Writing a column every day can sometimes be a challenge, in part because of logistics (I have to travel a lot, which can make things complicated), but also because I want to make sure I’m sharing interesting and relevant information.
My task, however, is very easy on certain days. When Economic Freedom of the World is published in the autumn, I know that will be my topic (as it was in 2017, 2016, 2015, etc). My only challenge is to figure out how to keep the column to a manageable size since there’s always so much fascinating data.
Likewise, I know that I have a very easy column about this time of year (2017, 2016, 2015, etc) since that’s when the Social Security Administration releases the annual Trustees Report.
It’s an easy column to write, but it’s also depressing since my main goal is to explain that the program already consumes an enormous pile of money and that it will become an every bigger burden in the future.
Here are the 1970-2095 budgetary outlays from the latest report, adjusted for inflation. As you can see, the forecast shows a huge increase in spending.
The good news, as least relatively speaking, is that we’ll also have inflation-adjusted growth between now and 2095, so the numbers aren’t quite as horrifying as they appear. That being said, Social Security inexorably will consume a larger share of the private economy over time.
Now let’s examine a second issue. Most news reports incorrectly focus on the year the Social Security Trust Fund runs out of money.
But since that “Trust Fund” is filled with nothing but IOUs, I think that’s an utterly pointless piece of data. So every year I show the cumulative $43.7 trillion cash-flow deficit in the system. Using inflation-adjusted dollars, of course.
Assuming we don’t reform the program, think of these numbers as a reflection of a built-in future tax hike.
You won’t be surprised to learn, by the way, that politicians such as Barack Obama and Hillary Clinton already have identified their preferred tax hikes to fill this gap.
Let’s wrap up.
Veronique de Rugy of Mercatus accurately summarizes both the problem and the solution.
The single largest government program in the United States will soon have an annual budget of $1 trillion a year. …The program is Social Security, and our national pastime seems to be turning a blind eye to its dysfunctions. …Since 2010, it has been running a cash-flow deficit—meaning that the Social Security payroll taxes the government collects aren’t enough to cover the benefits it’s obliged to pay out. …
Veronique punctures the myth that there’s a “Trust Fund” that can be used to magically pay benefits.
Prior to 2010, the program collected more in payroll taxes than was needed to pay the benefits due at the time. The leftovers were “invested” into Treasury bonds through the so-called Old Age Trust Fund, which is now being drawn down. …In fact, the Treasury bonds are nothing but IOUs. …Treasury…doesn’t have the money: It has already spent it on wars, roads, education, domestic spying, and much more. So when Social Security shows up with its IOUs, Treasury has to borrow to pay the bonds back. …Did you catch that? Past generations of workers paid extra payroll taxes to bulk up the Social Security system. But the government spent that additional revenue on non-retirement activities, so now your children and grandchildren will also have to pay more in taxes to reimburse the program.
So what’s the solution?
Veronique explains we need to reform the system by allowing personal retirement accounts. She was even kind enough to quote me cheerleading for the Australian system.
Congress should shift away from Social Security into a “funded” system based on real savings, much as Australia and others have done. The libertarian economist Daniel J. Mitchell notes that, starting in the ’80s and ’90s, that country has required workers to put 9.5 percent of their income into a personal retirement account. As a safety net—but not as a default—Australians with limited savings are guaranteed a basic pension. That program has generated big increases in wealth. Meanwhile, Social Security has generated big deficits and discouraged private saving. Who would you have emulate the other?
Though I’m ecumenical. I also have written favorably about the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system. Heck, I even like the system in the Faroe Islands.
The bottom line is that there’s been a worldwide revolution in favor of private savings and the United States is falling behind.
P.S. If you have some statist friends and family who get confused by numbers, here’s a set of cartoons that shows the need for Social Security reform.
P.P.S. As I explain in this video, reform does not mean reducing benefits for current retirees, or even older workers.
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The end result is flattering effort-reward curve for future Americans, an effort-reward curve that can no longer compete with more meritocratic effort-reward curves elsewhere in the world — existing ones as well a new ones that will form in our ever faster changing world.
With a growth rate that is already below average (though not quite as low as that of European welfare states that have already travelled down that road) the US to world growth rate deficit will grow, and the result will be arithmetically predictable deterministic marginalization of America and its economy on the world stage.
But there’s HopNChange that our morphing into a European style dismal growth welfare state is the road to salvation. The epitome of delusion my dear Americans. This hope into decline is a road well travelled by many many one nation on this planet. Seems like it’s your turn dear Americans to walk the walk, and it’s all labeled as “progress” — the epitome of delusion indeed.
The only thing better than private accounts is what I wished for from my very first paycheck at age 16. The freedom to say no thanks, I’ll take care of myself, be self sufficient and a future burden to no one.
rebel,
The SS “trust fund” is invested in US govt treasuries while a private investment account could be a mix of stocks and bonds. Looking backwards, US treasuries returned an avg 4.9%, while a 60/40 portfolio of stocks and US bonds returned 7.6%.
7.6% vs 4.9% may not seem like a big difference, but would be a huge impact over a long time period. If we invested the SS contributions (employer and employee) of the typical household in a private account at 7.6%, it would grow to almost $1.6 million after 40 years. The same SS contributions invested at 4.9% would be only $0.8M.
Exact results can vary depending on assumptions, but under any reasonable assumptions it is a big difference.
Rebelheart’s question is a good one. You can pick any number of investment strategies that you would prefer from the S&P 500 long-term trend of about 9% per year to conservative mixes that get 5% to 6% in the long run.
The tricky part comes in computing the return on Social Security taxes — which should include both the employee and employer taxes. Because of the redistributive design of the benefit formula, earners in the first quintile get a return of about 20% while those in the fourth and fifth get only 4%.
All those returns are before taxes. While Social Security is tax free at lower income levels, about half of Social Security beneficiaries must pay at least some income tax on their benefits. The after-tax return becomes zero if one has $75,000 of income from any source in addition to Social Security. Returns turn negative with higher income.
Has anyone created a computer model that compares personal savings accounts versus real world social security contributions? I’d love to see a comparison using a balanced portfolio of stocks and bonds.