Imagine you're a 35-year-old earning an average income, and someone is trying to sell you a federal insurance plan that promises you regular checks throughout your golden years. Call it Social Security.
You have more than a few reasons to be skeptical of the scheme. To begin with, you have options. The premiums that you pay into the system are funds that you could be saving and investing yourself, so you have to ask yourself: What makes this insurance policy a good investment? Why should the government manage my money?
That's a good question, because if you're a 35-year-old earning an average income, you're likely to pay around $135,000 more than you'll ever receive in benefits. That's an outrageous loss, tantamount to a stock market crash for most people's retirement plans. The difference is that the stock market offers potentially huge upside risk, whereas most people are guaranteed to lose money in Social Security.
Where is all that money going? First of all, the Social Security system gives some people who could be working a free ride. Working-class women, for example, are forced to subsidize the retirements of wealthy stay-at-home wives who collect benefits as dependent spouses.
More fundamentally, Social Security is essentially a pyramid scheme, with each generation paying for the previous generation's retirement. Pyramid schemes work fine as long as there is a ready supply of fresh blood, as in the 1970s, when children outnumbered senior citizens by two to one. By 2050, however, there will be a grandma and grandpa for every schoolchild. Money will start bleeding out of the Social Security trust fund much more quickly than it can be replenished.
The system also creates perverse incentives. The way to plan for a major generational turnover like the baby-boomer retirement is to invest money in valuable assets, such as stocks, bonds, and real estate. Money invested in the stock market, for example, doesn't just beef up a 401(k) - it also provides funds for business investment, so that the economy can support the needs of an aging population.
But Social Security removes the stake that individuals would otherwise have in the future by making seniors reliant on a promise: The government will take care of you. Thus, instead of providing an engine for savings and investment, American retirement planning consists of workers sending money to the government, which then promptly spends it. Nowhere in the process does anyone have an incentive to save - not surprisingly, the personal savings rate recently reached record lows.
And then there are the ghastly distributive consequences. Because the Social Security tax only applies to the first $87,900 of income, it places a disproportionate burden on the working class. Warren Buffet famously pointed out that his secretary winds up in a higher effective tax bracket than he does. Workers who cannot afford health insurance pay a higher percentage of their income to the federal government than the world's most celebrated investor.
Perhaps even more disturbing, Social Security cheats African-Americans by transferring their income to wealthier whites. Due to their shorter life expectancy, African-Americans receive significantly fewer benefits from the system than do whites, so that the system transfers up to $20,000 per person from blacks to whites.
Contrast the present system to private accounts, which allow workers to build a nest egg that they can invest and pass on to their children, and to private pension plans, which use financial rewards to encourage hard work and fair play. Instead, we have a system that encourages people to retire early, consume irresponsibly, and rely on society to support them in retirement - mostly at the expense of the working class.
Disturbingly, the entire system rests on a single proposition: that people aren't smart enough to manage their own money.
Proposals to reform Social Security will have to be evaluated on their merits, but there is no question about the need for reform. President Bush's "ownership society" is not a right-wing conspiracy, but an effective summary the American Dream: the dismantling of a system that steals from the poor and rewards mediocrity, and its replacement by a system that gives individuals the freedom to work hard and prosper.
Nate Goralnik '06 transcribed this article from previously unreleased Biggie tracks.
