Would you trade your Social Security for a reduction in your student loan obligations? It is a theoretical question now, but that may change in the future.
Recently GOP congressmen Rep. Tom Garrett (R-VA-5) introduced legislation that would allow borrowers to trade a higher age of eligibility for Social Security benefits for loan forgiveness today. For example, a borrower could get $6,600 of loan forgiveness in exchange for increasing his retirement age by a year.
The idea is definitely unconventional, but is it sound. Or is it just more politics as usual in which Congress willingly trades a solution today for an even larger problem in the future?
Sadly enough, the details only raise more questions, and reveal how far Congress is from dealing with Social Security. At this point, the congressman’s staff has not responded to any question.
Where Did The Numbers Come From?
The congressman’s promotional material claims:
“The Social Security Administration projects the Student Security Program would save more than $700 billion over the lifetime of the program — over 11% of what’s needed to make Social Security solvent for perpetuity.”
It is unclear where the Social Security Administration weighed in with this estimate of savings. Moreover, $700 billion is closer to 2 percent of what is needed to keep the program solvent “in perpetuity.”
Part of the problem here is that we do not know from what age someone is deferring benefits because adjustments to retirement age are a staple of most Social Security reform packages. A younger worker might be extending retirement from 67 to 68, or 68 to 69, or 70 to 71. So a significant portion of these projected savings may well be already captured by the time workers reach retirement.
Separately, there is no guarantee that these borrowers will use their Social Security eligibility at all in retirement. This transaction will appeal to millions of state and local workers not covered by Social Security. It will appeal to those who have shorter life expectancy. Finally, it will draw on a lot of people who plan to collect as a spouse. In these cases, the savings for Social Security is actually zero.
What Is the Cost?
The part missing from the coverage of the legislation is: how will the nation pay for the loan forgiveness? While the savings from the proposal are at best unpredictable, the cost will be unmistakable. Each loan forgiveness deal will push hard costs onto the taxpayer today. Moreover, for those workers who can’t replace their foregone retirement benefits, they will rely more on government assistance. This isn’t going to be cheap.
Who Did the Math?
This proposal is based on a fixed incentive, which disregards the age of the applicant, their health, their eligibility for Social Security, and their work record. That mix virtually assures a candidate mix that will generate the least savings for Social Security, and the most cost for the government.
To illustrate, the deal offers $550 per month of retirement benefits waived regardless of when the loan forgiveness is granted. If you look at a typical senior at normal retirement age with student loans, that person would be able to receive a little more than $16,000 in benefits during the year cashing checks, or $6,600 of loan forgiveness. Few of these seniors are going to take the deal.
At some point, the time value of money would likely make the deal much more appealing to younger borrowers. The candidates with the most to gain from this trade will be those furthest from retirement, a group that generally knows the least about their retirement plan. Moreover, it is apt to draw heavily from the segment of workers who appreciate the level of benefits the least.
Is This A Good Idea?
Maybe the program enables younger workers buy homes, get married sooner, have more children, and start businesses faster. Maybe, they put the savings in a 401K that will replace the lost benefits at retirement. If that is the desired outcome, we need to rethink the incentive because it is apt to draw heavily on younger Americans who think that Social Security will not be there for them in the future.
Cynics are apt to say that the deal simply codifies the existing arrangement where workers who cannot pay-off their debt by the time they retire have their Social Security benefits garnished to pay off outstanding loans. The participants are giving away benefits now that they wouldn’t receive in the future as a payment mainly on interest that accrued over the course of 30 years.
These effects aren't the same, and the legislation presents a serious long-term structural problem for Social Security. As the audience grows over time, it creates a voting block of millions who have somewhat opted-out of benefits. These voters will have even less self-interest to pay attention to the system, and will build a resistance to tax increases that might be necessary in the future.
This is a disaster manufactured to happen by well intentioned people.
Brenton Smith writes on all aspects of Social Security reform, translating the numbers and jargon of the issue into terms that everyone can understand. His work has appeared in Forbes, MarketWatch, Fox Business, The Hill, and a number of regional newspapers. To read more of his reports — Click Here Now.
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