Ignoring the End of Social Security for Yet Another Year
We are once again ignoring social security's impending collapse in 2015, forfeiting the opportunity to invest this year's surplus in market funds to provide real wealth for future retirees.
by Jerome F. Winzig
Sometimes nations and societies allow themselves to be overwhelmed by avoidable events. A nation's leaders may ignore obvious signs that a change is needed and refuse to make the necessary hard decisions. It seems much easier to point out such willful blindness when it occurs in other nations. American political commentators, for example, are quick to criticize South Africa's failure to adequately address its immense AIDS problem.
It is much different, however, when our own nation pointedly ignores an obvious but avoidable impending crisis. Such is the case with social security. For years we have known that the American social security system will begin to collapse around 2015. We have known that this will result in severe economic dislocation. We have even known that this will dump a massive debt on our own children and grandchildren, thereby causing explosive inter-generational conflict.
Yet year after year we refuse to do anything at all. Instead, Washington is obsessed with the balance of power in the U.S. Senate while politicians on both parties claim they've "invested" the social security surplus in a so-called government "lockbox." Almost no one points out that this "lockbox" is utterly phony. Instead, many leaders deliberately undermine the only feasible solution -- privatizing social security -- by ridiculing it as a risky, fat-cat scheme.
The facts about social security are abundantly clear and have been unfolding for decades, yet we refuse to believe or even discuss them. When Franklin Delano Roosevelt first proposed the social security system in 1935, it seemed plausible to fund retirement on a pay-as-you-go basis because there were 42 workers per retiree. But as the use of penicillin and other modern medicines began to lengthen the average lifespan, social security's hidden flaw -- having current workers pay for current retirees -- was exposed.
By 1960, the number of workers per retiree had dropped to 5.1. By 2000 it was down to 3.4 workers per retiree, and by 2030 there will be just 2.1 workers paying for each retiree. This means that a retired couple will be supported by just two two-earner working families, each paying over $20,000 in social security taxes.
Currently, the social security system collects more than it spends on retirees. The excess is loaned to the federal government, which immediately spends it on other federal programs. For years, that excess has provided us with a wonderful opportunity that we have ignored. If we had invested that excess in private social security funds, there would then be real assets available for retirees when, as is quite certain, social security starts to run dry.
2015 is the turning point. That's the year when the social security surplus disappears and the costs of social security benefits begin to exceed the income from social security taxes. If we haven't acted by then, it will be too late.
By 2015, there will be only two remaining alternatives. The first will be to cut benefits. But that will mean reducing retirees' incomes after having given them the impression that they can survive on social security and after having taxed them significantly during their entire working careers for the previous generations' retirement benefits.
The other alternative will be to raise taxes. But the amounts that will be required are enormous. The National Center for Policy Analysis predicts that when today's 18-year-olds retire in 2050, their children and grandchildren will have to pay 32.8 percent in payroll taxes for social security, Medicare, and other health benefits.
Between now and 2015, we still have the opportunity to invest the current social security surplus. If we invest it in market accounts that create real wealth, then we will have real wealth that can be used to help fund retirements in the future. But the window of opportunity narrows each year. If we had started 10 years ago and invested a trillion dollars in social security surpluses during the 1990s, we would already have substantial investments for future retirements. Instead, the federal government spent that surplus on other programs, leaving behind IOUs that can only be repaid by additional new taxes. If we do that for the next 14 years, we face certain disaster.