Social Security

Most people think about Social Security as a taxpayer financed retirement program. And those on the left of the political spectrum complain about the regressive nature of the Social Security tax.

They are all wrong.

Social Security is a welfare program designed to relieve severe poverty among the elderly and, in 1935 when it was created, it was sorely needed. To get the bill passed by Congress, Franklin Roosevelt, its creator, had to sell it as a retirement plan.

This brings to mind something that Abraham Lincoln said:

"How many legs does a dog have if you call its tail a leg? None: calling a tail a leg does not make it a leg."

So, Social Security was a welfare program then and remains one now. Ida May Fuller was the first social security recipient. She paid in a total of $24.75, retired in 1939, lived to be 100 years old in 1975, and in the process collected $22,888.92 in benefits. I don't know of any retirement plans that can provide a return like that!

We should note that taxes fund welfare while contributions fund retirement plans. Social Security is funded with taxes not contributions.

In discussing the regressive nature of the Social Security tax, the left are careful to inform us that all pay the same percentage of job related ordinary income up to the earnings cap. The left also notes that the effective percentage of income paid drops rapidly as job related ordinary income exceeds the earning cap. All true as far as it goes. What is left out is that benefits are not equally linked to contributions: low earners get a proportionately higher monthly benefit for the taxes that they have paid than those who, for example, have reached the earnings cap each year.
It was designed that way. The issue was extreme poverty among the elderly rather than the need for a government run retirement program. Retirement plans are far better done by the private sector.

The right persists in trying to turn Social Security into a true retirement program. The problem, which they carefully ignore, is the transition cost. The so-called Social Security Trust Fund is an accounting fiction. It assets consist solely of government bonds. I owe myself $100 is a delusion: I owe the bank $100 at least means that, at some moment, I received $100 from the bank. If I spent it wisely, then I have something of value.

Today's Social Security Taxes go to pay the benefits of current recipients. Since the government collects more in tax - now - than it pays out, the balance is lent to the Treasury and spent by the rest of the government.

So there really isn't any real money there. And if the current taxes were to be invested in real assets, there would be no money to pay benefits to current recipients. The government would have to borrow trillions to finance the transition. An article, written in 2003 and published on the Centrists.Org website, describes the transition cost issue succinctly. Read it here: http://tinyurl.com/3b6kul

While, in a funded system, there would be real assets, there would, also, be interesting problems of potential government control of [once] private sector companies. These issues are beginning arise with respect to the Sovereign Wealth Funds run by such countries as Norway, Dubai, China and others.

This is a problem for which, now, there seems to be no politically acceptable solution. Unfortunately, delay will only raise the cost of whatever solution we are forced to accept.