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How Social Security And Medicare Rip Off Americans


Economic Viewpoint

HOW SOCIAL SECURITY AND MEDICARE RIP OFF AMERICANS

The American economy is set up for failure. Liberal Democrats couldn't care less, and Republicans, too, refuse to address pressing issues. The welfare state once looked like a good idea, but after six decades, a formerly self-reliant population has been transformed into an entitlement-dependent one. Many inner-city families have been destroyed, and government has assumed responsibility for the medical care and income of retirees.

The two government programs underwriting an aging population--Medicare and Social Security--are both in financial trouble. Medicare hospitalization, financed with a 2.9% payroll tax, is now running in the red. Despite a Reagan-era "75-year fix," Social Security, financed with a 12.4% payroll tax, will be unable to make promised benefit payments after the year 2012 without running deficits.

According to the 1995 Social Security Trustees Report, retirees face--unless there are substantial increases in the payroll tax--a 10% reduction in hospitalization and retirement benefits by the year 2010, a 27% reduction by 2020, and a 41% reduction by 2040. There is very little most people can do to cushion themselves against these reductions, because the combined 15.3% payroll tax destroys their ability to save.

In the past, politicians responded to funding crises by hiking the payroll tax, but this method destroys employment even more effectively than a higher minimum wage, especially in the new era of global economic competition. Privatization is the only answer, but neither party has the courage for a frontal assault on the welfare state. Democrats believe that a government-dependent population is a moral achievement, and Republicans seem to agree.

The inability of either party to lead implies further payroll-tax increases. Unless there is a sudden spurt in productivity growth, these tax increases will be paid out of employment and living standards. Both will decline--a surefire recipe for intergenerational conflict.

BIGGER BENEFITS. Escaping from the entitlement trap is difficult, but the benefits would be overwhelming. Consider the question of Medicare hospitalization. The average income earner now pays a $1,000 annual Medicare payroll tax. Investment of that annual sum--compounded over 40 years at 7%--would produce an individual capital accumulation of $200,000. For someone in the 15% income-tax bracket, that accumulation, leaving the capital intact, would produce an aftertax retirement income four times as much as the average Medicare per capita hospitalization expenditure of $3,000. For a person in the 28% bracket, the return would be 3.3 times the Medicare benefit.

To see the full dimensions of the rip-off, add in the retirement (and disability) portion of the payroll tax. The annual investment of 15.3% of earnings over a working life would produce a nation of 100 million millionaires, as Sam Beard shows in his book, Restoring Hope in America, published by the Institute for Contemporary Studies (San Francisco).

PONZI SCHEME. Thanks to the American Association of Retired Persons, Americans are fundamentally misinformed about Social Security. Most think they are paying for their own retirement and that the money is safe because it is in the government's hands. The facts are that their payments are being used to pay the benefits of current retirees, and their own benefits will be dependent on the working population (and economy) in the future. There is no money in any account to pay any future retiree, and as the population ages, it is going to be impossible to come up with the money to pay the promised benefits. The Social Security Ponzi scheme is simply running out.

There is not an expert in the country who does not understand the dilemma and insecurity of a retirement system based on intergenerational transfer payments and a deteriorating ratio of workers to retirees. I learned about the problem when I was Assistant Treasury Secretary--and simultaneously learned that politicians will not deal with a sinking ship that they can pass on to a later watch.

The payroll tax is the worst of all possible worlds. It is failing to meet the medical and retirement needs of the elderly, and it preempts the income that would permit Americans to provide more efficiently for themselves. A country burdened with a low saving rate and financial responsibility for a large elderly population will not be able to make the investment necessary to stay abreast of competitors or to attain the productivity growth that would support rising living standards.By Paul Craig Roberts


Steve Ballmer, Power Forward
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