Social Insecurity

Michael W. Lynch | February 9, 1998

The federal government, chartered by the U.S. Constitution to "secure the blessings of liberty to ourselves and our posterity," is coming perilously close to forgetting about the posterity clause in its mission.

Recognizing this, President Clinton has proposed reserving the surplus to strengthen Social Security. The issue, however, is not whether Social Security will exist in the 21st century. It's what Americans get for their investment.

Created to provide universal government pensions and to raise the living standards of America's seniors, it now promises to reduce the wealth of its captive participants.

A sophisticated model developed by the Washington-based Heritage Foundation demonstrates this remarkable reversal of fortune. For those currently receiving

Social Security checks - or those who soon will - the system has indeed been a good deal, which explains its popularity among today's seniors.

Americans born in 1935, for example, regardless of their incomes, can expect to be at least as well off under Social Security as they would have been if they had invested conservatively in the private markets.

Low-income Americans, those earning less than half the average wage over their lifetimes, stand to benefit greatly from Social Security, garnering a 5 percent rate of return. That's better than the 4 percent they would have received had they invested their Social Security taxes themselves.

But things have changed for Americans born in 1975 and now entering the work force. Social Security promises to rob this generation, rich and poor alike.

According to the Heritage model, average-income Americans will lose some $100,000 over their lifetimes under Social Security, while high-income Americans, defined by the government as having average earnings of $77,000 and above, stand to lose more than $500,000.

Mandatory Social Security will even cost low-income Americans of this generation $15,000. The Heritage study points out that for a community of 200, 000 Americans with average earnings, the cumulative cost of Social Security is $27 billion over a generation.

The federal government's total tax take must be added to this financial loss.

In 1997, according to the Washington-based Tax Foundation, the average two- income family shelled out 25.1 percent of its income - more than one in four dollars earned - to its Uncle by the Potomac.

After state and local governments took another 12.1 percent and living expenses were paid, a mere 3.6 percent was left over for savings.

Compare this with America in 1957, post-New Deal but pre-Great Society. In that year, 20 percent went to the feds, 8 percent to state and local governments and 6.2 percent to the bank.

Relief would come not from plying narrow segments of the population with programs, as President Clinton would do, but from broad-based tax and Social Security reform.