Social Security is close to being an untouchable government program. No politician wants to suggest reforming or eliminating it for fear of irritating the masses of older Americans who want to see the money they paid into the system returned to them. However, Social Security will need to be modified at some point. A system based on younger generations paying for the older generations’ retirements only works when the labor force is large enough to foot the bill of retirees. While that may have been true in the past, it won’t be true forever. Consequently, a change in either benefits or the 12.4 percent effective income tax to support Social Security must occur in order to prevent the program from becoming insolvent.
If Social Security were truly a retirement program where individuals pay into the system while they work and get back during retirement what they paid in, there would be no point in having the program. It is rather redundant to give someone money only for them to give it back to you later. You would be better off keeping the money yourself. Evidently, Social Security doesn’t work that way. The first generation to receive Social Security hardly paid anything and thus received well more than they contributed. Many individuals retiring today, and in the future, can expect to see less money than what they contributed. Because of this imbalance in costs during work and benefits during retirement, Social Security is inherently a welfare program that transfers wealth from one group to another.
While I oppose any and all government programs that redistribute wealth, even those who support redistributive programs should be able to come to the same conclusion I do regarding to Social Security—it should be eliminated. As long as it is solvent, Social Security achieves its goal of keeping elderly Americans out of poverty; however, it utterly fails at contributing to the optimal retirement packages of ordinary Americans. This is obvious after analyzing how the system works relative to the alternative that would be possible if Social Security didn’t exist.
Currently, 12.4 percent of a worker’s income goes toward Social Security. The employee pays half while the employer pays the other half, but ultimately the employer’s half is coming from income the employee would’ve earned absent a Social Security tax. According to the Social Security “quick calculator,” a 22-year-old who plans on retiring at age 67 after earning an average lifetime salary of $75,000 would see a monthly benefit of $2,310 in 2015. This hypothetical individual would have paid into the system $418,500, calculated by multiplying the fraction of income paid to Social Security (.124) by the average lifetime salary of $75,000 and the 45 years worked. When evaluating whether or not Social Security (as a retirement program, not a welfare program) is beneficial, we should look at an individual’s ability to save on their own and compare it to saving through government. Since saving via a Social Security tax doesn’t take advantage of investing, its value is essentially equivalent to saving for retirement by putting money under your mattress. Investing is better.
Over a period of 45 years, it is reasonable to assume a 7 percent return on investment via the stock market. If, instead of paying a 12.4 percent Social Security tax each year, our hypothetical worker invested an amount equivalent to the value of the tax into the stock market, he or she could expect to amass $2.6 million in a retirement account. If the rate of return is 5 percent, the retirement account would yield $1.48 million. All of this additional wealth is foregone under Social Security.
Anyone would be better off saving for retirement without the “help” of Social Security. Because of this, everyone should oppose Social Security as a retirement program. Some people are certainly better off taking Social Security if they live much longer than average, and don’t pay much into the system, but these people are using Social Security as a welfare program. I understand if you want to vote for having a welfare program for senior citizens, but why would you vote for a “retirement” program that severely hampers your saving ability?
At the very least, Social Security is something you should be able to opt out of. I’d rather have a lump sum of several million dollars available to me at retirement than an annuity that didn’t take advantage of investment growth rates. For those determined to ensure all seniors have a steady income: Advocate for a welfare program that accomplishes such. There is no need to combine a failed retirement program and a welfare program into one. While eliminating Social Security would be ideal, almost anything, including replacing it with a welfare program for the elderly, is better than keeping the system how it is now.
Tim is a freshman majoring in finance and economics. Do you agree that we should eliminate Social Security? Please send all comments and questions to opinion@dailycardinal.com.
