You Can't Cheat an Honest Man - James Walsh [152]
Like a Ponzi scheme, Social Security relies on a steady stream of new participants. As long as the number of people in the American workplace grows or the money those people are making increases, the system can continue. As soon as that stream of participants plateaus— or, worse, shrinks—the system will collapse.
Like a Ponzi scheme, Social Security’s collapse can be softened and slowed by careful management and one-time infusions of cash—but it can’t be prevented. The system’s defenders like to point out that the federal government won’t let Social Security collapse. But the Feds can’t control market forces.
The growth of America’s non-immigrant population slowed after 1960. In that time, women have begun to have fewer children. The national average dropping from 3.5 in 1960 to 1.8 in the mid-1980s.
During the same period, older workers began to retire earlier—but live longer. When Social Security was started, the average male worker retired at 69 and then lived about eight more years. In the mid-1990s, the average male retired at 64 and then lived 19 more years.
The growth rate of the average American’s wages—which exploded for a quarter-century after World War II—slowed in the 1970s and 1980s as global competition and advances in technology reduced the need for unskilled, semi-skilled and even some skilled laborers. Those left often took a larger part of their compensation in the form of fringe benefits, which are not taxed by the federal government.
Together, these factors suggest that by 2030 there will be only two active workers supporting each retiree collecting money from the Social Security system. That’s a big drop from the 30 workers-per-retiree ratio which existed when the program started, 7-to-1 ratio in 1950 and 4-to-1 ratio that existed even in the late 1980s.
Still, Social Security remains a popular program. It helps millions of elderly and disabled people stay out of poverty. In the 1960s, the poverty rate among the elderly was twice as high as for all adults; by the 1990s, the rates were about equal. But this success is a double-edged sword. In 1996, 63 percent of all retirees relied on Social Security for the majority of their income. Making any reform that reduced benefits would be very difficult.
The Hard Numbers
Social Security participants are eligible for full benefits at age 65. They can draw reduced benefits—equal to 80 percent of the full amount— at age 62, but those benefits do not increase to the full level at age 65.
Social Security funds are invested in non-negotiable Treasury securities, which means the money is spent on current government operations. Treasury securities pay low interest—about 5.8 percent a year, as opposed to the 11.9 percent that the Standard & Poor’s 500 stock index averages.
Social Security has already been fiddled with numerous times. To keep the program solvent, payroll taxes have been raised repeatedly. In Social Security’s earliest days, the combined employee-employer rate amounted to only 2 percent on the first $3,000 of annual income. In 1996, the rate was 12.4 percent on the first $62,700.
Despite these adjustments, by the mid-1990s Social Security was already in financial trouble. According to a 1995 report published by the Social Security Administration, retirees faced a 10 percent reduction in hospitalization and retirement benefits by the year 2010, a 27 percent reduction by 2020, and a 41 percent reduction by 2040.
The primary suggestion for avoiding these cuts: More substantial increases in the payroll tax. At that point, a common suggestion was to add 2.2 percentage points to the payroll tax—raising it to 14.6 percent. The increase would buy another five years of solvency.
Structurally, this is something like the roll-over of principle or other kind of deeper investment that Ponzi perps push on their loyal