Eighteen months ago, this column considered problems of the U.S. Social Security system. The only thing that happened in the interim is the national pension system is a year and a half nearer collapse, young people can expect a yet lesser return on tax payments due to delay in privatizing accounts, a savings plan to create personal wealth is still illegal and the citizenry has endured more lies and incompetence from Congress control freaks over the duration. Slick Willie even got it right not long before leaving town when he said (27 July 1998) that to restore solvency there are only three options: raise taxes, cut benefits or get a higher rate of return through investment in real capital assets, not government bonds. That raises an issue about the Social Security Trust Fund: there is none! Government bonds are liabilities and not assets. As columnist Martin Gross asked, If Social Security (SS) has assets in some trust fund, tell me the name of the bank with the deposits.
The fact that there is no asset in the SS system is never stated by politicians or media people because they are (a) too stupid to understand or (b) liars with an agenda to obscure what is from what they want you to believe. Payroll tax currently brings more revenue than SS pays out and is forecast to continue until 2016. Until then, government will use surplus revenues to buy bonds it issues that are sold to the public. Proceeds government receives from bond sales become general revenues. However, bonds require payment at maturity for both principal and interest. So, a bond for the issuer is a liability and not an asset and lest you forget, you and me are the government. This next point is key: If money is added to the "trust fund" under current SS processes, that simply increases the amount of principal and interest due in the future. That is why the structure is a sham.
If working Americans could invest SS tax payments in privately owned accounts, they are assured that a higher rate of return can be realized, through good times and bad, as history shows over centuries. It is amazing to me that opponents and proponents of SS reform engage in discussion of whether all or part of our money can be invested instead of addressing the major issue of establishing mechanisms to do it. See above comment about liars.
Turning to matters of what privatization opponents offer as alternatives, there is precious little. The National Academy on an Aging Society says there is no limit on what Americans can bear for the cause of giving tax money to old people. In your dreams! Then Ken Apfel, SS Commissioner under Clinton, said the notion must be abandoned that "future tax revenues should not be increased." Vincent Sombrotto, president of National Association of Letter Carriers, urges the President to "reject the notion that taxes can never be raised to overcome the projected shortfall," overlooking the fact that 5 million state, county and local workers will not participate in SS because they get far superior benefits in their own plans. Regardless of opponent reasons for keeping this broken structure that exists today, they offer no plausible alternatives.
To maintain SS benefits after 2016 will require an escalating tax on workers that is untenable: $103 the first year rising to $1543 more per worker just twenty-eight years from now, just to break even, according to Congressional Budget Office (CBO). Further, past payroll tax hikes permanently killed over 500,000 jobs (each of four times 1979 through 1990) and CBO estimates that a 5% hike in payroll tax reduces after-tax wage income by 10%, leading to a 3% contraction in labor supply, resulting in a 3% decline in national GDP and a 2.5% decline in economic growth. In short, raising SS taxes results in reduced employment and a weakened economy.
No alternate plans to reform SS are credible other than privatization. Consider that increase in SS tax (according to Cleveland Federal Reserve Bank) would only result in a 3.8% increase in lifetime net for workers in the lowest earning quintile. Since 84% of all wage income falls under the $80,400 taxable cap, removal of the cap totally would only generate $461 billion, extending doomsday from 2016 to 2021. Plus cap removal would result in an immediate 12.4% marginal rate increase for earnings over the cap, applied to those who already pay over 90% of all personal tax. Next time you hear a politician talk about "fairness" or "tax breaks for the rich," tell him to go sit on it and to stop inciting class warfare. And do not fall for euphemisms about government need to manage tax investments, words like "broadening the portfolio" and "diversifying the investment strategy" and "improving the management of reserves." Enough of these liars and thieves!