Government Spending: Social Security, Part 3

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff continues his series of articles on Social Security spending, this time addressing some of the more common progressive clichés repeated by apologists.

“ONE OF THE MOST SUCCESSFUL/POPULAR PROGRAMS EVER”

Whenever anyone criticizes any aspect of Social Security—and there are plenty of them (Ponzi scheme, mismanagement, disability claims abuse, Congress spending the entire trust fund surplus, payroll taxes high enough to fund millionaire pensions if handled privately)—one of the more common retorts is “You’re in the minority. Social Security is one of the most successful/most popular government programs in American history.”

The logic here is that tens of millions of people not only receive Social Security benefits, but even voluntarily line up for them. Therefore, the thinking goes, it’s a “successful”—even loved--program.

But seniors lining up to get a refund on money that was previously taken from them by the government, with an explicit and very loud promise to pay them back later, does not mean the program is “successful” or “popular” unless you’re referring to the program’s capacity to take trillions of dollars from Americans as “successful” or “popular” in the eyes of politicians.

Otherwise, “popular” and “successful” could be said about a common thief.

Imagine a mugger runs around town and successfully steals lots of cash from virtually everyone who lives there.

Later the robber is caught by the police and a staggering billions of dollars he stole is sitting in huge money bags in his garage. A public announcement is made that victims can file a claim and get at least some of their money back.

Predictably, everyone who was robbed shows up to collect.

That the victims voluntarily participated in the refund process doesn’t make the robber “one the most popular people in history.”

Trying to get a refund on money that was taken by force, especially when the taker promises to pay you back later, does not make the whole trauma of being mugged and collecting later "popular."

In fact, if asked most people would say they prefer they were never mugged in the first place. The Correspondent wagers many of them would also like to see the mugger go to jail so he can’t rob anyone else.

“IF YOU DON’T LIKE IT FEEL FREE TO OPT OUT”

Often times as the arguments for preserving Social Security in its broken form start to run out after being corrected over and over, a popular last refuge among apologists is “Well if you don’t like it then opt out.” This response implies nothing is forcing you to deal with the program.

Of course as soon as someone replies “OK I'm happy to opt out. Just give back all the money that was taken from me plus interest, stop extracting future payroll taxes from my salary, and I forfeit all the promised benefits. I can do a lot better on my own..."

…the offer to “opt out” suddenly changes to “No, you can only opt out of benefits but the government gets to keep all your money.”

When the counteroffer is reduced to "OK, just give me all the money taken from me and I'll even forgo interest" the answer always remains "you don't get it back and still get no benefits."

Which exposes the misnomer of “opt out” which really means “You can’t opt out of the taxes, just your partial refund” or, put more bluntly, “By ‘opt out’ we mean you become an involuntary donor to the state whether you like it or not. You love 'freedom' don't you? Well that's freedom."

That kind of “opt out” is tantamount to “opting out” of eating at a restaurant, but you still have to order thousands of dollars of dishes from the menu and pay. You just don’t get to eat anything and are required to leave immediately after paying.

Well not quite. The difference is that unlike Social Security no one can force you to physically walk into a restaurant, sit down, and order. And unlike the payroll tax you don’t keep going back to the restaurant every payday just to keep ordering/paying for more meals just to get nothing. Social Security forces you to pay regularly whether you like it or not (or “opt out” or not).

“JUST DITCH THE CAP”

Currently Social Security imposes a payroll tax of 12.4% (6.2% from the employee, 6.2% from the employer) on all income up to $160,200.

Likewise, pension payments are capped too: at present a maximum monthly payment of $4,555 for high income earners retiring at age 70 or above.

In the meantime, every time news breaks of Social Security’s upcoming fiscal shortfall proposals to fill the gap are floated everywhere such as raising the payroll tax above 12.4% (the 21st payroll hike since the program's enactment in 1935), raising the retirement age, cutting benefits for wealthy retirees who “don’t need” Social Security, or some combination of the three.

But one of the favorite panacea solutions for left-progressives is “You don’t have to make any of those hard choices. Just remove the income cap for payroll taxes.”

So under the “higher cap” or “no cap” solution, if a wealthy earner such as a doctor makes $400,000 a year the government is not only entitled to withhold 12.4% of the first $160,200 (i.e. $19,864) but 12.4% on the entire salary (i.e. $49,600 a year).

Not that the Economics Correspondent particularly likes this “solution,” but if the government were to take 2.5 times as much in taxes from this worker’s paycheck but in return pay them 2.5 times as much during retirement, that might be a halfway reasonable tradeoff. Still not fair as retirees only get a fraction of what they paid in plus interest, but at least there would be some correlation between how much more is paid and how much more is received.

But of course this is the last thing liberal progressives have in mind. They want to take 12.4% of all income without limit, but still cap retirement payments at the current level of $4,555 per month (plus inflation).

So a millionaire earner would be forced to pay over $120,000 to the program annually (plus income taxes). By the Correspondent’s math, if that worker started at age 30 and earned 9% annual interest, then by age 72 he/she would amass $19.3 million earning $145,000 a month. 

But under the progressive "solution" the government would still pay a capped maximum pension of $4,555 a month and the retiree forfeits the entire $19.3 million nest egg too.

(all calculations assume zero inflation to keep them consistent).

So by raising the cap on the taxes but preserving the cap on benefits, our high earner is gypped of 97% of his/her monthly pension payment and loses 100% of the giant nest egg. Which means the “remove the cap” solution turns Social Security into what so many progressives already understand and want: a vastly larger instrument of income redistribution than it already is.