The Real Costs Of Social Security: Red Ink, Instability, Loss Of Choice

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The Real Costs Of Social Security: Red Ink, Instability, Loss Of Choice
By JAMES A. DORN
Posted 08/20/2010 07:02 PM ET

When President Obama told the nation last week that Social Security could be put on a sound basis with minor changes, he forgot to tell Americans about the real costs of that system.

Initially, the costs were low: The combined payroll tax rate was only 2% on a wage base of up to $3,000, for a maximum tax of $60 per year. Although the tax was legally split between workers and employers, the incidence of the tax (the effective burden) has always been on workers in terms of lower net wage rates.

Today, workers pay an effective payroll tax of 12.4% for Old Age, Survivors and Disability Insurance on earnings up to $106,800, for a maximum tax of $13,243.20 a year. That tax rate and the cap will continue to increase as the number of retirees grows relative to the working population.

Phony Assets

The real costs of Social Security far exceed the taxes collected: The compulsory pay-as-you-go retirement system has denied people the choice of using those funds for private investment, diminished the culture of responsibility and strengthened the redistributive state. People have become more dependent on government, and the retirement decision has become politicized. Social Security now accounts for 20% of the U.S. budget, with expenditures of $686 billion last year.

Reforms in 1977 and 1983 increased payroll taxes and the retirement age, but made no fundamental changes to the system in terms of empowering workers by allowing them to put part of their Social Security taxes in personal accounts.

The U.S. system has accumulated surpluses, but they have been used to expand the size and scope of government. The so-called trust fund has no real assets, only IOUs that taxpayers must eventually pay.