Millennials face two long-term, man-made financial disasters in their lifetime: Social Security financing and student loan debt. One congressman has introduced legislation (Student Security Act, H.R. 4584) to address both of these priorities at the same time, asking whether you would trade your future Social Security benefits to have your loan forgiven now. Reports by Tom Garrett revealed many of the facts used in this article.

This trade might appeal to those who are struggling with student debt and who doubt that Social Security will remain unchanged for them.

Before you say yes, though, you need to know how it would work because the transaction seems like more "politics as usual" than a serious solution.

Student loan debt and Social Security

Both of these are problems.

Student loan debt has soared to $1.4 trillion, affecting more than 40 million people. That is an average of $30,000 in loans per person. These obligations exceed virtually all forms of debt, other than mortgages, by volume and lead all forms of debt in terms of default status.

For those born in the late 1970s, Social Security offers uncertainty. The imbalances in the system are growing at more than three times the rate of our economy, and yet Congress offers little in the way of action on the system’s long-term stability.

Would you trade?

Specifically, this bill would provide student loan forgiveness in exchange for accepting a higher age of eligibility for Social Security benefits. For every month that a borrower agrees to defer his or her own eligibility for Social Security benefits, they would receive $550 in student loan forgiveness. In other words, a borrower could get $6,600 of loan forgiveness in exchange for increasing his Retirement age by a year.

To simplify the situation, let’s look at the aged borrower who is at retirement age and worked an average career. Under the current formula, he could retire now and collect slightly more $16,500 from Social Security. As a second option, the retiree could defer the claim date by a year to receive more than $17,800 (inflation-adjusted) annually in retirement.

Under the new legislation, he would have the option to collect $6,600 in loan forgiveness as the final alternative.

As you might guess, this program would tend to help younger people who do not have large Social Security earnings.

A piece of the Social Security fix?

Probably not for two reasons.

First, the program is completely voluntary, so you have to ask for whom this trade-off makes sense. It would be a good deal for a spouse who plans to collect under someone else’s contribution record. It would be a great deal for a younger American with a shorter life expectancy. It would be a no-brainer for the millions of people who work outside the coverage of Social Security. In these cases, Social Security would be no better off.

Second, higher retirement ages are a virtual certainty for younger Americans. This change already exists in most proposals to reform Social Security. So the person born in 1980, for example, wouldn’t really know whether his retirement age was increasing from 67 to 68 or from 70 to 71. As a result, some of the savings claimed by this legislation may well be savings that are already baked into the next reform of the program anyway.

The costs

While the congressman claims that the Social Security Administration believes that the savings from his program would exceed $700 billion over the lifetime of the program, his promotional material does not even mention of the cost of the initiative to the rest of America.

The bill for us is apt to be expensive. First, the $6,600 incentive is a hard cost to the federal government, which means more debt. Second, the retirement portion of Social Security is the natural exit point for those collecting disability. By pushing retirement age back by a year, Congress will put more pressure on the disability system. Third, the deferment of benefits is certainly going to mean that retirees consume their savings over the year of lost benefits. This outcome is likely to translate into more people depending upon other government programs to replace the lost savings.

Politics as usual

Here is what supporters want to believe. This program would enable younger workers to escape the pressure of student loan debt.

Borrowers would buy homes, get married sooner, have more children, and start businesses faster. Otherwise, they might put the savings in a 401K that will replace the lost benefits at retirement.

Social Security is where it is today because Congress has kicked the can on the program’s costs for decades. In the same fashion, this legislation does little more than solves a student loan crisis by creating a bigger retirement crisis.

*The Congressman's office did not respond to questions about this legislation.*
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