Just look at the numbers and it’s obvious that Social Security is a “lousy investment” for anyone under 50, says Pete Dupont, the former governor of Delaware and current policy chairman of the National Center for Policy Analysis. “Social Security made sense in 1935,” he says. “In 2001, it’s dangerously outdated.”
Outdated in several ways – most importantly in terms of demographics. Start with 1940, the first year Social Security checks were mailed out. There were 42 workers supporting each retiree. By 1950, that ratio had dropped to 16-1. By 1960, there were only five workers paying into the system for every retiree. Today, we’re down to three workers per retiree, and it’s expected to be 2-1 by 2030.
What that means is more money going out and fewer people to pick up the tab. And it means the end of the system’s surpluses. Every year since 1983, Social Security has taken in more in taxes than was needed to pay benefits. That changes in 2016, according to the latest forecast from the Social Security trustees, when the incoming revenue from the 12.4 percent payroll tax won’t be enough to cover the price of benefits.
The system then begins to eat up the accumulated Social Security surpluses. By 2038, say the official projections, the entire surplus will be gone. In fact, the surpluses were gone on the day they came in, with the money spent on other government programs and replaced with the non-marketable Treasury bonds that make up the Social Security trust fund.
The Social Security trust fund, in short, bears little likeness to a private sector trust fund. There are no real “reserves” or “surpluses.” The “assets” are nothing more than paper IOUs, essentially promises by the D.C. politicians that they’ll do whatever it takes to come up with the money to redeem the bonds. They’ll raise taxes, in other words, or borrow the money from somewhere else, to generate the “surplus” that they’ve already spent.
Altogether, running on a pay-as-you-go basis with zero real resources, Social Security has an unfunded liability of nearly $22 trillion, an amount 7 times larger than the national debt. Bottom line, minus reform, it’s a system with too few workers, too many liabilities and tax hikes and benefit cuts on the horizon.
In the face of all this, Gov. Dupont points to a pair of tables in the recently released interim report of President Bush’s Commission to Strengthen Social Security to underscore his point about the system being a bad deal. The tables show the rate of return on Social Security taxes and how long taxpayers have to live in order to get their money back, in order to break even.
For men retiring this year and in all subsequent years, a table shows that the number of years an average earner must collect Social Security benefits just to get back what he paid into the system exceeds his life expectancy. More specifically, the commission’s report shows the deal that today’s 35-year-olds are receiving: “Workers paying the maximum tax into Social Security and retiring in 2030 would have to live past age 110 simply to get back what they paid in.”
It’s the same story for women retiring in 2010 and thereafter. In order to break even, they have to collect Social Security checks for longer than their life expectancy. “And for black Americans the news is even worse,” says Dupont. “Because of shorter life expectancies, they’ll on average receive $21,000 less in benefits over their lifetimes than their white counterparts.”
On top of that, Michael Tanner at the Cato Institute contends that Social Security directly contributes to the growing wealth gap between blacks and whites: “Because Social Security taxes squeeze out other forms of saving and investment, especially for low-income workers, many African Americans are unable to accumulate real wealth.”
Either way, black or white, we’re simply not accumulating enough assets for retirement. “The median U.S. household owned only $17,400 worth of financial assets in 1998, including retirement accounts,” states the commission’s report. “For African-American and Hispanic households the numbers were only $3,060 and $1,200 respectively.” Overall, the personal savings rate as a percentage of after-tax income was a negative 0.1 percent last year, down from 9.3 percent in 1974.
The way out? Says former Senator Daniel Patrick Moynihan, D-N.Y., the commission’s co-chairman: “Unless we move boldly and quickly, the promise of Social Security to future retirees cannot be met without eventual resort to benefit cuts, tax increases or massive borrowing.”
“Boldly and quickly” probably means the commission is set to give a green light to the idea of workers investing a portion of their Social Security taxes in personal investment accounts. As it now stands, says the commission’s interim report, the Social Security system “does nothing to promote individual savings or investment” and is “utterly devoid of options for building a net worth.”
The risk? Add it all up – the Great Depression, World War II, every downturn – and the inflation-adjusted annual returns on stocks in the Standard & Poor’s composite index have averaged nearly 8 percent per year, or about 8 times the rate of return that today’s Boomers and Gen-Xers can expect to get from Social Security.