If you did man-on-the-street interviews across America and asked people about Social Security, I suspect most of them would have some degree of understanding about the program’s looming fiscal crisis.
Since they’re not policy wonks, they presumably wouldn’t know the magnitude of the problem (not that I blame them since I once underestimated the shortfall by $16 trillion).
I also doubt many of them would be able to explain why the so-called Trust Fund is an accounting fiction, which is understandable since even supposedly knowledgeable people pretend IOUs are real assets.
But at least they know the program’s finances are a giant mess and that we face a fiscal crisis.
That being said, there’s a second crisis in the program that doesn’t get nearly as much attention. Simply stated, the program is a rotten deal for workers.
I explained both crises in this video I narrated for the Center for Freedom and Prosperity.
Today, thanks to a new report from the Heritage Foundation, we have a great opportunity to peruse up-to-date numbers on the second Social Security crisis.
Here’s the problem, succinctly defined.
With Social Security consuming such a large component of workers’ paychecks and offsetting their own private savings, it is important that workers receive a valuable benefit from Social Security—one at least as good as they, as a whole, could obtain from saving on their own. This analysis looks across the United States and across generations to see if Social Security does in fact provide that.
Sadly, Social Security does a crummy job of giving workers a decent amount of retirement income.
Taking an average of all 50 states and the District of Columbia, the average worker receives significantly less from Social Security than he would have if he had conservatively invested his Social Security payroll taxes in the market. …Individuals with lower life expectancies often lose greatly. This occurs because they receive little or nothing in benefits and cannot pass along all their lost contributions to their surviving family members. …Younger workers face lower, and even negative, returns from Social Security compared to older workers. This comes as a result of paying higher average Social Security tax rates over their lifetimes, coupled with a two-year increase in Social Security’s normal retirement age—as well as the benefit cuts that will occur.
The bottom line is that the implicit rate of return from Social Security is very inadequate compared to the genuine rate of return that could be obtained if workers could invest their payroll taxes in personal retirement accounts.
Here’s the key table from the Heritage study, showing rates of return for today’s young workers based on how long they live.
You have to wonder why so many young people are intrigued by socialism when they’re the ones getting screwed by big government!
Anyhow, there are 12 tables in the report showing lots of additional data, including breakdowns based by state. The entire study is worth a look.
But for those short on time, the conclusion is a very clear summary of why we need to fix Social Security’s rate-of-return crisis as well as the program’s fiscal crisis.
The results are overwhelmingly clear. Americans would be better off keeping their payroll tax contributions and saving them in private retirement accounts than having to sacrifice them to the government’s broken Social Security system. Social Security’s design has, over the decades, presumed that many Americans are too incompetent to make informed decisions for themselves, but few Americans believe that the government knows better than they do what is best for them and their families. Moreover, Social Security’s financial structure effectively guarantees that workers will receive extremely low, or even negative, returns on their payroll taxes.
P.S. Fixing Social Security is simple, but it won’t be easy. Benefits would have to be preserved for current retirees and older workers, so there would be a “transition cost” as we shift to a “funded” system of personal accounts.
P.P.S. But reform is possible. If you want real-world role models of retirement systems based on private saving, take a look at the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system, or even the system in the Faroe Islands.
P.P.P.S. Our friends on the left have a solution – albeit misguided – for Social Security’s fiscal crisis. But their approach would greatly worsen the rate-of-return crisis.
P.P.P.P. S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.
[…] so we can consider that a benefit. But the real issue is whether they receive net benefits. The answer is no when you consider all their payroll taxes. And the answer is a very emphatic no if you compare what […]
[…] more absurd to assert that Social Security is good for young people. Those are the people who are getting a terrible deal from the program. And even if young people aren’t directly hit by the author’s proposed […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] to a system of personal retirement accounts means trillions of dollars of near-term “transition costs” in order to protect current retirees and older workers, but reform will solve the […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of […]
[…] his column doesn’t even address the other problem for young people, which is the fact that they get a rotten deal from the program, paying in record amounts of money in exchange for hollow promises of a meager […]
[…] address both Social Security’s gigantic fiscal shortfall and the fact that the program is a really bad deal for younger workers. Instead, he supported plans such as Simpson-Bowles that would merely make […]
When SS was sold by FDR it promised to provide security for those in their old age and to ensure they would not be a burden on their children. It has achieved the exact opposite. As socialism and socialistic policies always do.
[…] very bad deal for workers (especially minorities), offering a paltry retirement benefit compared to what could be obtained with private […]
[…] it’s not just a fiscal crisis. Social Security is also an increasingly bad deal for workers. Especially minorities with lower average lifespans. When compared to what they would […]
[…] other words, the program has been a rotten investment. Heck, it makes Social Security seem like a good deal by […]
[…] all that spending (and future red ink) doesn’t even provide a lavish retirement. Workers would enjoy a much more comfortable future if they had the freedom to shift payroll taxes to personal retirement […]
[…] that spending (and future red ink) doesn’t even provide a lavish retirement. Workers would enjoy a much more comfortable future if they had the freedom to shift payroll taxes to personal retirement […]
Think what you would have had you been able to invest the SS and Medicare (18%, with employers matching) on your own.
The social insecurity office near me is full of illegals and single moms.
Social Security is more secure than any of the other heavily leveraged federal programs because no self-respecting congresscritter would dare take away the life savings of a hundred million well-armed American citizens.
Socialism insecurity in ɥɐʞᴉɹǝɯ∀
[…] reading Dan Mitchell’s post The Second Social Security Crisis, I drilled down to his discussion of the economic model of saving and pension plans in Chile. The […]
I meant: …Therefore those who DIE relatively young…
People with short lives spend very little time (their few last short years) in the know of their short lifespans, the typically short time between diagnosis and death. Therefore those who did relatively young only spend very few years repenting that they voted wrong. Then, once they’re gone they’re gone — they no longer vote — so they’re irrelevant. This is how democracy works after all. The short lived get screwed twice, short life *and* money taken to support those who will outlive them by several decades. So the rest keep on living and voting their delusion that somehow they will live to 98 and have a positive return from socialism.
Imagine working with cancer and seeing a chunk of your paycheck taken every two weeks to fund the retirement of those lucky to outlive you by several decades. I have seen this situation several times. But as I said, those who will die from cancer (or other causes) younger are a minority — so they don’t matter. And most don’t even know they’re in that minority, until it’s too late. At that point nobody listens to them, they’ll be gone soon — and stop complaining … and voting.
An astoundingly profound post, Mr. Mitchell, once again. You have given me the data needed to prove my point. It is essentially a broken system that is utterly unsustainable. ..why aren’t more people talking about it, is beyond me.