Who's Taking Care of Grandma?

Somewhere around Scottsdale, Arizona four senior gentlemen are finishing their putts on the 4th green on an early Tuesday afternoon. It’s sunny…of course. They’re growling about the safety of their Social Security payments and the obvious government conspiracy to take those payments away, probably through taxation. Later after the game they’ll have a couple of beers at the clubhouse, mount their Acuras and ride home to wait on dinner. At the same time, somewhere just outside Columbus, Ohio a couple in their early 70s sit at the kitchen table in their small apartment trying to figure out when they can afford front tires for their 10 year old Sentra. Each golfer (with his wife) receives about $26,000 a year in Social Security, representing 30% of his current income. The Columbus couple receives $15,600 annually which represents 91% of their total income - they worry even more about their Social Security.

Social Security, your politicians explain, is fully funded through…well…a run-out-of-money date, no-viability date, buy-the-ranch date, or whatever date floats, so much so it isn’t worth remembering. Just assume it’s some time out there, so they say, which is also so much horse poopee. The reality is that it isn’t funded at all and hasn’t been as long as this nation has run deficits and accumulated debt. How can that be, you ask? They’ve got that account with those trillions of dollars of bonds in it, that bastion of security – the Social Security Trust Fund!!

The Social Security Trust Fund was born in 1983 because the original concept of Social Security in the 1930s as a pay-as-you-go system was no longer functional. It started well, but ended up bad, I guess when nobody was looking. Benefits currently paid exceeded receipts and when you ran the numbers out over decades of aging workers, they got pretty ugly to look at. Alan Greenspan spearheaded the policy to increase payroll taxes essentially replicating the early years of Social Security when current revenues exceeded current payout, but this time we decided to put the surplus in a nice safe place to fund projected claims as the population grew older. Ergo, the Trust Fund. Moreover, it preserved the concept (dare I say: illusion for the conservatively minded) that Social Security was some kind of paid in retirement plan - not the horrid W-word plan. Of course, this contrived concept was not reality; primarily because the nation’s low tax/ high spend mania could not be abated.

To give you an example of this shell game: say you wanted to fund your own retirement plan, but as luck would have it the idea of doing so would put a crimp into your lifestyle, especially when that lifestyle exceeds your income. But, being sensible and thinking of the future (which was looking pretty bleak), you decide to go ahead and put 10% of your income into your retirement plan account. Then you realize that your flat screen is way too small, the green fees down at the club just went up, you know you’d feel a whole lot safer if you drove a Hummer, and all those plans are in jeopardy because you’d be short on cash. Then you come up with a great idea. You can fund your retirement with IOUs…with interest! Now you’ve got this great retirement plan, with great interest bearing notes in it, you can even pay the interest to yourself with more IOUs, and you still get to buy all that crap you can’t live without. Does it get any better than that? One small problem: when you want to start receiving those nice fat retirement checks, you’ll have to keep working to pay for them.

National debt is simply and purely nothing more than deferred taxes (which includes fees and divestiture of public assets). There is virtually only one way to eliminate debt without the transfer of real assets (taxing), and it’s not default. A nation cannot really default, at least not American style; there is no international Chapter 11. The debt doesn’t go away. People just stop lending you money. The only real way to dodge paying it all back is by devaluing what you owe, i.e. inflation. When a $100,000 Treasury bond buys you one quart of milk the Treasury is pretty much out of debt. As it happens, as a citizen and taxpayer you’re pretty much out of debt as well. Of course, there is also a lot of other really nasty stuff that goes along with that - but let’s not dwell on economic Armageddon.

Social Security (funded through whenever) is comprised then of deferred taxes, essentially the same if there was no Social Security Trust Fund at all. We’d either cover the tab on Social Security (and OASI) by taxing the bejeebies out of subsequent generations or (as in the current scenario) taxing the bejeebies out of subsequent generations to pay off the debt - sounds kinda similar to me. Of course we could continue to borrow more and more, but that boat ain’t gonna float...not without taking a broadside from the inflation torpedo.

The only way to deal with Social Security and all so called entitlements in which future benefits are unfunded is to begin to accept what it is and what it has always been since its inception. Someone who bends to the left might call it welfare; someone who bends to the right might call it insurance. It’s the same either way.

Our politicians enacted and we have subsequently accepted that, as a nation, we don’t want people, who because of age or health can no longer work, to be left in the streets to rot in public view. Historically that was actually the case, especially in the early immergence of urban industrialization. Social Security, even with our chest pounding raw dedication to free enterprise, was created during a brief, admirable embrace of humanity. Yet very soon it was subverted into a notion of a personal investment, by those who opposed it from the outset.

Personally I like to call it insurance (does that mean I lean to the Right?). No one can project who is ultimately subject to misfortune. Some perhaps by chance, some by their own hand, but what difference does it make? By paying into a concept of spreading the risk, as we should be doing with healthcare, we cover ourselves, our parents, and our children. With any luck at all we may never need a penny of it, and when that’s the case we shouldn’t get a penny.

The solvency of Social Security should be attained by continually reducing the projected unfunded benefits to those whose needs don’t meet its purpose. There ought to be set target limits on benefits, with benefits providing an honorable lifestyle. Using the Tax Code, Social Security payments should be taxed at rates up to 100% once income reaches and exceeds those levels. There could be some minor means testing of benefits, but it is still reasonable that those who paid in more should still receive higher benefits, since their qualification to receive benefits would presume a greater lifetime drop in living standards.

It should again be pay-as-you-go and be funded through a flat tax, as it currently is, but that tax should not have income limitations. Another dumping on the wealthy, you say? Hardly. The economic and social stability of a society always has and always will benefit the wealthy most. That’s because it increases predictability, which is the cornerstone of investment.