Monday, September 29, 2008

Unintended Consequence: Social Security

Social Security

Objective was to entice older workers to leave the work force in exchange for money to make room for younger workers. However, instead it did;

  • Increase in SS-OASI tax has reduced the US Savings rate.
  • Increased the cost of doing business
  • Increased the cost consumers pay for items
  • Shipped labor-intensive jobs over seas to lower cost countries.
  • Due to the large increases in the FICA tax in the late 60's and early 70's the Earned Income Credit was created by congress. Its objective was to compensate low income workers for paying higher FICA taxes. The problem was that the compensation came from general revenues, not FICA taxes. Sincere there has not been a general budget surplus since 1956, the direct impact of this legislation due to FICA has added $1 Trillion to the National Debt.

For 71 years Social Security paid benefits far in excess of what it could have. It was able to do this by draining the paychecks of workers. This caused workers to take out longer loans (30 year mortgage versus 10 years). This lowered the velocity of money through the economy,

It has also artificially priced retirement. Now that the system has reached maturity, the mature cost of the program is coming due.

Social Security helped millions of people and lifted living standards for seniors dramatically above what the economy could have sustained individually at the expense of three entire generations; baby boomers, generation x and generation y.

Since 1983, social security has been working on resolving its latest funding problem. It is no closer to a solution now than it was in 1937. Social security has earned 8.6% compounded continuously since 1980, but as a middleman will pay you a 0% return. A program that pays those born after 1985 just 29 cents in benefits for each dollar of taxes and credited interest is not fair. Americans want value for their dollar. You can buy a value meal at about any fast food chain consisting of a sandwich, fries and drink for about $4.00. If Social Security were to pay for a value meal, it would cost you $13.79. If we want to save social security, then each adult must send a check today to social security for over $100,000, or cut benefits by 40% or raise taxes by 85%. There simply is no painless solution. How firm are you on saving social security? I propose all workers keep their social security old age tax paid by employee and employer in their own accounts. Seniors who are found to be in need would be paid a means tested benefit of $1,214 a month.


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