Social Security or social insurance has had many forms and has been adopted by numerous governments around the world. However, the first formal, government-backed program came from Germany in 1889. None other than the famous Chancellor Otto Von Bismarck supported and pushed its implementation. The Americas would not see something of this caliber until 1935. Social Security would come to America in the midst of the Great Depression. On June 8, 1934, President Roosevelt created the Committee on Economic Security (CES). Six months after its creation, the CES created a comprehensive report for Congress. This report studied many of the European programs, their issues, and how Americans could implement similar legislation. In early January of 1935, the report was submitted to President Roosevelt and Congress, giving way to the Social Security Act of 1935.
How Does It Work?
Social Security utilizes the contributions of current workers to pay the benefits of retirees. This means that it needs a constant flow of new contributors to the fund to remain functional. In the world of finance, other organizations who utilize this structure, are seen as unsustainable to sophisticated investors. Robbing Peter to pay Paul has a long history and a very damaging one.
According to the Mercatus Center of George Mason University, “The growth in beneficiaries and the growth in workers remained roughly proportional from 1975 through 2008, during which time there were 3.2–3.4 workers for each retiree. However, since 2009 this ratio has consistently dropped.” The drop in workers per retiree is projected to continue dropping and by 2034 there will be a need to reduce benefits. According to a report by the Department of the Treasury, “trust funds for Social Security will be depleted and will be able to pay only 78% in promised benefits to retirees and disabled beneficiaries.”
Some would argue that the Social Security Fund is a necessary safety net for the American worker. That the money, “which they contribute”, is necessary and it ensures their future retirement. Yet, how practical and effective is it? Are the fund’s returns on investment truly that great?
To answer this question, Thomas Garret and Russell Rhine from the Federal Reserve Bank of Saint Louis calculated the returns a retiree would receive if he were allowed to invest into the stock market. Their findings indicated that for a worker who retired in 2003, 99% of workers would have received higher returns from the S&P 500 than from the Social Security Fund. Even contributing to a 6-month CD every six months would give 95% of workers a greater return.
For a system, which is projected to become extinct by its own administrators, to see itself as necessary is a flaw in logic. Policy makers should listen to the Department of the Treasury finding and eliminate the program before it’s too late. The only other solution will be to increase taxes on the remaining contributors and continue to sustain a failing scheme.
Disclaimer: The views expressed by the guest writers are strictly their own.