The Coming Social Security Crisis


Congress and the Carter administration have pulled another fast one on the American taxpayer. While the media focus attention on Carter's proposed $25 billion tax cut, few have reported accurately the massive increases in Social Security taxes legislated by Congress last fall.

To be sure, most people noticed a slightly higher FICA deduction from their first 1978 paycheck. In fact, the maximum SS tax—paid by most middle-income taxpayers—will be 10.9 percent higher this year. But since elections take place this fall, Congress very cleverly postponed the beginning of the large increases, those aimed at bailing out the system, until 1979 and beyond. Thus, after a new Congress has been safely elected, the maximum tax will increase a whopping 31 percent in 1979. And that's just the beginning of a succession of annual increases in both the wage base and the tax rate which will bring the maximum tax to $3045.90 by 1987 (compared with $965.33 in 1977).

Carter's much-vaunted tax cuts will have virtually no effect on counteracting these massive increases. In just the first year, 1979, a family of four with income over $20,000 will end up paying more federal taxes—$119 more if their income is $25,000, $221 more if it is $40,000, and so on up the scale. And in subsequent years the further increases in SS tax will wipe out an income tax savings for all income groups except those at the very bottom.

The net result of this massive tax escalation will be devastating—to middle-income taxpayers and to the economy. To begin with, a net increase of from several hundred to several thousand dollars in federal taxes each year will reduce each family's disposable income. And that, other things (like inflation) being equal, will reduce the amount they are able to save. That, in turn, will reduce the amount of money they invest in stocks and bonds or salt away in banks and S&Ls.

This depression of savings is not just idle speculation. Economist Martin Feldstein of Harvard has estimated that during the 1960s Social Security taxes reduced personal saving by 50 percent from what it otherwise would have been. That amounted to a $61 billion reduction in 1971 savings alone!

Social Security also reduces the extent of private pension plans. It has already had this effect over the past several decades and the tendency of corporations to cut back on pension fund contributions can't help but be strengthened by the tripling of Social Security taxes on employers over the next decade. Besides cutting the value of pension plans to employees, this trend will cause a further reduction in total investment in the economy. That's because private pension plans are a major source of funds for the nation's capital markets, providing, for example, $16.8 billion in new funds in 1974. So cutbacks in pension contributions will mean further cutbacks in new plant and equipment.

Why should we worry about that? Because it is only by continued capital investment that American industry can remain competitive with the increasingly modern, efficient industries of Western Europe and Japan. Several decades of Keynesian macroeconomic planning have biased the American economy toward consumption at the expense of saving. Only 4-8 percent of American disposable personal income ends up being saved (and therefore invested), compared with 14 percent in Germany and 20 percent in Japan. Is it any wonder that many American industries (e.g., steel) find it difficult to compete with their more efficient counterparts abroad?

Just its destructive effects on savings and investment would be reason enough for junking Social Security. But there's more, far more. Consumer advocate Warren Shore has persuasively argued that as a form of so-called insurance, Social Security is a massive fraud on the American public. The more common myths are increasingly recognized as such—e.g. that Social Security is actually insurance, or that its trust funds provide sound reserves. Less well understood are the outright distortions SS officials resort to in promoting it, e.g.:

• Understating the "cost" of the program by half by counting only employees' contributions.

• Exaggerating the value of future benefits by about 100 percent by failing to discount them to present value.

• Ignoring the fact that equivalent dollar value insurance protection for a typical family can be purchased from private firms for about one-third the annual SS payment.

These distortions are resorted to in order to keep taxpayers from realizing the extent to which Social Security has become a welfare program, transferring massive amounts of money, not into future benefits for those paying, but into present-day SSI and Medicare payments.

Is there any hope of getting this monster off our backs, before it devours us all? Fortunately, a golden opportunity is on the horizon. Many Congressmen are already predicting a massive middle-income backlash against the 31 percent increase that will hit next January first. As a result, many observers expect 1979 to be a year of yet another massive effort to bail out Social Security with new taxes. A1 Ullman is already hoisting trial balloons for a federal Value Added Tax and many liberals favor allowing "general revenues" (i.e., income taxes) to be used to finance Social Security. If either approach is adopted, any hope of curbing the continued explosion of SS costs and benefits will go down the drain.

But instead of using the expected taxpayer revolt as an excuse for massive new taxation, it could instead become the catalyst for phasing out Social Security once and for all. The present system is not "basically sound" and only in need of a little more tinkering to ensure its viability. It is an engine of destruction, consuming the savings that should be going into massive refurbishment of American industry and housing. It provides niggardly benefits hedged round with exceptions and exclusions, at an outrageous price compared with private insurance. The federal government is no more competent at providing insurance coverage than it is at delivering the mail.

No, Social Security must not be bailed out—it must be phased out. Several proposals to do just that have been put forward in the past decade. In 1968 James Buchanan proposed a plan for the government to issue social insurance bonds to replace Social Security. A revised version of this plan was devised by Charles Hobbs and Stephen Powlesland in 1975 at the Institute for Liberty and Community. Warren Shore's proposed "New Generation Compact" would phase in private insurers and phase out Social Security over a carefully structured transition period.

Perhaps a better, more libertarian, plan than these can be devised. Let us hope so. But let us also realize the urgency of having some sort of phase-out plan ready when the Social Security crisis of 1979 comes to a head. The present SS system is unlikely to survive in its present form beyond next year. Whether it becomes permanently embedded in the federal tax structure or set on the road to abolition could well depend on the efforts of free market advocates over the next nine months.