things kevin hates

Before we begin, a semi-related cartoon for your education and entertainment:

I usually try to steer clear of politics, but given the out of control spending of the Bush and Obama administrations, I simply can’t stay silent. In the name of “economic recovery” or “stimulus” (since those sound better than “bailouts” and “corporate welfare” and “giving money to idiotic companies so that they can give huge bonuses to their executives”) the federal government has been on an out-of-control spending spree, one that could very well bankrupt future generations (read: “people my age”). Yet this stimulus spending is only a small part of the problem. We find ourselves in a demographic crunch in which a massive redistribution of wealth from workers to retirees may sink our country in a morass of debt from which we cannot escape. At the heart of this problem is Social Security, which was a bad idea when it began and is an even worse idea now.

Nowadays, the way the system works is that workers are taxed and that money is given to retirees, who had paid into the system while they were working. (Isn’t that what got Bernie Madoff in lots of trouble?*) Instead of taxing people less and letting them save for their own retirement, allowing their investments to grow over time, money is just taken from workers and given to those who used to work. There’s a big giant Social Security Trust Fund, but instead of investing in a reasonably balanced mix of stocks and bonds, as would be appropriate given its long time horizon, it is required by law to invest only in US Treasury bonds (read: “IOUs to the government, by the government”). This system works okay when you have a growing population. But when as the baby boomers retire, the system is pretty much bound to collapse—within a few years, the payments made to retirees will surpass the tax revenues collected from workers, a situation which is obviously problematic. Social security is pretty much bound to fail unless you have a rapidly increasing population—one which has enough workers for each retiree. When the number of retirees equals or surpasses the numbers of workers, how on earth can the taxes collected at an affordable rate be enough to equal payouts sufficient to cover a good portion of living expenses? It simply can’t happen. It can work for a little while with a trust fund to cover the shortfall, but such a system is unsustainable.

Obviously there are ways to tweak the system—increase taxes a little bit here, decrease benefits a little bit there, etc. But it should just be scrapped instead. Employees are required to pay 6.2% of their income (up to a little over $100k) to Social Security. Employers also have to pay 6.2% of each employee’s income to Social Security, so 12.4% of each person’s income (for those who make $100k or less) is funneled to Social Security. That’s a pretty sizable chunk of cash—you’ll usually hear 10% thrown out as the amount of their income people should be saving. But a nanny-state program like Social Security decides that people aren’t smart enough to decide what to do with their money. And yes, people are really stupid with their money. But so is the government. Even some sort of mandatory retirement program (something like the “privatization” of Social Security) would be better than the current system. Critics would say that the stock market would then have too much influence on people’s returns; but factors like tax revenues, life expectancies, population changes, etc. will impact returns anyway if the system is kept as-is. And think of all the employees, paperwork, and costs involved in administering Social Security. The Social Security Administration’s administrative budget is more than $9 billion a year. (Figures from: a href=”http://www.ssa.gov/budget/2008bud.pdf”>http://www.ssa.gov/budget/2008bud.pdf.) That’s a decent-sized chunk of change.

In any case, while I understand the impulses behind creating such a system and attempting to provide a decent standard of living for retirees, the disabled, etc., basing it on a system where money is taken from people, handed to other people, then taken from another group of people to pay back the people who paid earlier is just silly. Social Security is a form of social insurance; the retirement portion insures that people will have enough money to live on when they retire. (It also has provisions for disability insurance, etc.) And there are certainly reasonable arguments on both sides of the issue as to whether people should be required to carry various sorts of insurance—health, life, home, auto, flood, and so on. But the current Social Security system is just plain moronic.

*Okay, to be fair, Social Security isn’t exactly a Ponzi scheme. It’s not promising any sort of extravagant returns on people’s money, so it doesn’t need to bring in new participants at an unsustainably rapid pace. But at the same time, it obviously needs a steady supply of new people coming in, or else it will collapse, and the SSA ackowledges the problems caused by demographic shifts of the sort we are seeing with the retirement of the baby boom. (Of course, it downplays the problems a little bit, but what can you expect from the party line?)