Murray Sabrin in the Naples Daily News today:
The proposal by senators to “fix” Social Security (August 3 article) ignores the program’s fundamental flaw: its financial structure depends on an intergenerational transfer of wealth rather than genuine savings and investment. Today’s workers finance today’s retirees, with the expectation that future workers will do the same. If an investment firm promoted such a scheme, it would likely face charges of operating an illegal pyramid or chain-letter arrangement.
Economists across the ideological spectrum have also demonstrated that Social Security provides relatively poor returns compared with long-term private investing. Analysts have shown that workers who invested equivalent payroll taxes in a low-cost S&P 500 index fund over their careers would generally accumulate substantially greater retirement wealth than Social Security benefits provide, particularly younger workers facing lower future benefit-to tax ratios.
For example, if a worker had a starting salary of $18,000 45 years ago, and received annual wage hikes of 4%, the retirement account would have reached $1,517,542 after 45 years of investing the 12.4% combined Social Security tax into an index fund returning 8% annually (compounded monthly).
There is also a constitutional issue. Article I, Section 8 does not authorize the federal government to operate a national retirement pension system.
A practical transition is possible. Current retirees and those nearing retirement should receive their promised benefits from general federal revenues while younger workers are allowed to redirect their payroll taxes into personally owned 401(k)s or Individual Retirement Accounts. Over a generation, Social Security could be phased out, restoring financial security to where it ultimately belongs – with individual responsibility, personal savings, and private investment rather than government dependency.
Murray Sabrin, Ph.D., Naples
