Yesterday, I received my Social Security statement in the mail. It looks something like this. I just assume that the country will be bankrupt by the time I reach retirement age, so I don't pay much attention to these things. I did notice a sort of Frequently Asked Questions insert that came with the statement, though. I was especially intrigued and infuriated by the question in the green box in the middle of the page. It asks the hypothetical question of whether or not Social Security will still be around when I retire. It then answers the question by saying that even though the whole enterprise will be insolvent, the current estimate is that Social Security will pay 76 cents on the dollar of promised benefits. (The website is apparently out of date.)
Let's put some real numbers behind this. Let's say Mr. Smith, a 30 year old man, makes $100,000 per year, or rather, let's say that his salary over the time for which we works, averages to $100,00 per year. Let's further assume that Social Security taxes stand at 7.65%, which is where they currently stand. They tend to increase over time, but let's try to keep this simple. Finally, let's assume Mr. Smith starts working out of college, at age 22, and works to his full Social Security retirement at 67. In this example, Mr. Smith will have worked for 45 years, earned $4.5 million and paid $688,500 (with his employer's matching contribution) into the Social Security "trust fund". Assuming that the entire $4.5 million is taxable for Social Security purposes, Mr. Smith is entitled to $2,659 per month. At this rate Mr. Smith could live for almost 22 years (to age 87) before he would exhaust the money he paid into the system.
Before we get ahead of ourselves, let's also look at the case of Mr. Jones, also aged 30 years. He makes closer to the median of $50,000 per year. At retirement, Mr. Jones will have earned $2.25 million and paid $344,250 in Social Security taxes. In retirement, using the same parameters as above, Social Security estimates that it will pay him $2,015 per month. Mr. Jones could live for 14 more years (to age 81) before his money would be exhausted.
What's wrong with this picture? In spite of the common arguments that people are living longer and fewer people are paying into the system than are drawing upon it, the government should be running a huge surplus given that the average life expectancy in the U.S. is currently 78 years. This is what truly makes this a Ponzi-scheme. People aren't even living long enough to exhaust their own benefits, and Social Security is still insolvent. This is almost certainly due to inflation, and Social Security benefits with it, rising faster than wages. I touch on the inflation and benefits portion of the problem later. First, let's look at the money that is paid into the system.
Social Security trust fund
You may have heard of the so-called Social Security Trust Fund. The idea most people have is that the money that is paid into Social Security by workers and employers is socked away somewhere in a bank quietly earning interest. Instead, the money paid into Social Security is invested in U.S. government treasury bonds. The actual money is then spent by the government to pay for other things (perhaps even existing retirees). In fact, there is no trust fund. What actually exists is $2.5 trillion of debt that the government owes to itself, plus interest. The money that the fictional Mr. Smith and Mr. Jones paid into Social Security has already been spent. Their retirement money rests solely on the government's ability (or possibly even willingness to) pay its debts.
Inflation is defined as "a rise in the general level of prices of goods and services in an economy over a period of time." Let me make a distinction, though. When corn prices rise because farmers had a bad season, that is not inflation. Instead when I say inflation, I'm referring to the existence of an excess amount of money in the economy contributing to the devaluing of all money. To demonstrate this phenomenon, though, here are a few charts:
This first chart is of the "consumer price index". The CPI refers to the price of a group of common goods bought by consumers. The dark line shows the relative price of those goods over time. The red line shows the year over year change in the price of those goods. Since the red line is almost always in positive territory, over time the darker line has to go up.
This chart is another way of conceptualizing what is shown in the CPI chart. Relative to the value of the goods that one would purchase with a dollar, the value of that dollar is falling. Stated differently, today's dollar is capable of purchasing 1/20th (or less) of a good that it was capable of purchasing one of in 1913.
This chart should drive home the point about excess money in the economy. You can see that things really went awry (in all three charts) around 1970, which coincidentally is when the U.S. finally severed all ties to a gold standard.
What does this have to do with Social Security? The federal government has two options with regard to Social Security: default or pay. I don't believe that there is the political willpower to default, which means that the government will attempt repayment (assuming the economy lasts long enough). The government can only raise money via taxes or inflation, and raising taxes is going to be politically difficult for the foreseeable future. That leaves inflation. The point of all of these charts then is to demonstrate that by creating inflation, the government will necessarily have to destroy the dollar. The worst part is that inflation begets inflation. In order to protect those on Social Security, the government raises their benefits through COLA. In order to raise their benefits, it has to print more money. By printing more money, it creates more inflation. Creating inflation is a very dangerous game, though. It can very quickly lead to hyperinflation, which some argue is not far away; and even if hyperinflation never occurs, the inflation tax is still levied on everyone.
What's wrong with this picture, indeed
I mentioned earlier that I was infuriated by the question in the insert with my Social Security statement. What infuriated me so much is that I was enrolled into the Social Security program without my consent and given no way in which to opt out of it. Assume that I got over that, though. Great, so I pay into a system that promises to pay me X amount at retirement (ignoring for a second whether or not I get the full benefit of the amount that I paid in). Suddenly, I get word that the rules have changed. I continue to pay in the same amount, but now I receive reduced benefits. If anyone but the government did this, it would be illegal. I believe the technical term is fraud.
Here's my favorite part, though. John Boehner has suggested that those with "substantial non-Social Security income" when retired should receive reduced or no benefits at all. From each according to his ability (via the progressive tax regime), to each according to his need (no benefits for those who don't need it). Who's the Socialist now, Mr. Boehner? Who would put their money into a system that guarantees a 100% loss before the first dollar is even invested? Nobody, that is, except by the coercion of law.
Here's is what I propose: If the government will release me from the Social Security system, now, I will forgive the money I've already paid into it and promise not to attempt to draw on it later. Sound fair?