How Social Security Rips of the Average American

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.

I did'nt miss any key, You did! (cooperative society)

This country was founded on independance and freedom, not goverment oppression!

If you have paid into SS all these years at max rates then you would have to have been doing pretty damn well for yourself.

So now your glad to be getting your monthly SS check! Is that because You are greedy or because you spent each and every one of your dollars???

This is a particularly nasty post. What do you propose for those workers who have had SS taken from their wages? There was no option to being taxed for SS for either you or your employer. Are you going to see to it that the money confiscated by the government via FICA be returned to the reluctant participants of this Ponzi scheme as well as to their equally reluctant employers? And are you even aware that a large percentage of SS taxes go for other than retirement programs? That is the real reason no politican wants to get mired in this SS discussion. So you let workers opt out of the system--then where will the money come from to fund all of the non-payers who get their cut from the money transfer schemes that have been grafted on to the SS system? Further, this money is recirculated into the economy and is taxed over and over again as it is spent. Get off you soap box, which most of us know all about anyway, and face the reality of the SS system.

"This is a particularly nasty post"
Because I called check and checkmate on an opponent?

"What do you propose for those workers who have had SS taken from their wages?"
For them to realize that the govt is not their friend and to prepare for ones ones needs!

"Are you going to see to it that the money confiscated by the government via FICA be returned to the reluctant participants of this Ponzi scheme as well as to their equally reluctant employers?
Who? Me???

"And are you even aware that a large percentage of SS taxes go for other than retirement programs?
Well thank you congress!

"Get off you soap box, which most of us know all about anyway, and face the reality of the SS system."

I have no soapbox. The reality is that the system will continue to enslave a freedom loving people into a life of pre-determined obligation!!!

"50% of the people in this country do not have a pot to pi$$ in or a window to throw it out of.

You're gonna have to prove that one, old man. I'm not letting that slide."

Well I have seen several surveys, the results of which are rather startling. I can go on for a long time about how the system is geared to always keep the brass ring in sight but never in touch, but I won't.
You can see the link below for some basics. There are others there too. As you can see from the link provided, in 1995, the median NETWORTH in the US was 126k for people age 55-64 of which 78k was home equity. So by the time they reach retirement, HALF the people in the country have less than 50k to their names outside their houses! Now since retirement income can be drawn down at a rate from your savings at 4%-6% per annum, that means half the country will be living on $2400 dollars a year or less based on other than home equity! Maybe you can now see what I was talking about. People have a lot less money that most of the posters seem to think they have after paying for living expenses along the way to retirement. That is why there is a SS program.

http://www.census.gov/hhes/www/wealth/1995/wlth95-1.html

Sorry, I didn't realize you had responded (got a bunch of responses at once from different threads and I think yours got lost in the shuffle).

Anyway, it really looks like to me that you're making more out of what's there than what really is. No one on this thread as far as I can see is obsessing over his every dollar to make sure he has the maximum control over it. What we're saying to you is that as a matter of principle, people have the right to set their own priorities in how they live their lives and expend their resources. Obviously we can all see the usual categories of things that people should not be allowed to do for various reasons, as well as that some money needs to be taken for the general good. But Social Security is not about that. It's about compulsory charity - that is, taking from Peter and giving to Paul. There's really no way around that. You can argue that Peter should give to Paul, and that he's being selfish (or "greedy") if he does not, but that does not mean that Paul is entitled to the money. Those are two completely separate concepts.

"It's about compulsory charity"

Well that is why we have elections and get to vote. If you think about it, FICA is much harder on the people depending on this "compulsory charity" then it is on people in higher income brackets. It is a much larger percentage of their incomes and hurts them more to pay it along the way. Their living standard is lower getting to retirement because of it. Please don't suggest they might be better off investing it as these people know zip about investing.If they did they wouldn't be in the lower half of the population wealth group.

If you want someone to complain about, I suggest my cousin who is about 30 years old, 600 pounds and to my knowledge has never held a regular job in his life . He is collecting SSI and will until he dies I imagine. These are the kind of individuals that makes one wonder how the SS program is administered. Maybe the complainers should focus on Supplemental Security Income. I suspect it is these people who are bleeding the system dry if anyone is.I think this is where the money is going. Disabled, too dumb, too fat.. Hey there's help...SSI ..for life.

If you think about it, FICA is much harder on the people depending on this "compulsory charity" then it is on people in higher income brackets. It is a much larger percentage of their incomes and hurts them more to pay it along the way.

All the more reason to dismantle the system. But in any case, it's the principle I'm talking about - the principle that Peter should not be robbed for the benefit of Paul.

Please don't suggest they might be better off investing it as these people know zip about investing.

I don't know squat about investing, myself. But I do grasp the idea of saving, which is all Social Security forces people to do (and even that is highly theoretical). Saving money is an attitude, not a knowledge.

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But I do grasp the idea of saving

Well I am happy that you do but the lower half of country will not do any substantial saving without being forced to do it. They will then be largely destitute with no guaranteed income. We can debate the fairness of the system but this fact is the reality that forced SS into existence in the first place.

I don't see how you could have any grounds for saying that people wouldn't save of their own volition, when Social Security has been purporting to do that for them for nearly 70 years. It's entirely unscientific to conclude that people wouldn't do for themselves something that's been promised to them already, when you haven't really had a chance to observe them in the absence of such a promise. Prior to Social Security, family bonds were much stronger, so people were generally taken care of by their families as they got old. If SS is dismantled, and people are told that it's up to them provide for their old age, it may be true that they'll fail to do so, or it may sink into them that they need to, or they might simply learn the hard way. In any case, there are all kinds of stupid things people can do, or fail to do, that can really screw them over later on. Do we really want to establish that they shouldn't be given responsibility for their own lives? Is that really a sound basis for society?

I don't see how you could have any grounds for saying that people wouldn't save of their own volition,

Well, lets see, prior to SS being established, people had strong families, people knew no one would take care of them so they had to save for their own retirement, well actually they worked until they dropped back then I think. And the result was old people living in poverty bad enough to institute SS. What part of that experience did you want to relive? Now especially with broken families?

Social Security was instituted in response to the fact that there was a deep economic depression, which of course hit the elderly among the hardest. It was the same season that gave birth to the federal dole and other aspects of the modern social-welfare state. None of these things would have been so objectionable if they had simply been temporary measures designed to deal with an emergency situation, but of course FDR's plan was entirely the opposite: to use the emergency as a vehicle to shoehorn permanent programs.

Prior to that, people did generally care for their elders (with what resources they had), and since that time, that obligation has atrophied largely because of the expectation brought on by federal assistance programs. It became, as has become a cliche nowadays, "someone else's responsibility". Well, the upshot of that is that more and more responsibility gets shifted to that "someone else" (witness the development of Medicare and Medicaid) and the people become more dependent and less free. This trend needs to be reversed, even if it's going to be a bit painful for the more stubborn and short-sighted among us.

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