They say that a camel is a horse designed by a committee. Social Security is a retirement plan designed by politicians.
Here is a survey of the various ways that Social Security payouts are actuarially indefensible—and unjust.
#1. The drudge penalty.
Jennifer, a psychologist, earns $4 million (today’s money) over a career that starts at age 32 and ends at 67. Jane, a night shift nurse, makes the same $4 million but over 45 years of labor. They put the same $496,000 into the system. (Workers pay a 12.4% retirement tax, half that they can see in their paycheck stubs, the other half hidden in a reduced wage.)
If those $496,000 contributions were funding IRAs, Jane would get more out in retirement because her money has compounded longer.
But Jane, the long toiler, doesn’t get more. She gets less. Reason: The benefit formula counts only the best 35 years of a career.
What the politicians thought they were doing: helping workers by omitting weak earnings from the formula, more or less in the fashion of a teacher counting only the best homework grades in the semester average.
What the politicians in fact were doing: penalizing workers who put in more hours.
#2. The second-earner theft.
Harry has earned a $3,000 monthly benefit. His wife, Wanda, raised kids and then joined the workforce. Wanda’s contributions should earn her a $1,400 benefit. But she is not permitted to collect.
What stops Wanda from getting anything back for the money she put in: A spousal benefit, set at 50% of whatever Harry has earned for himself. That, and a rule saying Wanda can get either her spousal share or her own earned benefit, but not both.
In this case Harry and Wanda get $4,500 a month; the $1,400 earned by Wanda goes down the drain.
What the politicians thought they were doing: being kind. It costs more to feed two mouths than one.
What they in effect are doing: pilfering Wanda’s contributions.
#3. The divorce bonanza.
Morris, who has earned a $4,000 benefit, has been married and divorced four times. If each marriage lasted at least 10 years and none of the cast-off wives has remarried (or earned a large benefit from working), Morris’s efforts generate a combined $8,000 a month. That’s because each ex-spouse is entitled to the 50% spousal benefit.
When Morris dies, the exes each get a survivor benefit, kicking the payout for this extended family to $16,000.
What would be fair: In a divorce proceeding, a Social Security benefit would be divided, just as an IRA is divided. It would not be multiplied.
What we’ve got: a reward for marital instability.
#4. The short-changing of millennials.
Today’s 70-year-olds are sitting in high cotton. Buying votes along the way, Congress has legislated for them benefits out of proportion to the money they put in.
Result: The system is running out of cash (see They’re Coming For Your Social Security). Today’s younger workers, confronting a future of reduced benefits and higher taxes, will in effect be paying for their own retirement plus some of their parents’ retirement.
#5. The gender gap.
Women outlive men. In the competitive marketplace for annuities, a $100,000 payment buys for a female a smaller monthly payout than it buys for a man.
Social Security makes no gender distinction. In times gone by, when most workers were married and all marriages had one woman and one man, there was no great injustice in this. But now? Single men and gay male couples get less than they deserve, while single women and lesbian couples get more than they deserve.
#6. The poverty trap.
Lower-income retirees have shorter lives than high-incomers, a phenomenon that undoes much of the progressivism in the benefit formula. Tobacco users, who congregate at the lower end of the wage scale, are the worst off.
Not only do smokers collect over shorter lifespans than nonsmokers, they pay penalties with every cigarette purchase: excise taxes plus a tribute to tort lawyers. (The lawyers created streams of extra revenue to the states and collect a percentage.) Why are people who get short-changed on Social Security paying for lawyers’ yachts?
#7. The state employment windfall.
Jack works 30 years as a state budget analyst, earning a cushy pension outside the Social Security system. Then he takes up a second career in the private sector. Because of its brevity, Jack’s earnings history in the second job resembles that of a low-paid worker like a hotel maid. The Social Security formula, designed to help out the low-paid, accords Jack an outsize return on his small payroll tax contributions.
Jack’s gaming of the benefit formula takes money from everyone else. It accelerates the depletion of the Social Security trust fund.
The law used to have a provision making a downward adjustment in benefits for a worker like Jack. In 2024, Congress repealed that provision.
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