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]]]]]]]]] SOCIAL SECURITY: NOTHING BUT A PONZI SCHEME [[[[[[[[
by John H. Makin, (11/2/88)
Director of fiscal policy studies
at the American Enterprise Institute
Op-Ed page of The New York Times, Oct. 8, 1988
[Kindly uploaded by Freeman 07656GAED]
Robert S. Strauss has uttered the unutterable. Recently, as
cochairman of the National Economic Commission created to
devise a bipartisan solution to the budget deficit, he hinted
that deficit reduction would require less spending or higher
taxes. Bad enough. Worse, since almost half of spending is on
entitlements, including Social Security, he further hinted that
the commission might think about slower growth in Social
Security benefits.
Both Presidential candidates immediately repudiated Mr.
Strauss's shocking lapse into truth. That bit of politics not-
withstanding, Mr. Strauss didn't go far enough. Major changes
in Social Security are required--changes that would mean both
lower budget deficits and a cut in regressive payroll taxes.
The Social Security system is grossly unfair to every
American under the age of 45. Today's retirees receive about
$3 in benefits for every dollar paid in Social Security payroll
taxes. But between now and the time when the under-45 baby
boomers begin to retire, the ratio will drop from $3 to just
$1.
The widely advertised $12 trillion surpluss being predicted
for the Social Security Trust Fund will not help either.
Quite the reverse.
This surpluss--a creature of the 1983 increase in the Social
Security payroll tax--only exists because of an accounting
trick employed by the Federal Government. In the years when
payroll taxes to finance Social Security benefits exceed the
benefits actually paid, The Social Security system acquires
special government bonds. The system is then credited with the
interest on those bonds. Fair enough. But that interest,
which will accumulate to just $12 trillion between today and
retirement by today's workers in their late 20's, will be paid
by the Treasury out of general revenues collected from the same
workers whose payroll taxes were raised. In short, the $12
trillion surpluss just measures another increase in taxes over
and above higher payroll taxes.
Today's middle-aged and younger taxpayers may think that at
least this painfully accrued "trust fund surpluss" will pay for
their children's benefits. It will not. As today's taxpayers
in their 30's and 40's begin to retire, their large numbers
will require that all of the surpluss be paid out in benefits.
It is ironic that a child born in 1983 to a baby boomer whose
taxes were raised to "rescue" Social Security will be left
facing the same crisis his or her parents had faced that year.
Sixty-five years after 1983, the "rescue" will leave Social
Security bankrupt again.
The problems of Social Security are the result of a radical
transformation of the system from a simple safety net to an
intergenerational Ponzi scheme. During its first half century
of operation, the system has provided a very generous benefit-
contribution ratio for Americans born during the 40 years be-
fore World War II, but little, if any, net benefit for the
numerous baby boomers and nothing at all for subsequent
generations.
This cross-generational pattern of discrimination is rooted
in mutually reinforcing causes: short-sighted attempts by pol-
iticians to curry favor with a growing, politically active
population of older Americans, and the 1946 to 1962 surge in
birth rates.
During the Great Society years of 1968 to 1974 [?], Social
Security benefits were doubled while average weekly earnings
rose by only half that amount. This benefit bulge preordained
a rise in payroll taxes since wage earnings are the tax base
from which Social Security benefits must be financed.
In an effort to slow the extravagant increases in benefits,
responsible members of Congress made an effort to index those
benefits to inflation, reasoning that such increases would be
less than the 10 percent to 20 percent annual increases being
pushed through by less responsible politicans. They were wrong.
Unfortunately, indexing took effect just as a period of unus-
ally high inflation was begining. The double-digit inflation
of 1979 to 1981 meant that benefits increased by another 40
percent; earnings, however, rose by only 16 percent.
The jump in the payroll tax burden that was necessary to
this benefit bulge was compounded by a steady rise in
the ratio of the retired to the working population. In 1950,
there were 16.5 payroll taxpaying workers for every Social
Security recipient. By 1980, the ratio had dropped to 3.2.
That drop, when combined with the hugh benefit increases, led
to the 1983 Social Security bankruptcy crisis.
This demographic vise will continue to tighten. For baby
boomers there will be only two workers per retiree when they
retire and a 1983-style crisis calling for still higher taxes
will thus emerge all over again for their children.
The bogus trust fund surplus and the poor disign of the Soc-
ial Security system should prompt serious consideration of a
return to a safety net concept for Social Security. [?]
Only about one-fifth of Social Security outlays is necessary
assure that no American over age 65 has an income below the
poverty line. The payroll-tax based Social Security system
should be phased out over a 40 year period for
Americans under 50 and replaced by a simple negative income tax
applicable to individuals over age 65. [?]
The negative income tax would mean that any individual over
65 with an income below the poverty line [whatever that is]
would receive a check from the Government that would lift him
or her out of poverty. [At whose expense?]
A phase-out of payroll taxes would provide Americans with
increased means to provide for retirement by investing as they
see fit, rather than by saddling them with ever-increasing
taxes.
Those who cling to the idea of an ever-expanding Social
Security system should reflect on the likelihood that the
simplest way to achieve a phase-out of today's Social Security
system would be to make participation in the system voluntary.
[But let's not replace it with a scheme to make retirees out-
right welfare recipients, BG.]
Robert Strauss deserves praise for having the courage to
raise the issue of Social Security as he and his colleagues on
the National Economic Commission wrestle with the budget defi-
cit.
Granted, returning Social Security to a safety net program is
not what Mr. Strauss had in mind. But once the Presidential
candidates and other commission members realize that such an
approach would mean both less spending and lower payroll taxes,
they might at least be willing to talk about it in public.
[Social Security, and Medicare (and Medicaid) should be made
voluntary and then phased out completely, along with all other
welfare -state schemes that can't be ended precipitously, BG]
* * *
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