How Warren Buffett Thinks We Should Fix Social Security




 

Social Security has nearly $3 trillion in reserves but is expected to completely run out of money by 2034, thanks to the gradual retirement of the baby boomer generation and generally longer life expectancies. There are several potential ways we can fix the program, but all can be split into two main categories -- raise taxes or cut benefits. Democrats generally are in favor of tax increases, while Republicans often propose some form of benefit reductions, such as raising the retirement age and cutting benefits for high-income retirees, among others.

Surprisingly, Berkshire Hathaway CEO Warren Buffett's ideas on how we should fix Social Security combine both types of changes. Here's what Buffett (a Democrat) and his right-hand man Charlie Munger (a Republican) have said about Social Security and how we should fix it.

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Here's what Warren Buffett has said about Social Security

There are two main ways that we could fix Social Security's projected financial shortfall -- cut benefits or raise taxes. And past comments by Warren Buffett show that the Oracle of Omaha is generally in favor of the latter.

For starters, Buffett has advocated removing -- or at least increasing -- the Social Security maximum taxable earnings. For 2018, the maximum amount of income subject to Social Security payroll tax is $128,400. This leaves billions of potential Social Security tax from high earners on the table. And while Buffett hasn't directly mentioned raising the Social Security payroll tax rate -- currently 6.2% on both employers and employees -- he has spoken in favor of the U.S. paying a greater percentage of GDP toward Social Security.

Buffett's right-hand man Charlie Munger agrees: "If the country is going to grow at 2%-3% per annum for decades ahead, it's child's play to take a little larger share of the pie and divert it to those who are older. Social Security has a low overhead and does a world of good."

However, it's important to point out that not all of Buffett's ideas about Social Security have to do with raising taxes. Buffett also pointed out that it may be necessary to raise the full retirement age, as well. "Perhaps the idea that 65 isn't the right age for retirement anymore is correct and more change is needed," Buffett said in a 2006 annual shareholder meeting.

The full retirement age has since been raised to 67 for Americans born after 1959, and it's unclear what full retirement age Buffett would prefer. Along with this comment, Buffett elaborated that life expectancies have increased significantly since 1935 when Social Security was first implemented, so it doesn't make sense that the full retirement age has remained the same.

One thing is for sure, though: Buffett is not in favor of cutting Social Security benefits in order to fix the program's shortfall. "I don't want to do anything to hurt the bottom 10%-20% of the population," Buffett said in a 2005 annual shareholder meeting. "I've seen people who fear for the last years of their lives [that they won't have enough money]."

Three Social Security changes that Buffett probably would approve of

A 2014 study by the National Academy for Social Insurance analyzed the long-term benefit of several potential Social Security fixes, as well as the costs of some potential improvements. Here are three fixes that would align with Buffett's Social Security views and how much of an impact they would have:

Combined, these three changes would boost Social Security's long-term revenue by 142% of the expected shortfall. In fact, if these three changes were implemented, we also could raise the minimum benefit to a level where nobody who worked for 30 years would retire poor, give every Social Security beneficiary a $65-per-month raise, and still have a long-term surplus.

Will it happen?

To be clear, I believe something will be done to fix Social Security before it runs out of money in 2034. History tells us that politicians will figure it out. And Buffett agrees. In his 2016 letter to Berkshire's shareholders, Buffett predicted that in the future, "America's Social Security promises will be honored and perhaps made more generous."

Having said that, I wouldn't hold my breath for Social Security tax increases to be passed while Republicans control the White House and both houses of Congress. While lifelong Republican and Buffett's right-hand man Charlie Munger has spoken in favor of paying more, he acknowledges that most of his party doesn't feel the same way.

"It's a perfectly reasonable thing to do, to pay a little more in the future, to support what I regard as one of the most successful programs in the history of our country. I wish my own party would wise up," said Munger at Berkshire's 2006 shareholder meeting.

The bottom line is that Social Security is fixable. As Buffett has said, "our country can easily handle the Social Security issue." It's just a question of when and if the necessary changes will be implemented. The earlier a solution is put in place, the less painful the additional cost will likely be, but there still is plenty of time before anyone has to worry about their benefit checks being slashed.

Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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