If Social Security was offered by a private company, the executives would end up in jail for pushing a classic Ponzi scheme. The government collects money from today’s workers to pay today’s retirees. The scheme worked so long as there were enough workers — almost 17 in the 1950s, for instance — for every retiree.
But the ratio of workers to retirees is rapidly heading towards two. At the same time Americans are living longer, and thus collecting far more in benefits. When Social Security was created nearly half of people died before collecting a check, resulting in the perfect government program: offer benefits in return for votes, but avoid paying the benefits when the grateful constituent died.
As the demographics shifted, so did the economics. The early tax levies were low but have sharply escalated as ever fewer workers have had to support ever more retirees. Many beneficiaries will actually lose money — they are tossing money away when they pay their Social Security taxes.
System revenues are set to go negative in little more than a decade. Alas, there is no trust fund to keep paying benefits until 2041, as claimed by system supporters: all Uncle Sam possesses is a file cabinet full of IOUs from one federal agency to another.
These attractive pieces of paper (special issue Treasury bonds that cannot be sold) have been termed an “accounting mechanism” by the Congressional Budget Office. With or without them, the government will have to drastically cut benefits, dramatically raise taxes, or significantly increase borrowing to keep sending out benefit checks.
The first two would further worsen the return on the money “invested.” The last would increase interest costs and total federal debts — which eventually would have to be paid, either through budget cuts or tax hikes. There ain’t no free lunch, as Social Security’s defenders seem to suppose.
But the debate over numbers threatens to obscure the most important issue: giving people control over their own retirements. The AARP, apparently unconcerned about sparking a generational war as the tax burden on the young escalates ever skyward, got the issue precisely wrong when one of its hysterical direct mail letters demanded: “No private accounts with Social Security dollars!”
There are no Social Security dollars. There are only Americans’ dollars. (Unless, say, the Emir of Kuwait, still grateful at being rescued by the U.S. after Iraq’s invasion long ago, is secretly underwriting the retirement program.)
Since Americans are paying into Social Security, they should control the use of those dollars. And they should actually own them, in contrast to today, when their benefits vanish if they die prematurely — or Congress decides to take them away.
No surprise, individuals are more responsible guardians of their own interest than is Congress. Indeed, given the personal scandals, institutional misbehavior, and irresponsible spending endemic to Capitol Hill, who could believe otherwise?
One can legitimately argue about the design of a reform package, the size of the accounts, and the speed of the transition. But the worst thing to do is to maintain the status quo — or reinforce it by hiking taxes, pouring more money into a system doomed to actuarial failure.
Opponents of personal accounts have attempted to argue that it is too expensive to let people control their own retirement futures. There are “transition costs,” they intone.
Well, yes, it isn’t easy to maintain current benefits while allowing future retirees to put at least some of their current taxes into private accounts. But doing nothing entails its own costs. About $12 trillion worth.
That’s the current estimate of Social Security’s unfunded liability. It has to be paid somehow. Private accounts simply turn some status quo costs into transition costs, while reducing the total. That’s a good deal by any measure.
But grant the concern about the immediate future. How to finance the transition in the short-term?