Posted by
Jim on Saturday, December 23, 2006 10:23:26 PM
The assertion by the federal government that your social security dollars will be there for you is simply not true.
Social Security was created in 1935 as a core part of President Roosevelt?s New Deal program. A payroll tax of 1 percent on both the employer and employee placed on the first $3000 of wage income per year. The result was a maximum annual tax of sixty dollars for each worker. In return, the program paid benefits to retirees after age 65.
However the key element to Social Security is the pay-as- you-go mechanism. Taxes of today?s workers are not saved and invested to finance their future benefits but are paid out to finance the benefits of today?s retirees. In essence, the young 20 year old, let us call him Mr. Twenty, is paying for the older Mr. Sixty. When Mr. Twenty retirees, he needs at least another such worker to finance his retirement. Essentially, this is a redistribution plan not an investment and savings program.
If Social Security were truly a funded savings program then there would be sufficient reserves to pay all future benefits. However, with the pay-as- you- go system, the program must continually bring in more new workers to fund the increasing amount of retirees. Can this system sustain itself? Let us review more facts.
After World War Two, birth rates, brought on by the development of the birth control pill, legal abortion, and changing social views of the 1960?s, declined sharply. The U.S. fertility rate moved from 3.8 in 1957 to 1.77 in 1975. It stayed at that level until 1990. But for the US to sustain a stable population the rate must be at a minimum of 2.1. Now, on the opposite side of the ledger, we find that in 1940, life expectancy was 61.4 for men and 65.7 for women. But today, life expectancy is 74.4 for men and 79.5 for women. This is due to the rapid advancement of medicine.
As the younger group shrinks, the older group expands. The result is Social Security will not have the younger worker paying taxes to sustain the older worker. From 2018 until the funding ends in 2042, the federal government must find $8 trillion dollars to keep the system operating by paying promised benefits. In order to do this, continuing higher taxes have to be incorporated into this federal program.
There are two other disadvantages to Social Security. First, comparing the return on corporate stocks with the return on Social Security, we find that as far back as 1926, corporate stocks have a return of 7.5 per cent. On the other hand, a study by Mr. Peter Ferrara and Mr. Michael Turner, found that for most workers the real rate of return would be 1 to 1.5 per cent. The disparity between these amounts is striking. Second, another study by economics professor Martin Feldstein found that because workers assume that Social Security will pay for retirement, they don?t save for it or reduce what they would have saved. The result is a net loss for the economy in savings and investment ? not to mention a loss of income for the individual.
A new way of looking at this federal program must be adopted. The goal had always been to provide a safety net for poor Americans in their time of need. Personal accounts where the funds would be invested for the worker and not used or touched by the government is clearly the solution. Each worker would have control of the account and it can be a part of any inheritance. The optional plan would use part of the current payroll tax as the financing mechanism. Any legislation would provide for a federal guarantee for the person to at least receive the return provided by Social Security. For ultimate safety, instead of investment in the stock market, owners of these accounts can purchase Treasury or state bonds.
Gone would be the loss of a real reward for the retiree and the reliance of other workers having to pay into the system. Gone would be the drain on the US Treasury and eventually our federal debt. Plus, there would a huge pool of capital for business to invest, and create solid jobs. The worker would own stock in American business through these accounts and be able to pass it on to the next generation.
It is time to rethink this well intentioned but disastrous federal program. Remember that it is your money gained through hard work and a great deal of sacrifice. You should control your own destiny and not leave your bounty in the hands of a spendthrift bureaucrat.