Should Social Security Be Scrapped, Changed? : <i> It’s a Miserable Deal for Today’s Young Workers </i>

When discussing the issue of Social Security, the public usually focuses on financing problems--namely, whether the program will be able to pay all its promised benefits. But as Social Security has matured, a new and potentially even greater problem has developed. For today’s young workers, even if all promised Social Security benefits are somehow paid, the program will still be a miserable deal, given the enormous tax burdens those young workers will face over their careers.

This is true even though today’s retirees are still receiving a good deal from Social Security. Today’s retirees only had to pay relatively low Social Security taxes in the earlier years of the program.

The maximum annual Social Security tax, including both employer and employee shares, was $60 in 1949, only $189 as late as 1958 and $348 as late as 1965.

In contrast, the maximum annual Social Security tax is now almost $5,600, and it will be near $8,000 by the end of the decade.

Recent studies, which I conducted with John Lott, assistant professor of economics at Texas A&M; University, show that the actual return that most of today’s young workers will receive for these high tax payments is negligible.

Could Get Much More

For those who pay the most in Social Security taxes--workers with incomes near the maximum or above, and most couples with two wage-earning spouses--the real return will be practically zero, and even negative in many cases.

If these workers could invest their Social Security tax funds in an expanded Individual Retirement Account system, they could expect, two, three or more times the benefits currently promised by Social Security.

Moreover, it is still doubtful whether even these inadequate promised benefits will ever be paid. While Social Security’s financing seems stable in the short term, primarily because of the recently strong economy, the program faces potentially disastrous financial problems over the long term, particularly when the large Baby Boom generation retires.

The latest annual report of the Social Security Board of Trustees projects, under what it calls “pessimistic assumptions,” that in order to pay all the benefits promised to those entering the work force today, the total employer-employee Social Security tax rate will have to be raised to 37.5% from 14.1% today.

By publishing such projections, the federal government is in effect admitting that such a development is at least possible. And if such tax rates are officially possible, then we are all in big trouble.

In fact, many independent analysts believe that the projections of such tax rates are not pessimistic at all, but indeed the most realistic.

Grossly Inequitable

In addition, the Social Security benefit structure is grossly inequitable. Two workers paying the same taxes into the program over their entire careers can receive widely differing benefit amounts.

Many economically disadvantaged minorities with below-average life expectancies receive lower returns through the program because they live fewer years in retirement to collect benefits. For instance, a black male born today can expect to live 64.9 years, about two years less than the applicable minimum age in which he will be eligible to collect full Social Security benefits.

We also can have little hope of ever reducing the enormous burden of government spending without doing something about Social Security. The program along with Medicare amounts to almost one-third of all federal spending.

The key to solving the many serious problems of Social Security is to recognize that such reform does not require asking sacrifices of the elderly--in fact, quite the contrary.

This can be accomplished by allowing workers the right to substitute expanded, “Super IRAs” for part--and eventually all--of their Social Security coverage. Workers could be allowed, starting now, to contribute to their IRAs each year an additional amount up to 20% of their Social Security retirement taxes.

Instead of the current IRA income tax deduction for these contributions, however, workers would receive a 100%, dollar-for-dollar, income tax credit equal to the amount of such contributions.

Full Income Tax Credit

Workers would also be allowed to direct their employers to contribute up to 20% of the employer share of the tax to their IRAs, with each employer again receiving a full income tax credit for these amounts.

Because they would be receiving an annual income tax break, workers who utilize this Super IRA option would have their future Social Security benefits reduced proportionately. A worker who opted for the full credit during his entire career would have his future Social Security retirement benefits reduced by 20%. Opting for half the credit each year would reduce benefits by 10%. These foregone benefits, however, would be more than replaced by the worker’s increased IRA benefits.

Later, the Super IRA option could be expanded further--ultimately equal to 100% of Social Security taxes--giving workers complete freedom to choose how much to rely on IRAs or Social Security.

Workers could be allowed to purchase life, disability and retirement health insurance through IRAs to cover the full panoply of benefits currently offered by Social Security.

It is important to remember that the Super IRA income tax credit does not reduce in any way the payroll tax revenues that exclusively finance Social Security.

Consequently, Social Security revenues would continue to be paid in full to finance benefits for today’s elderly. Workers who desired would have the complete freedom to rely entirely on Social Security as is, without any benefit reduction whatsoever.

But those workers who opted for the Super IRAs could expect much higher retirement benefits overall. These benefits would be completely equitable, with each worker receiving back in benefits the actuarial--or statistical probability--value of what he paid in contributions, plus interest.

Workers who opted for the Super IRAs would also be able to tailor their investments and benefits to suit their personal needs and preferences.

The maximally mobile and flexible Super IRAs would be far better suited to modern family structures and life styles than rigid, inflexible Social Security. Through the IRAs, each worker would also be developing a substantial personal investment and ownership stake in America’s business and industry.

In addition, fully expanded Super IRAs could potentially increase national savings by hundreds of billions of dollars each year, creating new jobs and greater economic growth.

Eventual reductions in employers’ payroll taxes would also ultimately improve the economy. With workers relying on Super IRAs rather than Social Security, federal spending could potentially be reduced by more than 25%, without the pain of benefit cuts.

On our present course, Social Security offers us periodic bankruptcy crises, unending tax increases and inadequate benefits.

Unless we turn away from our present excessive dependency on Big Government for retirement support and open up new opportunities in the more productive private sector, we will encounter a financial disaster that will end up hurting the very people the system was designed to protect.