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Social Security Isn't Going Away — But It Is Going to Get Worse

January 30, 2015 in Economics

By Michael D. Tanner

Michael D. Tanner

Seventy-five years ago, Ida Mae Fuller of Ludlow, Vermont received the first American Social Security check. Ida, who lived to be 100, ultimately collected $22,888 in benefits. Because she had paid only $24.75 in Social Security taxes, the national retirement program turned out to be a very good deal for her.

Unfortunately, it’s not such a good deal for today’s young workers. Thirty year olds now will be lucky to receive a 1.5 percent return on what they pay into the system, far below what they could earn from investing that money privately. In fact, many will die before they get back what they paid in, let alone collect any extra return.

To pay all the benefits promised in the future, Social Security would have to increase the payroll tax by as much as half, or slash benefits by 23 percent.”

That’s because Social Security operates very much like a pyramid scheme. When you pay your Social Security taxes, none of that money is saved for your retirement or invested. Instead, every cent you pay in is used to provide the benefits to those who are already collecting. When you finally retire, your benefits will come from the taxes paid by the next generation of workers — your children and grandchildren.

Like any pyramid scheme, Social Security was able to deliver a windfall to early recipients like Ida Mae, who received their benefits when there were lots of workers and only a few retirees. Today, however, Americans are living longer and not having as many babies, meaning there are more retirees and fewer workers to support them. In 1950, there were 16.5 workers supporting every retiree. Today, there are 2.8. And by the time today’s young workers retire, there will be just over two.

Does that mean Social Security won’t be there when they’re ready to collect? No. As long as there are people paying into the program, retirees will be able to take benefits out. Unlike a pyramid scheme, Social Security cannot go broke as long as the government can make future generations pay taxes.

But if fewer young workers are there to support each retiree, one of two things will have to happen: Either those young workers will have to pay more (tax increases) or retirees will have to get less (benefit cuts).

To pay all the benefits promised in the future, Social Security would have to increase the payroll tax …read more

Source: OP-EDS

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