Joe Economist
Council Member
The President recently put forward a budget that would change the way benefits in Social Security are calculated. That change acknowledges what the Trustees have said for years. Social Security is in trouble. The President's proposal and the critic’s response pretty clearly demonstrate that Washington does not understand the problem with Social Security nor its size.
The experts in Washington express the problem facing the Social Security system in terms of cashflow. It is true that Social Security expects to draw in less money than it spends. The corresponding insolvency is however the outcome rather than the core problem – much like a fever is an outcome of the flu. The fact that Social Security is running out of money is the visible outcome. The disease is the fact that Social Security is a terrible investment.
The question of solvency is simply the unavoidable outcome of the poor economic returns of Social Security. It should surprise no one that a terrible investment runs out of money. People avoid bad investments whether it is on Wall Street or in Washington. It is a matter of economic gravity that poor returns drive people out of any financial system.
Economic returns are what you get for what you contribute, and they are terrible particularly for younger workers. According to the Social Security Administration, some younger workers can expect to get back as little as 40 cents on the dollar on a pre-tax basis. That means that Social Security isn’t terribly different than spending quarters to buy dimes.
Experts argue that raising taxes and lowering benefits for future generations are the only two solutions. Comically enough, their cure treats the symptom and feeds the disease. We are going to fix poor returns by making them worse. As returns drop, so does participation. As participation drops, the system will see greater and greater cash shortfalls.
Washington will tell you that payroll taxes are mandatory – which is true. The problem is that wages are not mandatory. People can stop working. People can shift wages into benefits which are not captured by payroll taxes. Businesses can shift wages into stock options which are not part of the payroll tax equation. This is not evasion. It is the sound of people fleeing a failing system.
The experts do not believe in economic gravity. In their world, no one retires earlier because of lower compensation. No one acts in their own self interest to avoid the tax. And no one loses a job because of the higher cost of employment. In the mind of Washington experts, the economy is a frictionless system where rising costs have no consequence.
The problem is that Social Security is spending quarters to buy dimes. The experts would tell you that the solution to this problem is to get people to spend quarters to buy nickels. This is lunacy. These solutions make the system less appealing to the working generation – without whom the system fails in spectacular fashion.
In general the problem with Social Security is the economic returns. Today SS is like spending a quarter to buy a dime. DC's solution is for us to agree that our children will spend a quarter to buy a nickel. Raising taxes and cutting benefits is a placebo will work until it doesn't, at which point you will have an implosion.
The experts in Washington express the problem facing the Social Security system in terms of cashflow. It is true that Social Security expects to draw in less money than it spends. The corresponding insolvency is however the outcome rather than the core problem – much like a fever is an outcome of the flu. The fact that Social Security is running out of money is the visible outcome. The disease is the fact that Social Security is a terrible investment.
The question of solvency is simply the unavoidable outcome of the poor economic returns of Social Security. It should surprise no one that a terrible investment runs out of money. People avoid bad investments whether it is on Wall Street or in Washington. It is a matter of economic gravity that poor returns drive people out of any financial system.
Economic returns are what you get for what you contribute, and they are terrible particularly for younger workers. According to the Social Security Administration, some younger workers can expect to get back as little as 40 cents on the dollar on a pre-tax basis. That means that Social Security isn’t terribly different than spending quarters to buy dimes.
Experts argue that raising taxes and lowering benefits for future generations are the only two solutions. Comically enough, their cure treats the symptom and feeds the disease. We are going to fix poor returns by making them worse. As returns drop, so does participation. As participation drops, the system will see greater and greater cash shortfalls.
Washington will tell you that payroll taxes are mandatory – which is true. The problem is that wages are not mandatory. People can stop working. People can shift wages into benefits which are not captured by payroll taxes. Businesses can shift wages into stock options which are not part of the payroll tax equation. This is not evasion. It is the sound of people fleeing a failing system.
The experts do not believe in economic gravity. In their world, no one retires earlier because of lower compensation. No one acts in their own self interest to avoid the tax. And no one loses a job because of the higher cost of employment. In the mind of Washington experts, the economy is a frictionless system where rising costs have no consequence.
The problem is that Social Security is spending quarters to buy dimes. The experts would tell you that the solution to this problem is to get people to spend quarters to buy nickels. This is lunacy. These solutions make the system less appealing to the working generation – without whom the system fails in spectacular fashion.
In general the problem with Social Security is the economic returns. Today SS is like spending a quarter to buy a dime. DC's solution is for us to agree that our children will spend a quarter to buy a nickel. Raising taxes and cutting benefits is a placebo will work until it doesn't, at which point you will have an implosion.