A Bitter Bill to Swallow
By Robert Schiener
Social Security is expensive. It takes many bills to pay for its functionality. Hidden in this explicit cost is its corrosive effects on industrial growth, savings, and work incentives.
A recent CBO study published in 1997 made a forecast as to the percentage of GDP to be composed of by Social Security by 2030. It was told that nearly 16 percent of such aggregate income would be taken by this redistributive welfare program. That is simply amazing in terms of relative historical comparison. Most people in the 1930s never lived long enough to extract such public monies and hence resulted in a low percentage of GDP (approximately 2-3 percent).
Therefore, current actuality paints a dire portrait of the future for both tax rates and the savings rate. Even when one takes into account the Social Security reform proposals, each one calls for significant increases in the payroll tax. This is to be expected since demand for public resources will rise in the next 30 years. Nevertheless, higher tax rates will increase the deadweight loss upon labor markets and lower personal disposable income. These two effects reap significant losses for social surplus and efficiency levels. It is unfortunate that policy analysts and politicians are ignorant of these facts since these are the people responsible for alternative methods for public finance.
In terms of the corrosive effect Social Security has on the savings rate, one particular phenomenon results: the income effect. Because Social Security provides income in retirement, individuals have less incentive to save today. Less saving equals less investment. And because Social Security steals wages from today's workers, households have less disposable income to save. Less savings, once again, equates to less investment. Less investment turns our nation into a poorer one for our children and grandchildren.
Unfortunately, the duopoly has failed to respond to these aforementioned concerns. Both Republicans and (of course) Democrats are content with furthering the ways of Social Security. Both have short-term time horizons and both have a bath of financial ignorance. Neither care for a richer nation in the year 2030. Neither care but for the concerns of the liberal median voter. This voter will be older and more dependent on current workers in 2030. The correlation between age and dependence is conspicuous.
With regards to Social Security and work incentives, two phenomena result: income effects and substitution effects. First, because Social Security provides income after 62 years of age, individuals have less incentive to work. Secondly, if an individual works after 62 while receiving benefits, such benefits are reduced one dollar for every three dollars of private sector income. Both of these effects, once again, are inefficient. The effect Social Security has on the choice of work versus leisure is implied within this context, as it increases the opportunity cost of work.
It is obvious that some members of society, namely the disabled and widowed, have a case for receiving public benefits. This is not to endorse Social Security. If political parties were more concerned for America instead of their own viability, they would send a reform proposal to the president ending Social Security in a very gradual manner. Only individuals who lacked the asset of earning income would qualify for Social Security. I don't expect this since the current Congress is full of liberals who want to put another trillion dollars into this transfer program.
Oftentimes people, usually liberals, claim Americans don't know how to save for retirement and thus use this premise as rationale for expanding the budget for Social Security. Unfortunate that they should ignore a Texas town that, in the 1980s, opted out of the Social Security program as a result of a loophole in the payroll tax that has since been changed. This town saved and retired comfortably without the involvement of Social Security. This should surprise few since a nonpayment of the payroll tax could be directly contributed to an employer-sponsored retirement plan (e.g., 401(k) plans) earning a higher return to investment. And don't forget the new Roth IRAs which allow tax exempt compounding. This invention is truly great since it effectively reduces the stealing powers of the federal government.
Finally, let's not allow 99% of politicians to distort the truth with regards to retirement planning. It is up to individuals to take 100% of the responsibility for building a sizeable nest egg in retirement. If Social Security still exists (which it will), think of it as icing on the cake.