Skip to comments.How Social Security Rips of the Average American
Posted on 01/06/2003 8:36:26 AM PST by NorCoGOP
BALTIMORE -- Social Security "has been called the 'third rail of American politics' -- the one you're not supposed to touch because it shocks you. But, if you don't touch it, you can't fix it. And I intend to fix it."
So spoke George W. Bush in his acceptance speech at the 2000 Republican Convention. At the time, his words sent shivers down my spine. The candidate had won my eternal respect some months before by proposing that workers be allowed to redirect a portion of their Social Security taxes into private investment accounts. Fiscal conservatives had been talking about it for years, but as Bush points out it was generally deemed too politically risky by Republicans. Bush never backed down from his bold proposal, and in fact pushed it with consistency, mentioning it in almost every stump speech. With a firm Republican majority in both houses of Congress, this landmark reform is finally within the range of possibility. It would be Bush's single greatest domestic initiative.
First let us dispense with some petty definitional issues that have plagued the debate in recent months. A plan like that described above would once have been known as "Social Security privatization." Recently, Republicans stopped referring to it as such and began speaking of "personal Social Security accounts" or something of that sort. Liberals seized on the name-change, charging that Republicans were being deceptive, or that they were backing off of their position.
Polling does show that "personal accounts" are somewhat more popular than "privatization." I am not running for office, and so I will continue to use the shorter "privatization." The truth is that both names describe the exact same policy. If anything, the new name more accurately describes what Republicans are pushing for. Privatization in the past has pertained to the likes of railroads and public companies, and has meant some approximation of "sell off to the highest bidder." That does not describe what is actually being proposed here: The transfer of Social Security taxes into -- get this -- personal accounts!
These accounts would be vehicles for workers to save for their retirement. Most likely, workers would be prohibited from withdrawing from these accounts until they turn 65. Under most proposals, their options would be limited to several diversified investment plans, similar to mutual funds or 401(k)s, that would include a balance of stocks and bonds.
So why does Social Security need fixing? The reasons are so various, and so compelling, that it is difficult to list them here in the space allotted to this column. To start, the program is destined for bankruptcy. Around 2012, baby boomers will begin to retire. Estimates vary as to how large a strain this will put on the system over the next 30 years. The lowest estimates for the un-funded liability in the system (i.e., the difference between how much it will collect in taxes and how much it will pay out in benefits) are in the neighborhood of $6 trillion. High-end estimates are around $9 trillion. Now, you may say, that sounds like a whole lot, but how much money is that really? To give you some perspective, last year the entire GDP of the United States was just under $10 trillion.
On every paycheck, you may notice a large gap between what you earned and what you received which is helpfully labeled FICA. This delightful acronym is the official name for Social Security taxes. They total about seven percent of your wages. Your employer also pays about seven percent of your wages to the government. Usually this money is simply deducted from the wage offered to you. In reality you pay about 14 percent of your yearly income in Social Security taxes. Unless, of course, you're rich. Then you pay much less since FICA does not apply to incomes over $72,600. So if you make $300,000 dollars a year, you would pay only 3.4 percent of your wages to Social Security.
But let's stick with those of us who make low to moderate incomes, because we're the ones who are really getting screwed by this ostensibly progressive program. Don't low-wage earners get tax rebates at the end of the year? They get income tax rebates, not FICA rebates. If you make $14,000 a year, have three kids, and don't make enough to owe any income taxes, you still pay 14 percent of your income to Social Security taxes, period. What do you get in return? The amount of money you receive when you retire is equivalent to a two percent annual return on your taxes.
So what if you took that money and invested it in Treasury Bonds, which are fully guaranteed by the Federal Government, and make an average return of about six percent a year. You would be vastly richer upon retirement. What if you took it and put in into stocks, which make an average of 10 percent a year? You would be rolling in cash. The difference in compound interest over a lifetime of savings between 10 percent and two percent is absolutely immense. To get an idea of how Social Security privatization would affect you, go to http://www.socialsecurity.org and use the Cato Institute's calculator. The results may shock you.
But stocks can go down, say the fear-mongers. What if Social Security had been privatized and you had retired this year? Wouldn't you be screwed? Not at all. Sure, the Dow Jones Industrial Average has fallen from about 12,000 in March of 2000 to about 8,500 today. But as late as 1994 the index stood at around 3,500. You would have more than doubled your money in the last eight years alone! In fact, the American stock market has never yielded a negative return over a 10 year period, including the Great Depression and World War II.
Say every worker was investing a fifth of his Social Security taxes in this incredible wealth-generating machine. The government could slash his benefits by a third or more, and he would still enjoy a much higher retirement income. The un-funded liability in Social Security would be eliminated, and people would live richer and more secure in their senior years. If you were making two percent a year on such a huge portion of your income, and you knew that you could be making six percent on government-guaranteed bonds, with no added risk, would you shift your assets into bonds? Of course you would. To force people to do otherwise is moronic and inhumane.
Darn, you just reminded me that my paycheck is going down this week : (
Then the American Debt would be held by Americans and all of this B$ land confiscation for Federal lands would not be needed as collateral.
You are so right, I promise.
Why? Because Dems LOVE to spend the American workers' retirement money the minute they get their hands on it, instead of investing it for the workers' retirement like responsible money managers would. They're worse than children with money, and the LAST place retirement funds should be "managed."
Remember, members of Congress and the Senate do not have to pay SS taxes, they exempted themselves and created their own, separate, FUNDED pension plan for themselves, but the "little people" just get their retirement money spent, since government priorities are more important than workers' retirement funds.
SS is an illegal scheme to rob workers' of their retirement funds, that's all.
What helped bankrupt the system was the "welfare" part of it. If people properly and rightfully needed money for disability, widowhood, etc., why wasn't that also the burden of all taxable income, why did the money come solely from a tax on work?
If he proposed eliminating the FICA tax and financing Social Security out of general funds, he could re-shape the tax system to make it more progressive and more inclusive at the same time.
Here's the plan. Eliminate the 14% FICA tax, and put a 10% income tax on the first dollar earned. This amounts to a 4% tax cut on the poorest worker. Graduate the tax by whatever scheme suits your fancy, topping out at 30%. This will actually represent a tax increase for the very highest level, because the entire income would be subject to taxation at that rate, not like the current system where FICA maxes out.
This scheme would make the tax system make a lot more sense, and would make each and every worker into a taxpayer. Right now, over half of the people in this country don't pay into the general fund, so they have very little interest in making government efficient or limiting governmental largesse. If every worker paid into the general fund, every worker would have the same incentive to make government as inexpensive as possible. This would be a much healthier political situation.
The fact that this scheme also eliminates the pernicious fiction that people are paying into Social Security, so they should be able to get their own money back out, is also a good thing. This was never true, but the high FICA tax is what has made rational discussion of Social Security nearly impossible. Eliminating this dedicated tax would make it feasible to mold a system that provides a safety net for retirees without bankrupting the nation.
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