Social Security a Ponzi Scheme?, 09/08/11

Far from it.  Political rhetoric aside, retired citizens need Social Security, and they desperately need to continue to receive it.  The latest (2008) breakdown of IRS data on personal income sources reveals that 46% of retirement age taxpayers depend upon Social Security for a quarter of their income, and a quarter of Social Security recipients depend upon their benefit for 99% of their income.  Clearly, Social Security serves a fundamental and necessary purpose.  But, there is an inherent flaw in the funding concept and it needs to be addressed.

The System has been stressed by the declining ratio of workers to beneficiaries in support of the system on a pay-as-you-go method.   These paid insurance premiums have gone into the Social Security Trust Fund (SSTF), which has paid benefits to retirees and the balance has been “accumulated.”  As of 1969, however, the SSTF surplus was consolidated with the nation’s general revenues, and these funds have been borrowed to reflect a smaller annual deficit.

As more of the ageing population retires, the burden is borne by a decreasing ratio to workers.  The System is not bankrupt, and has been saved from projected deficits by increases to the income tax base and the percentage tax against that base.   (See the following table.)

Ratio: Income Base % Income Base Total
Workers/ (Combined Employer Combined
Retirees + Employee) Contribution

1937

159.4

$3,000

1%

$30

1950

16.5

$3,000

3%

$90

1960

5.1

$4,800

6%

$288

1970

3.7

$7,800

9.60%

$749

1980

3.2

$25,900

12.26%

$3,175

1990

3.4

$51,300

14.30%

$7,336

2000

3.4

$76,200

14.30%

$10,897

2010

2.9

$106,800

14.30%

$15,272

We cannot blame the actuaries who projected the Social Security cash flow in 1937.   Statistically in 1940, the average life span was 54 years for men and 61 years for women.  While it is true that only half the population was projected to collect their benefit (at age 65), the projections were based upon accurate average payments of 12.7 years for men and 14.7 years for women.

Lifespan after retirement has improved, but the increase in longevity is not the major reason for future projected Social Security outlay deficits.  (One cannot look to the life-span data from birth in 1937 and compare that to today, when so many childhood diseases have been defeated.  Adult life beyond retirement age has improved and lengthened due to advances in medicine.  The average man reaching 65 years of age in 1990 can expect to live another 15.3 years and the average woman 19.6, an average increase of 5 years since 1940.) The big problem in the funding forecast is the shrinkage in the numbers of retired individuals vs. the worker tax base, and the pay-go method of funding conceived at the beginning of the program.   The ratio of workers to retirees has dropped from 159 in 1937, to 16.5 in 1950, to 5.1 in 1960 to 2.9 and shrinking in 2010.

Returning to the revenue shortfall, according to the Congressional Budget Office, “In calendar year 2010, Social Security’s outlays will exceed tax revenues (that is, the trust funds’ receipts excluding interest) for the first time since the enactment of the Social Security Amendments of 1983. Over the next few years, CBO projects,the program’s tax revenues will be approximately equal to its outlays. However, as more of the baby-boom generation (that is, people born between 1946 and 1964) enters retirement, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. Starting in 2016, CBO projects, outlays as scheduled under current law will regularly exceed tax revenues.

CBO projects that the DI trust fund will be exhausted in fiscal year 2018 and that the OASI trust fund will be exhausted in 2042.”

What’s to be done?  Changing the tax base from worker income to a VAT consumption tax would benefit the economy.  Workers would expect to receive an increase in pay equal to their contributions, which would no longer be collected.  Employers would no longer have a significant add-on drag to employment.  Everyone would have an incentive to save more rather than spend.  Imports would carry an equal burden to domestic production and exports would not be burdened, so U.S. goods and services would be more competitive at home and abroad.

Yes, this is a game change, a redistribution of the burden from the youth to the elderly.  A legitimate argument can be made that retirees would be paying twice for their benefit, but this could be resolved by an increase in Social Security payments to offset the VAT for the majority of taxpayers.  It is a fact that most of the wealth of the country is in the hands of the older citizens, and it is unfair to burden the youth of this country for the benefit of those with means.  Wealthier citizens of retirement age should be willing to sacrifice to not unfairly indenture the youth and workforce of the country.

Alternatively, Social Security could again be saved by lifting the cap on the tax base and increasing the percentage of the Payroll Tax.   Far better that we use this challenge as an opportunity to make the U.S. more competitive in this era of globalization.