Federal Triangle: Solving a Pinnochio Problem
John Q Public did not recognize, but had visceral understanding of this point, first stated in 1881 by German ruler Otto von Bismarck: "Whoever has a pension for his old age is far more content and easier to handle than one who has no such prospect." He introduced the first compulsory social security plan. Roosevelt and New Dealers learned from the Germans. In 2000, 55% of equity shareholders in America are age 50 or younger, 47% are women, half do not have college degrees, half earn less than $50,000 a year, and 48% of wage and salary earners own equity in the private sector. The single-earner couple at age 30 this year that earned $24,000 will pay over $134,000 in retirement tax and receive $292,320 in lifetime returns from Social Security. Not bad until they recognized that if the coerced tax was privately invested, their family should earn $875,280. When voters viewed current Social Security as a "risky scheme" and its purveyors as political cons, voters rejected class warfare and found self-interest, which raises the point whether the system can or should be reformed.
History serves well because government documented terms for payroll tax "insurance contribution" under the Federal Insurance Contribution Act "trust fund" are deliberate dishonesties. Social security FICA taxes are not "contributions," there is no "insurance" involved, and there is no "trust fund" in existence. In a May 1937 Supreme Court ruling (Helvering v. Davis), brought by an Edison Electric employee to restrain the company from making deductions for social security as insurance, the Court noted, "The proceeds of both employee and employer taxes are to be paid into the treasury like any other internal revenue and are not earmarked in any way." In a separate case, Ephram Nestor, who paid FICA taxes from 1936 through 1954 but was deported to his native Bulgaria in July 1956 for being a Communist party member, sued for loss of his social security benefits, arguing he had "property rights." In 1960 the high court rejected any comparisons of social security with insurance or an annuity. In the words of Commissioner Arthur Altmeyer who was subpoenaed into Congressional testimony: "There is no individual contract between the beneficiary and the Government," raising the question of why public policy goals should be directed today to saving this inefficient wealth redistribution system. Tax rates have been raised 30 times since inception, benefits have been reduced (through increasing the retirement age), there is no ownership right by wage earners on taxes paid so government can change rules again, and the Social Security Administration faces a $21.6 trillion cumulative deficit by 2075 by current rules.
The groundswell by the public to allow private, self-guided investment in social security accounts is a done deal. Now it is quibbling over possibly substantial details, including amount under personal control, criteria for acceptable investment vehicles, younger worker transition into the privatized system, and government responsibilities and methods in guarantees against failure. Those who read the handwriting will argue for a minimum of 2% of the 12.4% total tax allocated to private investment in a wide array of approved stock and bond funds under professional management administered with low fees.
What causes recent problems are analyses by SSA Board of Trustees, which conducts a political exercise. The "trustees" are the Secretaries of Labor, Treasury, Health and Human Services, the SSA Commissioner, and two outsiders appointed by the President. Honest observers cite violations of actuarial standards as a major problem that biases results leading to a conclusion often expressed by liberals as "a crisis that doesn't exist." There are numerous assumptions made on economic growth, labor force, fertility and immigration rates, compensation and composition of taxable pay, and mortality. The politicization of assumptions to make the answer come out right for the vested interest doing the analyses makes an old phrase come to life: "figures lie and liars figure." It is probably this aspect of problem that gnaws most inside young people to not trust government on this issue. Politicians and bureaucrats need to correct that perception, but remember how hard it was for Pinnochio?