a 15% rate on a consistent basis, and human nature being what it is, people tend to buy high and sell low. That’s just part of human nature. So, in terms of investors investing too conservative, how would I change that? Well, I guess you could mandate a forced 15% savings rate, either individually or shared with your employer, and have one long-term investment. My understanding today is that the vast majority of cash flows are going into the target date funds. I believe that the last financial crisis demonstrated that once people are contributing into a 401k, they will continue to contribute even during a financial crisis such as we experienced in 2008-09. 401k contributions did continue into those retirement plans. However forcing a mandatory savings rate of 7.5% or 15% is contrary to our County’s principles of individual freedom and liberty. The majority of people would benefit from working with a trusted or valued adviser who can coach and encourage them to stay with the investment during the bad times, which there will inevitably be.”

As Tubridy alludes to, beginning to think of Social Security solutions in terms of defined contribution plans introduces an entirely new set of philosophic arguments into the discussion, namely, how much freedom should be sacrificed to prevent people from doing the wrong thing – and whether or not that’s an appropriate question for a free society to even ask. “I am not sure it is a better solution to Social Security,” says Kurinec. “If people are allowed access to these accounts prior to retirement who is to say they won’t deplete them and be left with nothing. There is a fine line between taking control away from the government and providing it to the masses.”

At the heart of it, though, the defined contribution solution has the same merits that the saw the rise of the 401k plan and the fall of the pensions in the 1980s. Employees saw the opportunity to seize control of their own money – and their own destiny – by removing their retirement dependency from the chains of a disinterested institution. But, with that self-determination comes a risk. “The IRA idea puts control in the hands of the individual and takes Washington out of the decision of taking workers money and moving the target for when they get it back,” says Sheahan. “The problem with this is that the growth of the funds is based on market volatility and gives no sense of security that a guarantee income benefit offers.”

In many ways, we have returned to the early 1980s with one critical difference. Back then, many had more faith in their government than they do today. “In 1983,” says Tubridy, “I didn’t have any fear or thought that Social Security would not be there for me. So fast forward to today, I think there is a recognition by Millennials that Social Security may not be there. Why the difference? I think just the continued erosion in confidence in government in general and the recognition of the enormous debt our county has built up over the past 30 years.”

The theme of dissatisfaction with the political class is particularly acute today. It’s not unusual to see people blaming them for the mess we are in. Lazaroff says, “It is worth pointing out that delaying entitlement reform only increases the magnitude of tax hikes or benefit reductions that will be necessary to fix the problem – compound interest works both ways. Both sides of the aisle are at fault, so hopefully America elects officials in 2016 that will work together for the greater good of our country. Solutions shouldn’t just focus on taxes and benefits. We need to increase incentives to work longer, fix the 401k system, and use tax incentives more effectively. We need to find a way to incentivize people to work longer and save more. The impact of changes is less likely to impact Baby Boomers than Generation X and Millennials. That said, the advice for all three generations remains the same: work longer if you can and save more.”

While he doesn’t necessarily think Social Security should be replaced, Self says “Americans do need to show more personal responsibility by saving our own money for the future. The savings rate for the average American is embarrassing.”

Ridding one of dependency is an honorable goal, but the fact is, whatever personal responsible people assume, we all remain liable for the Greatest Legal Ponzi Scheme ever undertaken – and that liability will remain until Social Security is fixed. The only question is: How long will it take to fix? Self says, “The fix is going to come from a grass roots cry when people get fed up with kicking the can down the road, then likewise, from a group of politicians that have the political spine to stand up and do something about it, even if it means they don’t get re-elected…for the good of the country.”

Mr. Trump, are you listening?

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. John Clinton
    John Clinton September 09, 11:14

    My question is, how would you be able to leave the SS system untouched for those currently receiving benefits and those within 10 years of doing so, while stopping or reducing the benefits for everyone else? Wouldn’t Gen Xers and millennials still have to pay into the system? If so, why do you think they would continue to do so if they’re not getting any benefits from it?

  2. Brenton C Smith
    Brenton C Smith September 09, 13:41

    “Sheahan says “10 years before eligibility” represents a good cut off. Ten years may seem like a long time, but if we think of it in terms of age, that places the age somewhere in the mid 50s.”

    Your article would be more timely 10 or 15 years ago. Today it is a reflection of how far removed Americans are from the size of the problem. Today the system in a good economy will not provide scheduled benefits to 50% of the Americans turning 67 this year.

    We aren’t paying attention.

  3. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author September 09, 14:24

    Agreed. There’s been too little attention paid to this issue in the media. It’s like everyone is afraid to talk about it. But, as one of the quotes towards the end of the piece says, time marches on and this get worse if we pay attention or not.

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author September 09, 14:25

    That’s a subject for another day. Personally, I’ve always felt that there is no end game that doesn’t include a bail-out. If it was good enough for “too-big-to-fail” big-city banks, it’s good enough for retirees in America’s heartland.

  5. Brenton C Smith
    Brenton C Smith September 10, 04:58

    I think you need to spend more time with Chris’s question. It is the one that people will be asking in 10 years. You want to give a generation a pass on a problem that it created by ignoring the problem. It isn’t going to happen.

    People who compare today to 1983 have no grasp of the size of the problem we are dealing with. In 1983, Social Security faced modest shortfalls what would give-way to prolonged surpluses. Benefits were generous compared to what people had contributed. The work force had room to create tax increases. None of this is true today. The problem is 10 times the size, and the shortfalls are projected to grow into eternity.

  6. Jack Towarnicky
    Jack Towarnicky September 10, 07:12

    Blah, blah, blah.

    Blame the lack of timely social security reform on Monica and the blue dress – which became national news in January 1998. When Brenton indicated in his comments that your article would have been more timely 15 years ago, most American’s forget that the need for Social Security reform and funding, the shortcomings of the 1983 changes, was apparent to anyone who was paying attention. It was part of the national conversation in the 1990’s and thereafter – see, for example:
    – Advisory Council on Social Security, January 1997
    – President’s Commission to Strengthen Social Security, July 2001

    However, we have seen no action since the Social Security Amendments Act of 1983.

    Your proposed changes fall right in line with what others recommend – for example, here is the Business Roundtable’s take from January 2013 “… any reforms should include the following elements:
    • Protect Retirees and Those Approaching Retirement: Initial benefits of those age 55 or older today should be protected.
    • Increase Retirement Age: The Social Security retirement age should be raised from age 67 to age 70. The unique needs of individuals in physically demanding occupations should be accommodated and the Social Security Disability Insurance Program should be modernized.
    • Change Benefit Formulas to Increase Progressivity: Benefit growth should be restricted
    through gradually phased-in adjustments in the calculation of future Social Security benefits. These adjustments should increase progressivity by adding a new minimum benefit that ensures that the benefits of a full-career worker would be above the poverty line and means-testing benefits eligibility for individuals with high income.
    • Update Method for Calculating Cost of Living Adjustments (COLAs): Future Social
    Security benefit COLAs should be based on the more accurate Chained Consumer Price Index (CCPI-U), which takes into account the changes that people make in the composition of purchases in response to price changes and is seen as a more accurate cost-of-living indicator.
    • Include Newly Hired State and Local Workers in Social Security: Employees currently
    exempt from Social Security coverage should be brought into the Social Security system. …”

    Assuming your suggestions or those of the Business Roundtable, or any of the other recommendations are put in place, chances are that 10, 20 or 30 or more years from now, we will be back here discussing what is now needed to “save” Social Security.

    Those serious about creating an indefinite solution aren’t going to come up with a bunch of changes based on what we know today, but will put in place an annually self-adjusting, dynamic pricing system that will solve the challenge, today, tomorrow, indefinitely:
    – Individual choice on available options for filling the funding gap,
    – No benefit improvements beyond current provisions, without a super majority vote of social security taxpayers (not voters, not social security beneficiaries),
    – A legally binding contract between Social Security and its taxpayers/beneficiaries, to provide a minimum benefit to survivors/decedents equal to each individual’s employee contributions less any benefits actually received.

    The solution is based on 35+ years of experience in corporate employee benefits – where we effectively and successfully used choice to enable individual employees to prioritize and make difficult decisions and trade offs. The basic rule of thumb is that individuals will more willingly accept difficult decisions where they have a say … where they get to choose the method of closing the gap. The largest shortcoming of the proposed solutions identified in the past (and above) is that others decide … and you end up with endless lobbying about “fairness”. We heard this in the run up to health reform … and the sentiment I heard from individuals was clear: “I want the best health care coverage YOUR money will buy”. Former Senator Long once described this as: “Don’t tax you and don’t tax me, tax that guy behind the tree.” It starts with exempting anyone age 50 or older … and where it ends depends on an interest group’s political clout.

    Let me know if you would like to know more.

  7. Brenton C Smith
    Brenton C Smith September 11, 19:03

    I was publishing a piece as we exchanged mail here. It just published on TheHill.

    “The Bush reform would not fix Social Security. It switched which pockets would pay for the program, resulting in an even larger system. It expanded the revenue reach of the system, and created guarantees for current voters that came directly at the expense of future voters.

    What would our children get for the $10.4 trillion bail-out? They would get the privilege to save for their own retirement. The entire plan was nothing more than an elaborate way to kick the can from generation to generation.”

  8. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author September 11, 19:40

    I’ve got a piece coming out in the October Benefits Selling magazine that might cause people to rethink why Social Security shouldn’t be patterned after a defined contribution plan instead of the present pension plan.

  9. Brenton C Smith
    Brenton C Smith September 12, 16:58

    We have defined contribution plans – tons of them – and they are subsidized with tax incentives. Why would you turn Social Security into something that we already have? The vast majority of Americans do not have access to affordable old-age insurance. So we are trading what we can’t get for something that we already have. Ping me at if your piece gets someone to rethink that trade.

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