If that is hard to understand, imagine we told our adult children to give us $100,000 to support our retirement and then to get that money back from their children, who will in turn get the money back from their children, etc. This is the basic story of Social Security and Medicare. If this greatly troubles you, then you should be extremely mad at the generation who lived through the Great Depression and fought World War II. They really made out like bandits from these programs because they paid very little money in taxes compared to the benefits collected, as can be seen in this same study.That's precisely how any Ponzi Scheme operates. Not often that a self-styled progressive admits it.
It's in the way the $100,000 is extracted, though, where the capital formation is inhibited. Donald Boudreaux explains.
The typical janitor in America today is paid $26,586 annually. Because even janitors must pay to Social Security 6.2 percent of their incomes, this janitor pays every year to Social Security $1,648.33. On top of this sum, this janitor's employer kicks in to Social Security another 6.2 percent of the janitor's salary.The paternalists will fret about the janitor, or other low-wage workers, not putting the money away, or dipping into the assets at the worst possible time, and the risk-averse will cherry-pick the few intervals of time over which stock investments lose value. But those financial instruments represent investments in productive capital. Even Mr Baker recognizes how productive capital is.
If a janitor works from age 18 until the full Social Security retirement age of 66, he will, upon retirement, begin receiving from Social Security a monthly check for $1,108. He'll receive such a check until he dies. (Note: when he dies — even if he dies just one minute after retiring — his heirs get nothing from Social Security.) But suppose that this janitor is relieved of having to pay 6.2 percent of his wages to Social Security and, instead, he invests each year this sum into financial instruments that pay, on average, a real annual return of 5 percent, compounded monthly.
Saving and investing no more than this sum each year during his work life, this janitor, when he retires at age 66, will own a pension worth $337,591. Even assuming (unrealistically) that these funds earn no further returns for the rest of the retired janitor's life, if he lives for another 15 years, every month he can take from his retirement fund $1,875.51 — or 69 percent more than the monthly amount that he would instead have received from Social Security.
Suppose we snap our fingers and eliminate completely every tax burden for the young associated with us old-timers. That means we not only get rid of the government debt, but we also zero out their Social Security and Medicare tax liability. Sounds great–we’ve really done right by our young now.Indeed we do.
OK, now let’s also get rid of all the technological breakthroughs of the last 35 years. There are no smartphones or even cell phones. There is no Internet and only the most clunky of personal computers. (Apple wasn’t even cool back then.) Music is still available only on cassettes and vinyl records. Life expectancy is much shorter, as we don’t have many of the treatments that have been developed in the last three decades. And there is no Uber.
So, are our kids better off now? I doubt most people would say yes, especially not the 20-somethings.
If we want to seriously discuss whether we are making things better or worse for our kids, then we have to ask about the whole economy and society we pass on to them.
It's amusing to find a self-styled progressive saying something positive about Uber. It's less amusing to have to accept the proposition that if the fiscal drag of "Social" "Security" taxation goes away, so does the creative destruction. (Likewise, there's no crowding out: I'm still of the view that one impetus for the mortgage-backed securities was to create additional low-risk investments when the Treasury was borrowing relatively little money.) Thus Mr Baker's sputtering indignation is less than persuasive.
When we force many of our kids to grow up with parents who are unemployed and/or in poverty because the Very Serious People won’t let us spend the money necessary to make them employed and let them have decent jobs, this is a huge issue of generational equity. The same applies to inadequate spending on infrastructure and education.Why not focus on the way the money that is being spent on infrastructure and education is being dissipated by rent-seekers? And why not find the missing money, which is the capital formation we don't get because of the way the payroll tax works?