An eighth of every paycheck
YOU DON'T have to be a financial wizard to know that Social Security is a lousy investment. Unlike the money you deposit in a bank or salt away in an IRA, you don't own the money you pay into Social Security. You have no legal right to get those dollars back, and when you die you can't pass them on to your heirs. Nor can you use your Social Security account before you retire -- you can't borrow against it and you can't cash it in. You aren't allowed to put the money into a balanced portfolio. You can't even watch as the interest accumulates, since your Social Security nest egg doesn't earn any interest.
Your nest egg, in fact, doesn't even exist. Because Social Security is financed on a pay-as-you-go system, the dollars withheld from your paycheck today are immediately paid out to retirees. The benefits you receive when you retire will be funded by the payroll taxes then being collected. But because the ratio of workers to retirees is steadily shrinking, Social Security is headed for a crisis.
Within 15 years, the system will be paying out more in benefits than it collects in taxes. Its shortfalls will grow larger and larger. Bankruptcy will loom. To save Social Security, Congress will have no choice but to sharply raise payroll taxes, go even more deeply into debt, or slash the benefits paid to retirees.
This of course is the background to President Bush's campaign to create personal investment accounts, which for the first time would allow workers to own and invest -- really own, really invest -- part of the Social Security tax taken from their paychecks. With personal accounts many of the features that make Social Security such a crummy deal for today's workers would be transformed into a package most of them could support. A social-welfare program created in the age of gramophones and the Model A would be updated for a world of iPods and superhighways.
To many Democrats, such talk is heresy. Letting Americans own some of their Social Security would be too risky, they argue -- another way of saying that Americans are too dumb to be entrusted with their own money. Much better to continue entrusting it all to Washington, which has managed Social Security so skillfully that workers younger than 50 will never get back in benefits what they are paying into the system now. (Perhaps that explains why 58 percent of Americans in that age group support personal accounts, according to a new poll by Zogby International.)
Social Security wasn't always a sucker's game. As with all Ponzi schemes, players who got in early made out like bandits. For many years, Social Security deductions were minuscule. Until 1949, the combined employer/employee tax rate was only 2 percent, and it was imposed on just the first $3,000 of income, for a maximum payroll tax of just $60 a year. The first Social Security recipient was Ida May Fuller of Ludlow, Vt., who retired in 1940 after having paid a grand total of $44 in payroll taxes. By the time she died in 1975, she had collected $20,933.52 in benefits -- a return on her ''investment" of more than 47,000 percent.
It wasn't really an investment, of course. It was a forced transfer of wealth from younger people to an older one. And as the number of Ida May Fullers grew, and the value of their benefits increased, the amount of wealth that had to be transferred kept climbing. By the time I entered the workforce in 1975, the Social Security withholding rate was 9.9 percent, applied to wages of up to $14,100. Maximum tax bite: $1,395 a year -- more than 23 times the $60 of a generation earlier.
And a generation later? Today Social Security skims off 12.4 percent of the first $90,000 earned -- one-eighth of every paycheck. There are no exemptions, no deductions. It kicks in from the very first dollar of income. It is the biggest tax the average American household faces -- 80 percent of us pay more in Social Security taxes than we do in income tax.
One tiny notch at a time, payroll taxes have been ratcheted up to a level that would have been unthinkable in Franklin Delano Roosevelt's day. No wonder Social Security is so unpopular among the young. It provides no security for their retirement, while impoverishing them in the present. In exchange for an eighth of their earnings today, it guarantees nothing but higher taxes tomorrow. That there are politicians who defend this arrangement wouldn't have surprised FDR. But how shocked he would be that they call themselves Democrats.
Jeff Jacoby's e-mail address is email@example.com.