By Donella Meadows
–January 16, 1997–
This country will be out of oil in 30 years. By 2030 we will pump dry much of the groundwater of the Southwest. We don’t hear a peep from our leaders about these problems. But they’re in a panic over the possibility that 30 years from now Social Security will go broke.
When the swollen baby-boom generation retires, they say, there will be too few working-age people to support them. So the politicians have appointed elite commissions to come up with ways to “save” the system. What should raise our hackles and cause us to sniff the wind carefully is that experts inside and outside these commissions are in deep disagreement. Some say that Social Security is not broken and does not need fixing and that this supposed crisis is actually a heist.
Let’s try, in the confusing discussion ahead, to keep a few facts straight.
First, that chunk taken out of your paycheck for Social Security (currently 12.4 percent, counting what your employer kicks in) doesn’t go into a savings account with your name on it. It goes to current retirees. For 60 years the system has been a pay-as-you-go compact between generations. While you work, you help support the folks ahead of you. When you retire, the ones coming behind do the same for you.
That’s crucial to understand, because most of the schemes to “fix” Social Security change it radically. They would take part or all of your payroll tax and invest it in stocks or bonds that you could cash in when you retire. There’s disagreement about how much to invest and whether the government should do it for you. But the big argument is whether we should make the huge moral and ideological switch from collective sharing in the present to personal savings for the future.
Here’s another fact. We do have a problem with shifting generation sizes, but it isn’t ahead of us, it’s upon us. In 1950 there were 16 workers to support every Social Security recipient. Now there are three. In 2030 there will be two. We’re handling the problem already, by slowly hiking up the payroll tax and reducing benefits.
We could continue to do that. Social Security could be fixed by an immediate raise of the payroll tax from 12.4 to 14 percent. Or by applying the tax to higher incomes, or reducing benefits slightly, raising the retirement age a bit, reducing the inflation allowance. Or some combination of the above.
The option of applying the tax to higher incomes brings up another important fact. The payroll tax hits the poor harder than the rich. It bites off that steady 12.4 percent whether you earn $5000 a year or $50,000 — until you get beyond $65,400. Then it goes to zero. And it applies only to earned wages, not investment income. So someone who gets $500,000 a year in dividends pays not a penny toward Social Security, but someone who earns $20,000 antes up $2480.
It does not seem to occur to people in power to fix Social Security by taxing all income, including unearned income.
There was a time when doing so would have been unfair, because income that isn’t taxed for Social Security doesn’t count toward the calculation of retirement benefits. High income folks don’t pay in more and don’t take out more. But that principle was compromised in the 1980s, when Congress sounded its first alarm about boomer retirees. To weather us over the boomer period, payroll taxes were raised so they bring in more than is needed for current payments. The surplus goes to a trust fund, where it supposedly earns interest and grows till the retirement boom reaches its peak. Then the fund will be spent down to help support retirees without raising taxes on the smaller working generation behind them.
The problem is, our deficit-ridden government is spending the trust fund now. The IOUs left behind will have to be paid by the taxes of future workers anyway. Either that, or Social Security will indeed go bust. The trust fund is a sham.
That’s the crisis, that’s the heist. The real purpose, or at least real outcome, of the scare talk about Social Security is to run the present government not from the progressive income tax but from the regressive payroll tax, shifting the burden from the rich to the middle class and from the present to the future.
About personal investment schemes, here’s the important fact to remember. Shifting from pay-as-you-go to any savings plan will still require future workers to pay for future retirees. Interest and principle payments on government bonds come from the people’s taxes. Dividends and rising stock values come from the people’s labor. The old Social Security system took money from workers and sent it straight to retired people. The new schemes will take money from workers and let either the government or private banks, brokers, and speculators play with it for a few decades. Then they’ll pay it back, maybe with interest, if there’s any left.
Therefore politicians and bankers and stockbrokers (who will make billions if we’re all required to set up private Social Security accounts) are loudly assuring us that Social Security is about to crash, that we can only save it by privatizing it, and that we’d have much more to retire on if we just invest with them.
They’re wrong. There’s only one thing that can support us in the future, and it’s not fictitious funds in Wall Street casinos. It’s the productive power of our working people, our economy, and our resource base. That requires investment capital, but it also requires educated workers, public infrastructure, research and technology, renewable energy when the oil’s gone, and intact groundwaters, forests, soils, and ecosystems. At the moment we’re spending down all those things.
There’s a lot to worry about, looking 30 years ahead. Social Security is the least of our problems.
Copyright Sustainability Institute 1997