This year, virtually every American worker will pay 12.4 percent in Social Security taxes on the first $113,700 of income earned. Adding the cost of Medicare pushes the tax to 15.4 percent. Most folks may not realize the payroll tax is so high because the federal government gets half from their employers without the employees even seeing the amount listed on their paychecks. But for employers, trust me, it gets counted as money paid to that employee.
When your income is taxed at high rates ostensibly for your retirement, theres this natural tendency to save less independent of the system. Especially for the working poor, or, indeed, anyone cash-strapped: when you dont have a whole lot to begin with, taking a huge hit every paycheck dissuades you from any kind of savings. As economist Eugen von BÃ¶hm-Bawerk explained, we prefer present goods over future goods. Its only as we accumulate wealth that we can save for the future, for with additional amounts of wealth the less urgent (future) needs can then be met.
And herein lies the tragedy of Social Security, a tragedy obscured by flip talk of fiscal cliffs and the like. The people Social Security was allegedly most designed to help — the poor — are the most hurt by it, because they are made dependent on government, the means for their own security having been taken from them.
Thats why, as a safety net, Social Security stinks.
The increasing contribution amounts (the payroll tax) means (almost ipso facto and a priori) the less you will save, making Social Security cease to be a safety net and become, with every payroll tax increase, its very opposite: a way to keep the poor down. It prevents them from bettering their own lot. It serves as a kind of tyranny.
It was not exactly designed as such. Most who supported the program likely had benevolent motives. But they never addressed the original criticisms of the program: That, since it was pay as you go, its funds were never invested, but instead taken by Congress as loans to pay for its deficits.
Theres almost no point in talking about Congress paying back those loans. Congress cannot even balance a budget to establish the fiscal surpluses that could be used to pay down Treasury bond loans. The only option Congress might have, I guess, would be to pay off its debt to the Social Security system by selling of federal land and Fort Knox gold.
The sad truth is not merely that Social Security is insolvent at current levels of pay-outs, promises, and payroll taxes. At the same time, Medicare and Medicaid — which can be viewed as Social Securitys younger sisters — are also insolvent. Barring ways to decrease the sheer numbers of retirees draining the system, the only politically obvious solution is to raise taxes, contributions.
The flaw at the heart of the program is no mystery. Contrary to folklore, Social Security doesnt take from you to invest and then pay you later. It takes from you to pay someone else. Later, someone else will be nicked to pay for you.
This attenuation of who-pays-for-what accountability — the kind of feedback looping that makes markets work as well as they do — left the system wide open for corruption by Congress . . . and the corruption of Congress. It not only makes the system unstable, it makes the retirement program progressively worse for each generation.
It is a trap.
And we are in it. With Congress. With each other. The only thing preventing an effective overhaul is the lingering unwillingness to confess that the system has failed, and was programmed for failure at the very beginning.
Unfortunately, while the nature of the institution is clear — and increasingly clear to the growing independents in American politics — the myth of the program as a social contract that we pay into and rightfully expect returns, prevents honest discussion. Though Social Security no longer serves as the third rail it once did, it does remain the signature social welfare program of the Democratic Party. Democrats continue to hold to it as if it were the Nicene Creed and the image of the Cross combined: it is both the prime example of their good intentions and the symbol that defines their orthodoxy. Democrats cannot give it up without giving up their faith.
Which suggests the only way to speak truth to their idolatry: Show, repeatedly, that the system serves the poor worst of all. After all, it is the poor that progressives hold up as innocent shields in their war on individual liberty and their continuous program of advancing the regulatory-redistributivist state. But when it becomes clear to all that the poor are the ones worst served by the welfare state, and by Social Security in particular, then the whole ideological house of cards can only come a-crashing.
In that day, and that day only, will progressives be relegated, along with their fellow-traveling Marxists, to their hermetic ghettoes in the Academy. [further reading]