Reform Social Security

It should be funded more fairly and made more transparent

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At a meeting in his state, the Congressman (who shall remain nameless to save him from being tarred and feathered and ridden out of town on a rail) asked members of the Tea Party: "In the interest of really cutting spending, how many of you would be willing to temporarily forego your Social Security check for a short time, say three months?"

The answer was an emphatic "no."

"We're entitled to that money," was the angry response. "We're only getting back what we paid in."

Members of the Tea Party are hardly alone in their belief that the government should reduce spending -- except for spending from which they benefit. But these are people who know there is a fiscal crisis and profess to be worried about it.

In point of fact, the typical retiree receives more in benefits than he or she paid in payroll taxes. The longer people have been receiving benefits, the greater the advantage.

A milestone was reached in 2010. Most people who retired that year will receive less than they paid in, according to a study by the Urban Institute.

A single man who retired in 1980 and who earned the average wage all his working life would receive in Social Security benefits about 211 percent of what he paid in payroll tax, the Urban Institute said. But if that guy retired in 2010, he'd get back only 90 percent of what he paid in. The gap will grow with each succeeding year, absent reform.

Social Security and Medicare have transferred an enormous amount of wealth to seniors from younger generations. In 1984, households headed by persons aged 65 or older had 10 times the wealth of households headed by persons under 35, according to the Pew Research Center. In 2009, households headed by seniors had 47 times the wealth of the younger generation.

But even most of those who seem to be coming out ahead get less in Social Security benefits than if what they'd paid in payroll tax had been invested for them in mutual funds or Treasury bills.

Politicians have found a way to cheat every generation simultaneously. This is possible because benefits are paid to those retired by those still working. In the private sector, this is called a Ponzi scheme. It's illegal, for good reason.

In 1950, there were 16.5 people paying Social Security tax for each person drawing benefits. Today, there are fewer than three. That's the chief reason why the Social Security Trust Fund went into the red -- paid out more than is being collected in payroll taxes -- in 2010. Reserves will be depleted by 2033, Social Security's trustees estimate.

When the reserves are gone, the law says benefits must be cut to the level of payroll tax revenue. "As it stands, that would amount to a 25 percent haircut," estimate Nick Gillespie and Veronique de Rugy of Reason magazine.

But really, there are no reserves. The Social Security Trust Fund is an accounting fiction. When you pay Social Security tax, the money goes into general revenues (where it is spent right away). When you get a Social Security check, it comes from general revenues.

So the good news is you needn't fret about the Social Security Trust Fund going broke. The bad news is the finances of the U.S. government as a whole are in even worse shape than the Social Security Trust Fund would be, if it actually existed.

Politicians pretend there is a Social Security Trust Fund in part to foster a sense of entitlement among those who mistakenly believe benefits are based on their contributions. Mostly the politicians do it to fool people about a tax few would stand for if they knew the truth.

Payroll taxes are high, and they're regressive. Politicians justify both by pretending Social Security and Medicare are social insurance programs, when in reality they've been structured like welfare programs.

Payroll taxes should be abolished. Social Security and Medicare should be funded from a reformed, preferably flat, income tax. This wouldn't make them more fiscally sound. But it would raise the money to pay for them more fairly and efficiently. And the honesty and clarity reform would bring would make Americans more aware of how much Social Security and Medicare cost, and how that cost affects the fiscal health of the nation.


Jack Kelly is a columnist for the Post-Gazette (, 412-263-1476).


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