In 1935 the Federal government created the Social Security system to address a chronic problem in society - how to take care of people who cannot support themselves through age or disability.
The problem had been an issue long before 1935, so many local and state governments, and some businesses had begun seeking to address the problem by creating pensions systems for their workers. The concept that dominated was a defined benefit plan - if you worked a certain number of years you would be entitled to a amount of money each month after you reached retirement age defined as a percentage of your final salary. It relies on complex formula's to project how much money has to be set aside each year to have a pot big enough to meet retirement obligations.
Social Security as created in 1935 was a work around to supplement defined benefit plans already in place.
In the century since the defined benefit plan became popular it's two glaring deficiencies have long been apparent.
The first problem is the model relies on the managers correctly projecting how much per year they need to set aside to provide a big enough pot for retired employees. Management who have other business priorities, like finding money for raises for themselves, are incentivized to err on the side of putting too little aside. Rather than what would be prudent they assume the best case scenario. Assuming a 7% annual return has been common even during recessionary times. The result has been pension plans often verge on insolvency during stock market downturns.
The second problem is defined benefit plans usually contain "vesting" requirements - money set aside for each employee did not actually become the employee's money until the employee had worked a specified number of years. This was a considerable benefit to the organizations. It allowed them to dangle the carrot of a pension to entice potential employees, but they could rely on a certain number of the employees leaving before their retirement vested, so the contributions in the leaving employee's account went back in the pot and reduced the overall contributions the organization had to make - in effect long term employees were subsidized by of short term employees.
The result has been chronically underfunded pensions, and workers who often accumulate little or no pension as they move through life. It also tended to keep people at jobs they no longer liked in order to become vested. Finally it is a hurdle for potential entrepreneur's needing a little financial security before striking out on their own to create new business.
Congress recognized the problems decades ago and responded with regulations aimed at private business. Private business, in response, moved away from defined benefit plans to 401K's, employee investment programs created by Congress that effectively funnel money to Wall Street - not only a huge money maker for Wall Street but also a huge factor in the chronic overvaluation of stock markets.
Government and church related non-profits are still unregulated and continue to imposed vesting requirements that may require years of working service before the worker is entitled to their money.
The Congressional solution to the insolvency issue was a program aimed at funding bankrupt retirement plans, But with the National debt currently exceeding the national income the ability of the Federal government to bail out underfunded pensions is limited, particularly given that the reason many retirement funds currently appear solvent is because of a stock market chronically inflated by low interest rates. A market crash could devastate retirement plans, which could crush consumption.
It is time to start redesigning Social Security law around what's good for workers rather than relying on the poorly aligned incentives of private pensions and 401K's herding retirement money to Wall Street. A big step forward would be to give workers the option of having retirement contributions directed into the social security system in their name, or rather than supplementing their social security account, use it to fund a business, buy an asset or otherwise take control of their retirement pot without a complex web of restrictions.
