The truth is Social Security is not going broke because:

October 24, 1998

The baby boomers are approaching retirement.
The FICA tax is too low.
The surplus FICA revenue is being invested in United States Treasury Notes.
The fund is being spent on other items.

The very simple reason for Social Security going broke is the current and past retirees did not pay a high enough FICA tax. The current and past retirees paid only enough FICA tax to pay the current retirees. NO surplus funds were ever saved for their retirement. As a result, this generation of workers and future retirees are being made out to be the scape goat for the failure of the past generation to save and pay taxes. The proof of this is found in Table

You want your children to collect Social Security Benefits, I hate to be the one to burst your bubble, but it will take $11 Trillion invested at the Treasury rate to save Social Security. The OASI fund at the end of 1997 had just under $600 billion in United States Treasury notes. About 5% of what it needs today. The really sad fact is next year the $11 Trillion grows by 5.8% which is a lot more than the $27 billion OASI surplus revenues in 1997. $27 billion divided among 135 million workers is no much of a savings. Do you think it will be enough to make up for 1.3 fewer workers in the future? I do not think so.

Do not make the mistake that wage growth will save Social Security. The benefit formula uses the average wage in the year you turn 62 as the basis to adjust all previous years wages. Therefore with this number in the numerator and all previous average years wages in the denominator, the replacement factor grows faster than inflation. This makes the future benefit much larger than inflation would make it. Rising average wages make the fund last a bit longer, but the downward slope is much steeper. At some point in time the debt has to be paid. Which Generation is it going to be? The return on a person making $ 4 an hour is 4.68% from Social Security. It drops too almost 1% for the person making the maximum. That is 20% less than the United States is currently paying Social Security. What gives? Can you figure it out?

Raising the age to 70, does little but the make the system a lottery. It kills off 16% of the population between 65 and 70. This means people pay in and not get a thing. The odds of living to 70 are just slightly better than 68%, 50-50 flip a coin.

Subjecting more of the Social Security Benefit to taxation may not work for too much longer. In just 15 years at low inflation, the benefit bing paid to the highest incomes will be basically return on capital, no interest. Therefore, it will be double taxation. I doubt the Supreme Court will allow this to continue. This is going to happen because the OASI rate needed to fund future retirees at the current Treasury rate is just under 4%. A self-employed person pays 10.4%, almost three times more than necessary.

Raising FICA taxes makes the national debt larger. It increases the deficits. The proof is reviewing what has happened since 1975. As the FICA rates were increased in the 70's and 80's in the attempt to save Social Security, the Federal Tax Rates were cut to offset these huge increases. Tax Payers cried for tax relief. Instead of cutting FICA, they gave IRA, 401K, child care, Child tax credits, earned income and other credits and exemptions to average and below average workers. The result was a decrease in Federal Revenue and the beginning of deficits. Social Security has created a $5.5 Trillion national debt. Do you really want to be part of increasing this debt? Table 2 shows the additional Federal Taxes which would have been paid had FICA not "squeezed" out federal revenues. I will now pay no Federal Income Tax on an income that is twice the average wage. The five kids I have not only eliminated my tax liability, but also allows me to take more capital gains without taxation. However, I still pay more over all Federal and FICA taxes, on the same adjusted for inflation income, than my father did between 1950 and 1970. When FICA goes up 1,500% faster than inflation, it is very easy to do. Table 1 shows what the balance in the OASI fund would be had all workers paid the same OASI rate as today.

Then there is the reduction in Corporate Income Taxes. As FICA rates have risen, companies must pay more FICA. This in turn reduces the corporate profits paid by companies. Table 3shows the amount of loss revenue to the United States Treasury simply due to this increase since 1970.

Social Security is like playing hot potato. You do not know who is going to be left holding the spud when it goes off. Will it be this generation of retirees, current workers, future retirees or future workers? Do we really want to have a system that is so far in debt that it would have to tax the American tax payer $11 Trillion this year? If we do not want to do it this year, it only gets worse the longer we wait. The best thing we can do is ELIMINATE SOCIAL SECURITY