]]]]]]]]] 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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