April 1 is an appropriate time to reflect upon how we fool ourselves about the viability of our Social Security system, which accounts for 20 percent of current federal spending.
I want to begin by disarming the demagogues. We need Social Security, but it is not viable in its current form. That is because we have fooled ourselves about the program since its inception. Too many Americans mistakenly believe there’s a lockbox or bank where their Social Security contributions are safely tucked away for retirement.
Politicians of all stripes have abetted this monstrous lie. The truth is that Social Security is a plain old payroll tax, in which current workers pay the benefits to current retirees. This has led some to label the program a Ponzi scheme. It is not, of course, except for in the promotion of the lockbox lie, which does give it an air of Ponzi-like misrepresentation.
Ironically, the fact that the program’s not a lockbox, but rather one generation looking after another, makes it a gentle representation of the optimism of our Republic. But as with many other social programs in the 21st century, the current plan will be bankrupt in a generation or so because of the sheer number of aging baby boomers. And we cannot tax our way out of the problem.
Just about 15 percent of what workers would otherwise receive in income is collected each year in Social Security and Medicare taxes. Later, these benefits are scaled by the amount workers pay into the program. Under the current scheme, that makes it just about the worst retirement benefit available.
In fact, if treated as a financial investment, Social Security is a really effective way to destroy wealth. If it were only a retirement plan, everyone (except the workers at the Social Security Administration) would be better off if the program were privatized.
Social Security does three things beyond simple retirement plans: provides financial support to disabled Americans (a highly abused federal program that nevertheless is much needed, with a few reforms), makes death payments to families, and provides some retirement benefits to workers who would otherwise not plan for retirement.
The truth is that private enterprise offers ready insurance options for the latter two situations. Failure to have insurance isn’t a problem of free markets, but of the planning and judgment of households.
There are a wide range of options that would little affect the old, and provide the young plenty of time to plan. It is ironic that, if the problem were tackled soon, few except lobbyists would be discomfited.
But the longer we wait, the worse the situation, the lower benefits, the higher the costs and the more people who will slip through the cracks. How terribly foolish of us to delay.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at email@example.com.