Day By Day© by Chris Muir.

Monday, February 14, 2005

A pretty pithy summary of what's wrong with Social Security today

Jeff Jacoby pretty much nails the problem with Social Security in his most recent column:

You don't have to be a financial wizard to know that Social Security is a lousy investment. Unlike the money you deposit in a bank or salt away in an IRA, you don't own the money you pay into Social Security. You have no legal right to get those dollars back, and when you die you can't pass them on to your heirs. Nor can you use your Social Security account before you retire — you can't borrow against it and you can't cash it in. You aren't allowed to put the money into a balanced portfolio. You can't even watch as the interest accumulates, since your Social Security nest egg doesn't earn any interest.
What's fascinating is how he exposes the true nature of this government sponsored Ponzi scheme:
Social Security wasn't always a sucker's game. As with all Ponzi schemes, players who got in early made out like bandits. For many years, Social Security deductions were minuscule. Until 1949, the combined employer/employee tax rate was only 2 percent, and it was imposed on just the first $3,000 of income, for a maximum payroll tax of just $60 a year. The first Social Security recipient was Ida May Fuller of Ludlow, Vt., who retired in 1940 after having paid a grand total of $44 in payroll taxes. By the time she died in 1975, she had collected $20,933.52 in benefits — a return on her "investment" of more than 47,000 percent. It wasn't really an investment, of course. It was a forced transfer of wealth from younger persons to an older one. And as the number of Ida May Fullers grew, and the value of their benefits increased, the amount of wealth that had to be transferred kept climbing. By the time I entered the workforce in 1975, the Social Security withholding rate was 9.9 percent, applied to wages of up to $14,100. Maximum tax bite: $1,395 a year — more than 23 times the $60 of a generation earlier. And a generation later? Today Social Security skims off 12.4 percent of the first $90,000 earned — one-eighth of every paycheck. There are no exemptions, no deductions. It kicks in from the very first dollar of income. It is the biggest tax the average American household faces — 80 percent of us pay more in Social Security taxes than we do in income tax.
I'm not sure whether Pres. Bush's privatizing idea is the perfect answer, but it's certainly better than the situation we have now.