OK, I’ve written this column before, and I’ll probably write it again. It’s a recurring tale of woe that only gets worse by the year. However, I feel I am duty bound to try to improve things, so, once again, I will try and explain why Social Security is screwed and what can be done about it.
First off, let’s look at how Social Security works. Currently, there is more money going into the Social Security system than going out. After grandma and her pals get their checks, the government has some money left over. What does it do with this money? It either spends it on poppycock projects like paving West Virginia or, if the overall budget is in surplus, it pays down some of the national debt.
But what about the Social Security trust fund? The “trust fund” is the amount of money the government has spent on poppycock projects over the years when it had more Social Security money (i.e. payroll tax money) than it needed. It’s just that – literally, just numbers. The government has not taken the money and actually put it in a “fund”; the government has promised to pay for Social Security by “funding the fund.” How it will do so is anybody’s guess. The government is not investing or saving the excess in Social Security payments. That money is gone.
In approximately the year 2012 (the year keeps changing, depending on how the economy is doing), largely because of the baby boom and lengthening life spans, the amount of money collected in annual Social Security taxes will be less than the amount needed to keep up with grandma’s payments. When the government opens up the “trust-fund box,” it would be akin to Jim Carrey and Jeff Daniels opening up their Samsonite briefcase at the end of “Dumb and Dumber”: There’ll be nothing but IOUs.
With no trust fund, we will have three options: Cut grandma’s benefits (that she has counted on her whole life), raise taxes or borrow money (which is nothing more than delayed taxes). Grandma isn’t going to like us cutting her benefits, and grandma votes, so that’s not likely to happen. Plus, it is not exactly ethical to cut the benefits which she has counted on her whole working life.
Raise taxes? OK, fine. Let’s look at raising just the payroll tax. Currently, Social Security taxes amount to 12.4 percent of our paychecks. In order to keep making payments for retirees, that number will have to go to 17 percent by 2016 and to 25 percent by 2035. That’s on top of regular income taxes. We could raise those, but it’s the same amount we’d need from the same paycheck. Any way you slice it, unless we cut back on the ability of old people to eat, we will have to double our payroll taxes.
And there’s one other thing. All this money put into Social Security produces an annual return of 1 percent to 2 percent. That’s right. If today’s retirees take the payroll taxes they have paid their entire lives and put the money into a bank account paying 2 percent interest, they would be getting the same, and perhaps higher, benefits that they currently are.
Do you like this future? A future of 25 percent payroll taxes with a retirement where you get that money back at a criminally low return? If you do, then do nothing. If you don’t, you should support the dirty word of privatization. Afraid that naive workers will invest all their money in high-risk stocks? Then mandate that they put it all in already-insured bank accounts. They still would get better than a 2 percent return, probably much better. This would also take the load off of payroll taxes because retirees with privatized Social Security won’t be gobbling up future benefits.
And why not let people put the money in the stock market? Mandate that people have to use general mutual funds if you’re worried of a catastrophic crash. Even with a crash, returns would be better than 2 percent. Measuring back to 1801, the worst 35-year period for general stock returns yielded 3.4 percent, still twice as good as Social Security yields. The average has been 6.8 percent.
There’s no other way to avoid massive tax increases or benefit cuts. It’s not political; the numbers just happen to add up that way. It’s either privatize now, raise taxes later or throw grandma into the snow.
Which do you prefer?
