Social Security : Delayed Claiming Needs Reform

This piece originally ran on TheHill.Com

The debate about Social Security focuses too much on fix and too little on better. At some level, the debate about Social Security should consider how we can make the system run safer or serve the country better.

The government must run Social Security.  Social insurance is by its nature antitheoretical with capitalism because pricing is dictated by the buyer’s earnings rather than production costs. 

The program has however overtime assumed tasks that go beyond social insurance. One example of that expansion is the rule which enables a retiree to increase monthly benefits by delaying retirement claiming (DRC). This function essentially translates current benefits into an inflation adjusted annuity.  It serves an individual’s want, not a societal need, in which the retiree transforms his benefit into the way that he wants to collect his benefit.  There is nothing social about it.

When DRC was created in 1972, the annuity market may have forced the government to assume a monopoly role. The past is the past. Today, the government’s role is completely unnecessary. There is a robust annuity market today that could support retirees with an expanded range of choices.

The problem for Americans with this rule is risk. Annuities in the private sector are priced daily – every day.  The government does not re-price the annuity daily, weekly, monthly, or even yearly.  The last time that the government changed the pricing for the annuities issued by Social Security was in 1983.  Pricing is a tri-decennial event.

A lot has happened over the last 32 years.  Interest rates have dropped from 13.75 percent to slightly more than 2.125 percent.  Our life expectancies have risen nearly two years since that time. Pricing seems unconnected to the cost and benefit of what the government is selling.

It isn’t a problem that the government provides incentives or disincentives for work behavior.  Social Security in 1990 paid people to collect benefits early, and today it pays them to defer their retirement. 

The problem is that we do not seem to follow what incentives are hidden in the system.

Pricing is a legislative process which is neither perfect nor responsive. In 1972, for example, Congress introduced a flawed benefit adjustment method which triggered benefit increases large enough to push the system into crisis by 1983.  It took Congress five years to address that flaw.

DRC introduces open-ended risk to the system because we don’t know how long these annuities will last. For prospective, the VA is still paying today on pensions from the Civil War.  So any mistake may be around for a very long time.

All of the risk for the system benefits the few. Who are the few?  Today about 10 percent of claims occur after normal retirement age.  The one thing that we know about these retirees is that they can afford to defer their benefits. 

It would be wonderful if Social Security could help retirees structure their income protection.  It can’t.  DRC are expensive to run, complex to understand, and assigns accountability to no one. I buy and sell risk for a living.  I never buy open-ended risk.  I never leave open-risk unattended for more than 10 minutes, and am never more than 3 clicks away from cancelling it.  The government has left open-ended risk unattended for more than 30 years, and we have rewarded it with a monopoly on annuitizing the benefits from Social Security for our seniors.

At some point, the debate about Social Security reform must grow beyond simply cutting benefits and raising taxes.  These solutions do not fix Social Security. They are the way that we pay for its brokenness.