Quo Vadis, Social Security?
Clocking in at more than $1 trillion annually, Social Security is the largest federal program in existence, consuming more than one-fifth of all federal dollars and representing 5% of Gross Domestic Product. It is also probably the most grandiose federal program ever enacted and has long been considered virtually sacrosanct, the so-called “third rail” of American politics.
Enacted in 1935 as the “crown jewel” of Franklin D. Roosevelt’s New Deal Revolution, Social Security built on previous attempts to provide old-age pensions such as the programs of the Iron Chancellor Bismarck in 1880s Germany. During the Great Depression, the idea of providing supplemental income to senior citizens gained traction with the Townsend Plan, an idea advanced by an American physician Dr. Francis Townsend as a means of stimulating the U.S. economy. The Townsend Plan proposed giving every retired American over sixty $200 per month which needed to be spent within 30 days. It would be funded by a 2% national sales tax.
FDR’s plan was heavily influenced by Townsend but was financed with a payroll tax instead of a sales tax. With the program not kicking in until the age of 65 and life expectancy at that time less than age 65, Social Security seemed a no-brainer. With 42 people paying into the system for every one retiree, massive surpluses built up in the system, the so-called “Trust Fund.” The payroll tax started at just 2% and was never to rise higher than 6%. Most people did not live long enough to collect benefits and if they did, their life span was shorter.
Designed as a “pay as you go” system, Social Security was demographically- challenged from the beginning. Instead of individuals’ “contributions” being invested in stocks, mutual funds, real estate or other economic assets promising a generous rate of return, the taxes paid the benefits of current recipients, making it more of a welfare or redistribution scheme than a retirement plan. It could only remain successful as long as a growing number of workers contributed at higher and higher tax rates in order to support a growing number of retired seniors living longer and longer lives. The so-called “surpluses” that developed in the early years due to a massive influx of “contributions” and limited payout dwindled as the politicians repeatedly raided the surpluses to fund other government programs, like endless wars abroad.
The politicians always saw Social Security as a way to win votes from the elderly and signed off on expanding the program in subsequent years, such as adding disability benefits under President Eisenhower in 1956, medical coverage through Medicare under LBJ in 1965, cost-of-living adjustments under Richard Nixon just before the 1972 election and prescription drug coverage by President Bush in 2005. Payroll taxes kept rising to keep up with the growth of the program, the increased number of retirees and the declining numbers of workers to support the program. Today, the payroll tax is 15.3% ( including Medicare ) and the number of working Americans supporting it down to just 3.4 to every one retiree. With Americans having fewer children and the “baby-boomers” living longer than ever, any program based on a “pay as you go” foundation is doomed to inevitable collapse. The program is currently “borrowing” from its fictitious $2.9 trillion “surplus” to pay current benefits ( which essentially means swapping IOUs ), but that will run out by 2035. At that point, taxes alone will cover only about 79% of benefits. That’s when it will all hit the fan.
The tragedy of Social Security is that a well-intentioned plan to provide the elderly with additional retirement security in their golden years devolved— thanks to the vote-buying and manipulation of politicians – into a demographically and financially insolvent Ponzi scheme that can only pay benefits if new people enter the system and pay taxes. The program has served also to discourage four generations of Americans from taking personal responsibility for their retirement and saving accordingly, making the great majority of seniors almost totally dependent on their Social Security check for survival.
Back in 1964, Senator Barry Goldwater of Arizona – the liberty-loving Republican candidate for President – was one of the very few political leaders at the time to sound the alarm bell about Social Security. Contrary to the phony propaganda thrown against him by LBJ and the national media, Goldwater never advocated abolishing Social Security. He simply suggested that Americans should be left free to invest privately for their own retirement if they saw fit. He objected to the mandatory nature of the program, not the program itself. He believed that if working Americans could find a better alternative to Social Security, through a mutual fund, annuity, or some other retirement plan, they should be freed of the burden of the payroll tax.
In recent years, many more politicians have come to agree with Goldwater. Even President George W. Bush advocated allowing Americans to re-assign a portion of their payroll tax to a private retirement plan. The Democrats, however, ever eager to pander for votes, ensured that such a sensible idea never saw the light of day. Instead, they are content to just support raising payroll taxes higher and higher to fund a broken system, regressive taxes that hurt low-income wage-earners hardest.
Of course, the enormous popularity of IRAs and 401k retirement plans in recent decades points to the inherent superiority of private sector solutions over those of the public sector. Individuals invested in stock-based IRAs can see an average annual return of more than 7% as opposed to 2% or less in the government bonds invested in by the Social Security “trust fund.” That’s why so many Americans have chosen to participate in these plans, while still having to pay a high payroll tax for benefits many of them doubt they will ever receive. It’s high time Americans be freed from the albatross of the Social Security payroll tax and be allowed to invest those funds in private retirement accounts. This is what Chile did back in the 1980s when they reformed their Social Security program. In exchange, younger Americans so invested will relinquish their rights to Social Security benefits when they retire and should be repaid whatever they have already paid in. The only exception should be those Americans fifty and older. They should be guaranteed whatever benefits they are owed. By permitting ( but not requiring ) younger workers to invest privately for their old age, a new economic boom would be realized, with hundreds of billions of dollars becoming available for new investments throughout the country.
Social Security may be the biggest and boldest federal program ever devised with an enormous voting constituency behind it. Yet, we must put the politics aside in order to avoid financial calamity and ensure retirement security for all Americans in the coming years.
Dr. James Veltmeyer is a prominent La Jolla physician voted “Top Doctor” in San Diego County in 2012, 2014, 2016, 2017, and 2019. Dr. Veltmeyer can be reached at firstname.lastname@example.org
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