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Monday, August 16, 2004

Social Security has Always been Bankrupt – Morally!

Consider the problem: some people retire in poverty, either because they don’t save enough for their retirement, or because their private pension plan fails. FDR’s 1935 New Deal solution was to force everyone into an Old-Age Survivor Disability Insurance (OASDI) plan, commonly called Social Security. Thank goodness we have a Constitution to limit such arbitrary authority of government - or so we thought. While much of the early New Deal legislation was declared unconstitutional, by 1937 the Supreme Court was so corrupted by progressive socialist ideology that it allowed Social Security to stand.

Even though people were being forced to pay for this “insurance”, many people loved the new system. Why? For two reasons. 1) Payout was based on your pay history, not your contributions, so older workers got something for nothing. 2 ) Half the contributions were taken from a person’s employer, so younger workers thought they were getting something for nothing too. Of course, employers would respond by paying people that much less, but few people were (and are) that economically aware.

Politicians love Social Security most of all, because it allows them to conceal deficit spending. Here is how it works. OASDI taxes generate more tax revenue each year than the system pays out, and Congress mandates that the extra money be used to purchase government bonds at a special low interest rate. Congress then spends the money, but the money is called tax revenue, not borrowing, for purposes of computing the deficit. (OASDI is a tax – get it?) This funny accounting means that our national debt is actually about $12 trillion larger than claimed (according to Forbes, October 1995). Alas, this party will be over starting in about 2016, when annual Social Security payout will first exceed annual OASDI tax revenues, at current tax rates.

Even assuming Congress can repay all of its borrowings, the system still becomes insolvent in about 2042, because of the ever-growing liabilities of an aging population. To solve this problem, politicians would love to keep raising the combined OASDI tax rate, which started at 2% of pay in 1935, and is now over 14%. That is the way the socialist countries of Europe do it too, but because they started ahead of us, their combined payroll tax rate is now approaching 50% (in France and Italy), with no end in sight. Such a high tax on employment is a real job killer, and it partially explains why socialist countries have such chronic high unemployment rates.

If Social Security is so great, why must workers be forced to participate? Furthermore, how can the government claim greater wisdom than the individual for deciding when and how much to save for retirement? Many young households carry debt on their house, car, and credit cards, ranging in interest rate from 6% to 15%. Does it make sense for these households to be investing money for retirement at 2%? Clearly, they would be better off paying down their debt first, and saving for retirement later. So much for the wisdom of government.

It has been proposed to allow workers to put part of their OASDI tax in a private account, protected from political whim, to possibly grow by investment. This would alleviate the problem of stealth deficit spending, and it might improve the rate of return for some workers. But it still does not address the basic moral problem - that Social Security is a socialist program founded on force and plunder. Instead of being fixed, the program should be ended.

Because two-thirds of people polled now say they expect nothing from Social Security, it may be politically feasible to end the program. This can be done as follows. 1) No new participants added to the system. 2) Pre-retirement participants allowed to opt out. 3) Means testing for all current and future retirees. 4) Funding shortfall paid from the general fund. The time to do this is now, before the baby boom generation retires.

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