One obstacle to reining in our runaway Federal government is that certain programs are considered sacred. Foremost among these is the Social Security system. The conventional wisdom says that retirees are so dependent on this program that they will never listen to any discussion of alternatives. Well, I have a little more respect than that for my parents’ generation. It’s time we had some serious talk about this issue.
Let me say at the outset that I am not going to propose that we take away the benefits of anyone who relies on Social Security for retirement income. Rightly or wrongly, our government instituted a Social Security tax that millions of us have paid for decades, with the promise that we would receive retirement benefits in return. It would be wrong to break that promise after using it to justify taking so much money from our citizens. What I do want to say is that it was unconstitutional to institute Social Security in the first place; that it is a bad financial investment rapidly becoming a disaster; and that upcoming generations of retirees should not be forced to rely on it for their security.
Article I, Section 8 of the US Constitution enumerates the powers given to Congress. It should not surprise readers of this column that providing for citizens’ retirement income is not listed among those powers. Since it is not to be found among the powers of Congress, the Tenth Amendment applies: this power is reserved to the states or to the people. I would maintain that it is the responsibility of each person individually, not the states, but that is a subject for another column. Suffice it to say that Social Security is not authorized under the US Constitution, and should therefore never have been instituted.
The quality of Social Security as a long-term investment to provide retirement income is a complicated subject. To fully explain it requires showing comparisons between Social Security and private investment plans, for several age and income groups. There isn’t room here for that, but I’ll try to make the point anyway.
There are two kinds of investment return to consider: the buildup of principal and the monthly payment. With Social Security, the government takes the principal. In a private plan, the principal remains the property of the investor. Thus, when Social Security benefits end at death, the “investor’s” principal is gone forever. With a private plan, the investor or his estate can recover the principal. This amounts to a difference of anywhere from over $100,000 for current retirees, to several times that for younger workers (because they are paying FICA taxes at a higher rate than current retirees did).
For current retirees, the monthly payments produced by Social Security are about the same as they would have been for a private plan, or even a little more. Future retirees (those now in their twenties, for these figures) are scheduled to receive the same monthly benefit (adjusted for inflation), after paying about twice the taxes. This yields a monthly return of about half that from a private plan.
Combining both principal and monthly benefit, current retirees receive $1.30 to $1.75 per dollar invested. Younger workers will receive benefits totaling less than the taxes paid in. Even a passbook account earning 2% interest would pay back $1.60 per dollar invested over a period of 45 years (age 20 to age 65). Social Security surely qualifies as one of the worst investments of all time. If a bank or insurance company operated this way, its officers would be spending their retirement in a federal penitentiary.
Americans need to admit to each other that Social Security is a bad idea; that it needs to be replaced by a system in which investments are managed by private entities, even the worker himself if he so desires. This should not even be controversial. After all, whom would it hurt? Current retirees would see no change in their benefits. Future retirees would see a vast increase in theirs. The economy would benefit as money that is now used to fund the growth of the federal government would instead be invested in founding new businesses or improving existing ones. Our voracious federal government would be forced to do without our FICA taxes to fuel its growth. I call that a win-win situation.