The reality of the Social Security system and laws is that the system design is fundamentally and fatally flawed. Unless we fix the design flaws, any other changes to the system are purely cosmetic and doomed to perpetual tinkering, temporary fixes, and eventual failure.
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We will have failed our younger citizens by failing to address the flaws. The options are painfully simple. Do nothing, which our federal government has done well since the program’s inception, or truly fix the system.
The crux of the problem is that the Social Security system was never structured to keep the beneficiary front and center of every investment decision. Most pension-fund fiduciaries are held to a prudent expert standard. The Social Security trustees are not in the same position because Congress has largely removed their investment discretion.
That lack of investment discretion creates an insurmountable obstacle to the system — the sacred trust of Social Security stewardship. It is the fatal flaw.
We have done a great job of masking the reality of the failure. As a result, they are clamoring for more of the very system that failed them because our citizens have been lied to about Social Security — the sacred trust is anything but.
To be blunt, Social Security is not a capitalist, free-market creation. It was the start of a socialist system and its systemic failure should be a warning sign of what to avoid and not a green light to make it bigger.
When Americans discuss Social Security, the conversation usually begins with financial issues — the numbers, so to speak. How much should payroll taxes increase, should the retirement age rise, should benefits be reduced for future retirees, or should the payroll tax cap be lifted?
These are important questions, but they all assume the same premise — that the only challenge is finding enough money to fulfill the promises that have already been made. These questions do not address the core problem and a potentially fatal flaw in the Social Security system itself.
Whether a trust belongs to a family, a corporation, a charitable foundation, or a public pension system, one principle has remained remarkably consistent through generations: the trustee’s first obligation is to the beneficiary. Every other responsibility is secondary.
When I was a legislative member of the PSERS pension system for teachers in Pennsylvania, our fiduciary counsel continuously reminded us that our only responsibility was to the beneficiary, and that is how it must be.
That fiduciary principle is so fundamental that it is the bedrock of any sound financial model and is the underpinning guiding principle of trustees, board members, and others charged with governance.
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Social Security is different. Social Security trustees cannot currently be fiduciaries because they do not have investment decision authority. They can only invest in U. S. government securities.
When the financial crisis of 2008 required extraordinary monetary policy, the Federal Reserve pursued policies that were designed to stabilize the broader economy. Quantitative Easing was born. Congress supported those efforts because the nation faced extraordinary circumstances. Whether those decisions were right or wrong is not the same question if that decision is right or wrong for Social Security and its beneficiaries.
Who was responsible for asking whether years of exceptionally low Treasury yields would significantly reduce the long-term investment earnings of the Social Security trust fund? Who was required to ask whether the existing investment structure still served the exclusive interests of future retirees? Who spoke for the beneficiary?
The answer is less clear than it should be. Social Security governance problems existed well before 2008 and quantitative easing, but the magnitude of the Social Security funding crisis was intensified by that policy.
Every organization eventually faces competing priorities, but stewardship requires something more. It requires ensuring that the people for whom the trust exists are never lost in the translation of competing priorities. That is why fiduciary responsibility is such a powerful principle. It reminds us that someone must always remain focused on the beneficiary, even while others address broader institutional responsibilities.
Social Security deserves that same discipline. The purpose of reform is not to criticize yesterday’s leaders. It is to strengthen tomorrow’s stewardship.
Every trust has advocates and every beneficiary deserves one. If we begin there, we may finally find ourselves discussing not merely how to finance Social Security, but how to govern it in a manner worthy of the trust that generations of American workers have placed in it.
If the current structure doesn’t ensure that the beneficiaries’ interests are always represented, Congress needs to change the law, and that is the question we must answer to solve the Social Security funding crisis by allowing trustees to manage the trust funds.
Until Social Security trustees are permitted to properly and prudently manage the trust funds, Congress will be obligated to make up for the shortfall in earnings between what investments in Treasury securities earn versus what the average fund earns. The other alternative is for the fund to invest funds as any trustee would do, prudently. Guardrails would obviously be established similar to those that government employee pension fund managers have now to ensure that the federal government does not interfere with our capital markets.
Frank Ryan is a CPA, retired U.S. Marine Corps Reserve Colonel, former member of the Pennsylvania House of Representatives, and former Vice Chair of the Pennsylvania Public School Employees’ Retirement System (PSERS).
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