For decades politicians have sometimes quietly, sometimes noisily, acknowledged that Social Security must be reformed if it is to survive the onslaught of the aging baby boomer generation. Its endangered Federal Insurance Contributions Act (FICA) sister, Medicare, threatens to implode even sooner, perhaps within just a few years, accelerated by the government’s assault on “wasteful” reimbursements to increasingly diffident medical providers.

We often hear the tired drumbeat from Washington that taxes must be raised or benefits postponed because the ratio of active workers to beneficiaries has dropped to unsustainable levels, itself an essentially irrelevant demographic observation. Some want to tinker our system back to health, while others believe that only a major overhaul can save it. The Social Security/Medicare crisis is not one of funding, but of mismanagement. The elements necessary for financial stability have always been in place.

In her June 12th Senatorial debate with Ed Case, U.S. Representative Mazie Hirono flatly ruled out boosting the retirement age to help save Social Security. Her intransigence is defensible, but for reasons not so obvious. In fact, encouraging more workers to opt for early retirement would help preserve the system.

According to the Social Security Administration (SSA), an age 62 individual beginning benefits today would collect a monthly payment 25 percent lower than what she would realize by waiting until her full retirement age of 66. For a hypothetical beneficiary, this could mean $750 per month instead of $1,000, a difference of $3,000 each year for the rest of her life, which the SSA estimates to be an additional 22 years, to age 84 (19 years for a male, to age 81).

Another 62 year old female choosing to hold off until age 66 would receive the full $1,000 monthly amount. By age 78, this woman will have passed her early retirement contemporary in cumulative benefits, while the adjusted life expectancy tables project that both will live for 10 more years. If so blessed, the early retiree will withdraw $30,000 less from the system than the full retiree.

Of course, this really means that it makes more sense to consider a home equity or personal line of credit to delay these first 4 years of benefits, instead of filing for Social Security at age 62. Even if repaid over 20 years, such a strategy would net about the same monthly benefit as that for early retirement. However, within her lifetime, the recipient will eventually get to enjoy the same higher monthly stipend as her full retiree counterpart.

In view of the 8 percent annual benefit increase granted by the SSA to those further deferring Social Security until age 70, it might even be prudent to borrow at current low rates around 5 percent to bridge at least part of if not the entire gap from age 62 to 69. At worse, the retiree would break even on the transaction.

Social Security and Medicare are not true entitlements. The Supreme Court in Flemming v. Nestor ruled that there is no contractual right to receive Social Security benefits.

Nevertheless, the 7.625 percent subtraction from our paychecks is not really a tax but a de facto annuity insurance installment payment, matched by an equal sum from our employers. That’s 15.25 percent in total, a substantial amount of compulsory retirement savings.

Proponents of allowing individuals to privately invest these FICA contributions have been criticized as too willing to minimize what can be formidable market risks. The safest investment vehicles have always been US Treasury Notes and Bonds, but can these conservative instruments generate the revenue stream necessary to maintain a “reasonable” standard of living? If, by “reasonable” one means something comparable to what the system currently promises, then the answer is yes!

An individual reaching the age of 66 after earning no more than the minimum wage for 35 years from 1975 through 2009 would have paid about $36,000 into Social Security, and over $8,400 towards Medicare. If these funds had been continuously invested along the way in 10 year Treasury Notes, the deposits would have grown to almost $100,000 in Social Security and $23,000 in Medicare. A 19 year duration (female life expectancy at age 66) annuity based on $100,000 earning interest equivalent to the 10 year Treasury Note 7.4 percent average for the preceding 35 years would create a monthly income in excess of $800.

Consider now that the minimum wage earner is the exception (just 5 percent of all employees). Over these 35 years, the minimum wage has represented less than 40 percent of the average hourly compensation for all working Americans. Adjusting the numbers to reflect what the average worker could expect, the annuity inflates to over $2,000 per month!

Similarly for the Medicare component of FICA, the potential monthly annuity amount for the typical American wage earner would be more than $460. In Hawaii that covers a significant portion of premium costs for many individual health insurance plans.

Although today’s Treasury rates have been artificially held under 2 percent, most experts predict that returns must eventually revert to historical norms, given the Federal Reserve’s expansionary monetary policy. A higher future benefit would be realized with 30 year Treasury Bonds. Triple A rated corporate securities and state/municipal obligations thrown into the portfolio mix would result in still greater yields, with negligible added risk.

Former Vice President Al Gore had it right. We need not only a “lock box”, but a guarantee that our monies will be invested and ultimately returned, with interest. We must demand that our elected representatives recognize FICA deductions as savings bond purchases, not discretionary loans, or worse, taxes thrown into the general fund.

About the author: Barney Wilson has been an Oahu resident since 2003, and is employed as an analyst for a major transportation company. He earned his M.B.A. from the University of Michigan.