The real disaster
Issue #56 • March/April, 1999
With all the talk about the various disasters looming in our future, I thought it would be a sensible idea to focus on a future disaster that is guaranteed, namely the impending collapse of the social security system and the severe consequences that collapse will have for America. All studies agree that this economic calamity will begin engulfing America about the year 2012, when my generation—the 76 million post World War II baby boomers—begin to collect social security. It has been called an economic time bomb that will spark a Generational War between workers and the retired and ultimately bring down the American economy and political system.
Although politicians of all stripes have agreed for years that something must be done, and done now, social security is known as the “third rail” of American politics, namely, touch it and you’ll suffer political death. So our politicians, of course, have done nothing.
Here’s the problem: Since its deceitful introduction as some sort of insurance plan in 1935, Americans have been led to believe that if they put social security taxes into the social security trust fund, they will get social security payments when they retire. Most politicians now admit that there is, in fact, no such trust fund, that the money paid into social security by workers today is immediately paid out to today’s social security recipients. What money is left over goes into the government’s general fund to pay other bills. The social security trust fund contains nothing but government IOUs called “special treasury notes.”
This government fraud worked fine as long as the number of workers kept growing, much like a pyramid scheme works fine as long as you keep getting a fresh supply of suckers. Unfortunately, the number of American workers has been shrinking relative to the number of social security recipients, due mainly to a declining birth rate and an increasing life expectancy. In 1935, for example, there were 40 workers paying into the social security system for every 1 retiree receiving benefits, but that ratio had shrunk to 16 to 1 by 1950, and today it is just over 3 to 1. It will shrink to about 2 to 1 when I retire. To help prop up this pyramid scheme, our politicians have increased social security taxes 17 times, from an original 2% to today’s 15.3% (including both employee and employer contributions).
Today more money is being paid into the social security system than has to be paid out to current social security recipients. But that will change in the year 2012 (sooner if we have a severe economic downturn) when baby boomers begin to retire. Then the government will begin paying out more than it collects. Since there is no money in the trust fund, the solution will be to 1) increase taxes again (to about 40%), 2) cut benefits and/or raise the retirement age, 3) cut government spending.
We know from past performance that the government is unlikely to cut spending, so a combination of the first two seems likely. Workers will get taxed to death and the retired will get less and less, creating a disgruntled work force and a huge retirement population slipping into poverty.
That’s the best outcome. A more likely one, however, will be that neither workers nor retirees will stand for it.
Workers will not accept paying huge taxes to support “their” retired person (2 to 1 ratio by then) with money they could be using for their own families, especially when it will be obvious by then that they themselves will get nothing from social security when they retire. The retired, on the other hand, will not accept being thrust into old age poverty. They’ll think they are owed something, and since they’ll control the vote due to their large numbers, they’ll try to force workers to pay. It’s easy to imagine destitute retirement ghettos, the emergence of a dominant underground economy, and the ultimate failure of our political system.
Here’s the solution: There is a solution if it is taken now. It is to privatize social security, that is, allow people to invest in the private sector the money they now are forced to pay into social security. Chile and Great Britain have already done it, we have studied them to death, and anyone who knows anything about economics agrees we should follow in their footsteps now, before it too late.
Chile privatized their system in 1981, and to date 95% of Chilean workers have joined it. The results have been astounding. The average Chilean worker now retires at an average of 80% of the salary he earned during his last 10 years working, which is nearly double the percentage available in the U.S. social security system. And the huge cash reserves in the fully-funded pension system fuel phenomenal business and job creation, making Chile the soundest economy in South America. Great Britain is on a similar track, with their private pension funds already worth more than all the other pension funds in Europe combined. While the rest of Europe sinks deeper into debt and doubtful futures, England is paying off her debt, and retirees—at least those 75% of Britons in the private system—can look forward to a fully-funded pension.
So why won’t politicians privatize our social security system in the face of the irrefutable evidence that it is a doomed system that will lead to disaster? That’s easy: Privatization requires guts and honesty. What can those of you counting on social security do to protect yourself against winding up destitute in retirement?
Open your own Individual Retirement Account (IRA) or something similar now, then vote those bastards out of office.
For more information on this real disaster in our future, go to these Internet Web sites: