AFTER SOCIAL SECURITY
Social security remains a sacred cow, but a sacred cow that is on its last leg. Expenditures now top receipts by over forty billion dollars and the losses will mount to the tens of trillions in the next 70 years. Many politicians, like Nero, smile and fiddle while social security burns. The more prudent course is to confess that the promise made by the government was a lie from the start, to adopt a private sector alternative, and to ween the nation of this weighty burden before it sinks the new generation in a sea of debt and increased payroll taxes.
Social security expenditures exceeded social security receipts for the first time in 2010 by a whopping $49 billion. This year, another $46 billion will be added to that figure. As the baby boomers continue to create an enormous financial drain on the system, the nation will be forced either to increase payroll taxes by 15 to 20% or make drastic cuts in benefits offered. In short, social security “as we know it,” the very thing leading proponents of it now tout in Congress as what they will preserve, cannot be sustained. It will have to change; it is unaffordable. Once we accept that reality we may maturely address how it should be changed.
In the next 73 years, social security and medicare will cost about $103.2 trillion, while receipts from payroll taxes will equal only $57.4 trillion. To sustain the current system the government will have to add taxes equal to $45.8 trillion or it will have to cut benefits by that same amount or rely on a combination of both. If taxes are increased to that enormous extent on the youthful, productive elements of our society, the result will be devastating to productivity—resulting in far greater unemployment, less job creation, and less capital available to sustain economic growth. In short, we cannot afford to keep social security “as we know it.”
Consistent with popular politics of the twentieth century, politicians have promised greater and greater social security benefits for retirees, expanding the system from a limited needs based program serving 53,236 Americans at a cost of $1.3 million to a broad welfare system serving 52 million Americans at a cost of $615 billion annually. Social security once considered a welfare benefit for the truly needed is now considered a payment deserved by all and is a program that endeavors (but fails) to substitute for a living wage. In every respect, social security has failed to live up to politicians’ promises. Those who pay into social security have a horrible rate of return. Those now paying into the system are likely to receive far less money than if they had either saved or invested the funds taxed. Those who will soon pay into the system may receive few, if any, benefits. The system was touted as one financed by payroll taxes that would redound to the payer’s benefit. In fact, the money going in is already more than committed to go out to those now eligible. We are not paying for our own social security retirements. That too has been a major government deception over the years.
Because the nation taxed generations of Americans to pay for promised benefits it now cannot afford to pay, it will have to make those who paid the tax whole, receiving what they paid in but not the added value falsely promised by politicians over the decades. Although the nation cannot afford social security, it must find an alternative way to make whole those who paid into the system while liberating those now paying from the obligation to continue buying into the lie.
Certain immediate reforms could help end social security and replace it with a private sector alternative. First, the system should immediately be limited based on need. Individuals who have paid into the system but due to good fortune lack a financial need for social security should be excluded from receiving benefits. Instead, they should be reimbursed the amount taxed them for social security in a series of lump sum annual payments. Second, those in need should be exempt from all taxation federal, state, and local; they should be given a lump sum payment from the federal government equal in amount to the tax they paid in; and they should be given a combination of reduced payments prospectively until death and new marketable tax credits. The tax credits would be exchangeable in the free market for goods, services, or health care. Those who offer the goods, services, and health care would need to discount the cost of services to half their normal value in exchange for receipt of the tax credits which would permit a tax deduction equal in value to the full cost of the good, service, or health care. This would create a market conducive to discounting the cost of services to those in need. Third, those who will not be eligible for social security for five or more years should be allowed to opt-out of the system in exchange for a federal lump sum payment equal to the amount of taxes paid into the system. This opt-out system should be phased in based on need, with those who the tax burdens most receiving relief first and so on until all are out of the system.
Timed to coincide with the phasing out of social security, for the generations not presently eligible for it, the government should create a platform for private investment/insurance programs. Those programs would take what would accept automatic debits from payroll equivalent to social security payroll taxes now paid and apportion part of it for insurance to provide compensation in the event of disability encumbering employability, loss of life, or retirement and apportion the other part for conservative investment with added insurance against loss. Companies offering these combinations would be liberated from federal, state, and local taxes on earnings. The money paid in would be tax deductible to the payer and provision would be made to permit greater contributions than the minimum essential required for investment and insurance.
We have to come to the realization that social security “as we know it” is unsustainable, that most essential political promises made to taxpayers about social security were false when made, and that alternative systems that ween the nation of social security while simultaneously returning the taxes paid into the system must be considered seriously and adopted if we are to avoid a dramatic escalation of payroll taxes or a dramatic loss in benefits or both.
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There is no sound justification for social security when private investment/insurance programs could do a better job. Although getting to a free market from a socialized one requires effort, we can do so through a system that phases out the former by inviting innovative market solutions to fill in the gaps. Indeed, given historic returns on investment in the market (present market excepted), the amount a person would realize in returns on investment from the system proposed here would likely exceed, and possibly by many times, the economic value of all benefits social security now offers beneficiaries.
© 2011 Jonathan W. Emord - All Rights Reserved