If you think the $700 billion bailout of the mortgage crisis was expensive, wait until we need to bail out Social Security.
Between 2037 and 2075, the Social Security program is projected to run deficits totaling $30 trillion. Annual shortfalls are projected to start as soon as 2017.
But running out of money is not an option. In the end, some political calculation will be made, and it will have all the problems that collectivism breeds. Only from the starting point of individual freedom can effective solutions be found.
But first, let's consider some of the politically motivated suggestions that have already been proposed.
Former President Bill Clinton succinctly laid out the limited options facing the country: raise taxes, cut benefits or invest privately. Let's consider the first two possibilities.
Raising or eliminating the cap on income subject to the 12.4 percent Social Security tax would mean the largest tax increase in U.S. history, trying to collect over $100 billion a year. This would hit upper-middle-class families and small business owners the hardest.
Because entrepreneurs are the engines that stimulate economic and job growth, tax increases on them would be the most counterproductive and diminish returns. Estimates suggest that over a million jobs would be lost, and it would cost over $10 billion a year in lost economic growth.
Alternatively, we could double the tax rate and take 25 percent of every worker's paycheck. But Social Security is already the biggest tax that the average American family pays. With that rate on top of all the other taxes imposed, we might as well collect a worker's entire paycheck.
The law of diminishing returns suggests that even these massive increases won't cover the shortfall.
All this toil to maintain an average benefit of about $12,000 a year!
The second option would be to cut benefits to Social Security recipients. The difficulty here is that Social Security has become elder welfare. Without it, 46.8 percent of Americans 65 and older would have incomes below the poverty line. Social Security lifts over 13 million seniors out of poverty.
It doesn't seem to matter that retired people aren't supposed to have income. It's evidently not relevant that some of those who would be below the poverty line are multi-millionaires. You can have investments and real estate without having income. But any debate gets swamped by the image of the elderly forced to choose between purchases of food or their medications.
And it isn't as though the problem of elder welfare is not real. The average 65-year old has less than $10,000 of investable assets. Once we were a nation of savers. Now we are a nation of debtors. And our policies encourage the borrow-and-spend crowd through constant bailouts and punish the save-and-invest crowd through constant tax increases.
The only reasonable way to cut benefits would be to eliminate them for retirees with a greater-than-average income. We already reduce benefits for higher incomes, and the effects are a social disaster.
Many older people who would prefer to continue as productive members of society choose not to work or they do not work as much as they could, specifically to avoid a reduction in their benefits. These are not theoretical statistics. I know these retirees personally, and they choose not to work because their Social Security is slashed by 50 cents on the dollar, and then they still have to pay tax on top of that.
Punishing the productive translates to less productivity.
Until Americans are willing to recognize that Social Security is a zero-sum game, they won't see that the system is hopelessly broken, and no small fix will solve the fundamental flaw.
If Social Security had any real assets, they could be put to work growing and compounding over workers' productive years to provide for them during their retirement. But as a redistribution system, Social Security has no assets and therefore, no growth. The system has to take money from some and give that money to others.
Currently, 3.3 workers pay taxes to support each retiree. The system has worked so long as the base of the pyramid was larger than the top. But the baby boomers had fewer children than previous generations, so when they retire, the ratio of workers-to-retired boomer will be only 1.8 to 1.
Short of burdening the next generation with massive taxes to support us, there is no solution. The system was flawed from its inception.
What has become conventional wisdom in the current financial crisis is easily used as an argument against privatizing Social Security. But privatization is the only solution where the person who pays is also the person who benefits and also the person who controls how it is run.
Marotta Asset Management, Inc. of Charlottesville provides fee-only financial planning and asset management. Visit www.emarotta.com for more information. Questions to be answered in the column should be sent to email@example.com or Marotta Asset Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.
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