The Social Security tax was enacted in 1935 with only a 1% deduction on the first $3000 of wages. Today, the tax rate has climbed to 12.4% of the first $106,800 of income, resulting in a 44-fold increase in the total allowable confiscation. So how did we manage to expand the taxes exponentially but also end up with a system destined for bankruptcy?
There are two main reasons for this debacle. First, thanks to advances in medical care, the life expectancy for Americans has risen from less than 65 years in the 1930s to more than 80 today. The statistics are a bit complicated, but this simply means that the average worker today is more likely to make it to retirement, and likely to draw social security much longer when he does.
Second—like most government programs—the system was underfunded from the beginning. Forecasters should have been aware of likely changes in life expectancy at the time, but working these assumptions into their models would have resulted in a higher tax rate from the beginning, thereby threatening passage of the bill. Once enacted, the momentum builds and the left can simply “tax the rich” to make up the difference.
Social Security confiscates 12.4% of one’s wages that could have been placed in a private retirement savings account. Meanwhile, millions of Americans who “played by the rules” now expect what they’ve been promised. Current retirees should receive benefits and those close to retirement should be covered as well, although it’s certainly necessary to increase the retirement age and correct flaws in the way cost-of-living adjustments are calculated. However, the real question is how to reform or scale back the program for those who have a ways to go.
Opting out must be part of the solution. I believe Social Security should be optional for those who prefer to save for retirement through private plans. However, I usually get 3 thoughtful questions when I offer this proposal. First, what happens if I invest my retirement funds in commodities and the stock market crashes? This question assumes that the federal government will always be able to meet its obligations, a notion I don’t buy in the first place. Besides, individuals could be required to invest a portion—perhaps one-third—of their funds in “safe” investments such as government securities just in case, and accept the risk associated with their other investments.
Second, if those with middle and upper incomes opt out, then who will pay the benefits for the poor? This question acknowledges the fact that social security is really about wealth redistribution anyway. My response? Everyone pays 1%—the original tax—whether they opt out or not. For those who don’t participate, these funds can be used to help cover the shortfall at retirement time.
Third, doesn’t my proposal violate personal freedom by requiring individuals to save for retirement and contribute 1% to a plan they reject? Perhaps it does, to some extent. But I’m a pragmatist. “Social Security” is as much security for society as it is for the recipient. Without it, some Americans would choose not to save for retirement and would end up on the streets as seniors. Taxpayers would step in at that point anyway. It’s part of personal responsibility to save for times when you cannot work, so I don’t have a problem requiring that people do so, but in their own accounts.
Given the choices I propose, most Americans would opt out and Social Security would diminish to a fraction of its current size in the coming decades. Whether or not you like my proposal, we must face reality. The plan guarantees more than it can deliver, and a big part of the solution rests with individuals relying more on personal savings than on Washington. If we only tweak the system, the train will still wreck. When it does, the left will call for massive “means testing” as the solution, turning the system into a full fledge wealth redistribution scheme. Every year that passes without a serious solution is another step in that direction.
agree 99%, but I don’t like the 1% subsidy.
I didn’t like the 1% idea at first either until I did some math in my head. The system would probably undergo BIG CUTS EVEN WITH 1% FROM OPT-OUTERS. I see the 1% idea as a compromise to help low-incomers who will be way behind. They’ll still be behind, just not as much.
There’s already too much redistribution in the system. No reform could pass if the productive class could withdraw completely. Parnell’s 1% might smooth out things a little from where we are to where we want to go, but it’s probably not enough to convince even a Republican Congress to take a bold step.
I’ve received several emails on my “1% proposal” so I’m posting a clarification. Some fellow conservatives think that the 1% tax for opt-outers constitutes a redistribution of wealth and shouldn’t be part of any reform. Interestingly, I’ve been chastised by liberals who charge that 1% isn’t enough to cover the shortfall. Let me explain.
I am suggesting that nothing change for retirees and those near retirement. Young workers (20s & 30s) can opt out of SS if they like and must face the prospects of modest returns if they stay with the program. But there’s a problem with many in their 40s and early 50s. Our government has overcommitted in terms of projected SS benefits for these Americans. Moreover, the fact that today’s workers are paying for today’s retirees would create a strain on the system if (and when) many of them opted out. While it makes sense to renegotiate the SS payouts, we need to find a middle ground between previous commitments and austerity. This will require some additional revenue until another generation of workers get through the system. My 1% proposal is designed to help address the gap during this period. Workers who opt out will still be better off because they will be able to invest their own dollars in the private sector.
To my liberal friends…you are right–1% won’t be enough cover the gap based on current payout schedules. But the current system MUST CHANGE to remain solvent. You can’t expect productive Americans to subsidize a retirement program that is simply unsustainable over the long term. Americans–especially young workers–have a right to leave the system. 1% is a reasonable tax until the books balance.
probably right, Doc. It won’t be easy backing out of this ponzi scheme.
I am happy to see that you suggested low risk investments for personal accounts Dr. Parnell. Opponents of privitzation always say the staock market could crash leaving people with nothing for retirement. Of course it could. But there are a multitude of safer investments available like government securities and corporate bonds for those who are risk averse or who want to balance risk and return.
There is another upside to privitization. There would be a huge capital inflow into markets that could be used for productive purposes like growing business and such. The massive amount of money would be a huge boost to our economy.
Dr. Parnell, while I understand your rationale for the 1%, I don’t understand why anyone should be forced to protect others from their own poor decisions. And I also don’t buy into the “seniors living on the streets” argument. Did seniors live on the streets PRIOR to Social Security back in the days when all retirement brought you was a gold-plated watch? No.
As with any social welfare program, we have destroyed the family unit in America. A clear example of that is LBJ’s Great Society. We still have the same number of poor as we did then. Nothing gained, and a lot of personal revenue lost to the taxman.
Anyone 45, or under, still has twenty years to plan for their retirement. Those who are 55 and over have planned on receiving benefits when they turn 65, and it was a promise that the federal government needs to keep. Those Americans didn’t pay into the system on the basis that the government, if it ran our fiscal health into the morgue, would be able to renig on that promise. And the average life span of a white male in 1936 was 58. Most people were never intended to collect from a system they were required to pay into. And never doubt that FDR, and the Democrats, didn’t understand that.
retire05–I agree with you in principle, but our government has overcommitted in terms of social security benefits for decades. Many Americans have been paying their SS taxes while relying on the program to provide a modest income when the retire. They were never told that the system was a really a house of cards, so their financial decisions were based on government misinformation. An entire generation will get the shaft if we don’t find a way to provide some sort of supplemental assistance. I think we’re stuck with some type of “tax” in the interim while we shifted to an opt-out system.