As of last year, a married couple earning two average incomes would have paid more into Social Security that they could expect to receive from it. If the man lives to the expected age of 82 and the woman to 85, they would get back $556,000 of the $598,000 they paid into the system over their lives, according to the Urban Institute. That’s a bad deal, and the ripoff will only get worse without major reform.
Social Security operates the way Bernie Madoff ran his scam. Functionally, both are what are termed Ponzi schemes, where current receipts are used to pay off earlier investors. The first ones in make out very well; investors at the bottom of the pyramid are left with nothing. Madoff was sent to die in prison, but government can raise taxes to cover up the scam.
The first recipient of Social Security benefits paid $24.75 in taxes and received $22,889 in benefits. In the 1960s, the average married couple paid in $36,000 and expected to get more than $250,000. Today, that couple loses $42,000. As the baby boomers retire and the number of people receiving Social Security climbs sharply, the return for the generation paying for the boomers will deteriorate because Social Security is a pay-go system. Current revenue pays for today’s expenses, and not just for Social Security but for the whole federal government.
As demographics and benefits changed, the Social Security tax climbed from a modest 2 percent in 1937 to a peak of 12.4 percent. The current 2 percent rebate, which brings the tax to 10.4 percent, is scheduled to expire at the end of the current calendar year. Even at a 12.4 percent tax rate, Social Security won’t be able to fund its obligations without significant intervention. Changes might include higher taxes — which would further drag down economic growth and job creation — or cutting benefits, which makes the whole thing increasingly unattractive for younger workers.
Defined-contribution retirement funds, such as 401(k) accounts and IRAs, are more likely to give their owners a positive return. They dropped 31 percent in the 2008 market crash but recovered their value by the first quarter of 2012, according to the Urban Institute. The performance of defined-benefit plans — that is, pensions — was far worse, losing 37 percent of value in 2008 and still down 15 percent from 2007.
Social Security is broken. To float the system, it robs from the young and redistributes wealth to the old, who are already the wealthiest segment of society. It’s time to restore some generational equity. That includes giving greater freedom over retirement and savings decisions to workers, instead of saddling them with government control and ever-increasing taxes.
Nita Ghei is a contributing Opinion writer for The Washington Times.