Friends and faithful interlocutors A.I. and Donald Pays have been jousting with me over the Social Security System. Contrary to what they may suspect, I find a lot to praise about these institutions. They have virtually eliminated poverty among the elderly, and that is no small achievement. For precisely that reason we ought to be very honest about what is wrong with these systems, and there is a lot wrong.
If I understand my interlocutors, they more or less concede my point that, in fact, the Social Security Trust Fund is not a reserve of wealth that the system can draw on in the future. It is merely a collection of IOU's, or promises of future payment. They think, however, that the "full faith and credit of the United States" is more reliable than any private contract would be.
Given the trillion dollar plus deficits the United States is currently piling up each year, I am less confident than they are. But let us assume, arguendo, that they are right. Privately managed savings always involved a tradeoff between risk and returns. The savings are always invested in something that is expected to hold or increase its value. Someone hoping for a high return on his or her savings will have to accept a greater degree of risk. Someone wanting security will generally accept much lower returns. Privately managed accounts can pay returns because the money invested in a way that creates wealth, enough wealth to cover both the returns and to allow the managers to make a profit.
Almost everyone will expect some return on their savings, so that the money they eventually end up with is more than what they put in. If an "investment" offered no return, you might as well put the money in a pickle jar and keep it behind the wine in the basement. What sensible person would put his money into an account that paid back less than what he put into it?
Consider an average-wage, two-earner couple together earning $89,000 a year. Upon retiring in 2011, they…will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they're likely to get back.
Social Security, being mandatory, is also confiscatory. In return for that full faith guarantee of benefits, it seizes more than it is likely to pay back. Maybe that's a good bargain, but it's not one that would sell in the marketplace. Whether it would sell politically isn't clear, for the average couple doesn't know about this because the system isn't honest.
What does Government do with that extra 10%? As we have established, it doesn't put it aside to pay future benefits. It spends it. The surplus that Social Security has been running for decades goes into the Treasury. Perhaps this ought to be common knowledge.
Medicare, by contrast, pays benefits beyond all reasonable expectations. When our average couple retires in 2001
they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services — from prescriptions to hospital care — worth $355,000, or about three times what they put in.
Well, that's a good deal! Try getting a 300% return on any market investment. No problem, mon, if you can pick the next Microsoft or Google. Private investments have to create enough wealth to cover all returns. Medicare, by contrast, has to fund payments out of receipts.
The system has worked for 45 years, with occasional fine tuning. But the retirement of the baby boomers, the first of whom become eligible for Medicare in 2011, threatens to push it over the edge.
Medicare covers 46 millions seniors and disabled people now. When the last of the boomers reaches age 65 in about 20 years, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently, to 2.3.
"With Medicare, we are all still making out like bandits, shoving all those costs to future generations," said Steuerle. "At another level, we know that this system is totally unsustainable."
In fact, both Medicare and Social Security are totally unsustainable in their present forms, and for the same reason. The number of retirees drawing out is growing faster than the number of workers paying in. Soon enough Social Security will reach the breaking point. Medicare is approaching that point now.
I can't resist pointing out that ObamaCare is financed in part by hypothetical cuts in Medicare. "Mendacity," Paul Newman said in A Cat on a Hot Tin Roof, is the system we live with." Ain't that the truth. Maybe it's time for all of us to see the system for what it is.