Friday, December 10, 2004



This country is facing it’s greatest challenge ever and it’s not terrorism. Nor is it the Federal deficit that we’re indenturing our children with. What we’ve sold our children’s children into servitude to is Social Security. For decades we have been told that the Social Security system is broken and must be fixed, but cowardly politicians have consistently played a fast-and-loose shell game with it. Congress just passed the Medicare Modernization bill with the Prescription Drug Benefit to placate and secure a voting block. Social Security/Medicare is not a “third rail”, but rather a downed power line and we’re all in for a shock.


President Roosevelt created Social Security some seventy years ago and used the template laid out by Chancellor Bismark of Germany in the 1880s. The system provided a safety net for people unable to provide for their own costs resulting from sickness, accident, and old age. It was unrelated to any insurance or savings program. It’s called a pay-as-you-go system where workers pay into a fund that pays out to beneficiaries. There is no contractual right to funds “contributed”, but there is a legal right to benefits and there is no choice but to participate. Social Security is funded by payroll taxes and taxes on benefits. Medicare funding is more complex, combining payroll taxes, taxes on Social Security benefits, premium payments, and general revenue transfers. Early on, 12 workers paid benefits for one recipient. Today, each recipient is paid for by 4 workers. When it started the combined employer/employee payroll tax amounted to $60 per year.

De-Myth-tifying the Numbers

That $60 per year has become $13,400. In 2004 there are 156 million workers paying benefits to 47 million retirees, survivors, and disabled. The survivors and disabled make up about one-third of recipients. The tax revenues of Social Security are predictable and stable, amounting to about 12.71 percent of payroll in 2004 and projected to rise to 13.39 percent by 2080. Social Security expenditures are also fairly predictable: people will retire at given points in time and begin drawing out their benefits. As such, it is clear that by 2018 the expenses of Social Security will exceed the revenues. It hasn’t always been like that and the surplus revenues have been ‘saved’ in a Trust Fund. The Trust Fund is not a savings account, nor was it invested in financial assets. In fact, the fund was raided by both Republicans and Democrats and exists now as an accounting notation (read an IOU).

The Status of the Social Security and Medicare Programs report states “Since neither the interest paid on the Treasury Bonds held in the HI and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of any required Treasury payments to these trust funds must be financed by increased taxation, increased Federal borrowing and debt, and/or a reduction in other government expenditures.” Current recipients will take $12.7 trillion more out of the system than they will pay in taxes. Workers coming into the system in the foreseeable future will ‘contribute’ about $800 million more than they get in benefits. This leaves the Treasury holding the bag for $11.9 trillion.

The expenditure of Medicare is expected to be 2.69% of GDP in 2004. However, people live longer and medical costs increase each year. By 2022 Medicare will be 5% of GDP and estimates suggest 8% of GDP by 2038. Like Social Security, Medicare funding will not keep up. It will absorb 65% of it’s funding in 2004, 50% in 2019, and exceed 70% by 2042. We can expect participants in the system now to take $6.2 trillion and future participants $10.3 trillion more than the fund will have.

That shortfall will have to be covered by the general fund revenues. By law, the Federal government will have to transfer 3.6% of Federal income tax revenues to the system to cover the 2004 debt. In 2010 we can expect 8.6% of income tax revenue to be shunted to Social Security/Medicare and 50% by 2030. By 2070 Social Security/Medicare will gobble up all projected tax revenues in addition to the payroll taxes and other taxes already earmarked for it and leaving nothing to pay for any other Federal program.


Our European cousins are usually held up as exemplars of social responsibility. European governments provide “them with better health, longer lives, higher literacy rates...and...annual four-week paid vacations.” But at what cost? Germany’s Federal Labour Agency reported on Dec. 2, 2004, “Germany’s unadjusted unemployment rate [at] 10.3%.” Financial Times reported France’s unemployment at 9.9% on Dec. 8, 2004. That same day the International Herald Tribune reported that “France’s unemployment insurance system has a cumulative debt of E10 billion, or $13.4 billion.” In fact, in the EU unemployment has been over 8% since 1990. How do you fund payroll-funded Social Security with such unemployment? Our European cousins are finding out that you can’t. Europeans pay exorbitant taxes, too. In Germany, Bloomberg reports, “Schroeder’s government has lowered taxes [and] cut welfare payments.” The sleight-of-hand tactic of pointing across the puddle is disingenuous. Notice no one who makes the case moves to Europe.

Myth-ing Links

It is clear that Social Security/Medicare is broken. It should be clear that the system is fundamentally flawed. There are an estimated 20% of recipients who really don’t need it and approximately 50% of all current retirees have employer-sponsored pensions. This system is unsustainable and can’t be mended. The only other option is to fix it. Solutions include: 50% increase in taxes, 33% reduction in benefits, Federal borrowing ballooning the national debt, 20% cut across the board in all government programs, or do something different such as personal retirement accounts.

Martin Feldstein, Harvard economist, estimated in 1997 a net benefit between $10 and $20 trillion to the economy if payroll taxes for Social Security were privately invested. Lower income workers would receive higher returns from private investment than they ever will receive from Social Security benefits. All variations on personal retirement accounts include provisions for covering current recipients and transitioning over. 20 other nations have privatized their Social Security systems and would not consider returning to one like ours. 10 other nations are currently considering their own transitions.


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