Social Security and the Private Sector

By Ferrara, Peter J. | National Forum, Spring 1990 | Go to article overview

Social Security and the Private Sector


Ferrara, Peter J., National Forum


Social Security began as a quite modest required investment in public-sector pension and insurance coverage. The maximum annual Social Security tax on both employer and employee combined was just $60 for the first thirteen years of the program, through 1949. In 1958, this maximum tax was still only $189. Even as late as 1965, the maximum tax was only $348.

But this year the maximum annual employer-employee payroll tax for an individual worker is $7,800, and it win continue to grow each year. Why must we require today's workers to rely so heavily for their retirement and insurance needs on Social Security?

Of aU government activities, Social Security, defined broadly as our entire social insurance system, including Medicare, in fact has the most broadly recognized and widely utilized private-sector alternatives. Pensions, IRAS, 401(k)plans, Keoughs, etc. perform in the private sector the same basic function as Social Security retirement benefits. Private life insurance performs the same function as Social Security survivors' benefits for workers under age 65. Private disability insurance plays the same role as Social Security disability insurance. Private health insurance performs the same service as Medicare. These private alternatives are not imaginative theories or speculation. They are major American industries which serve the public wen. Why can't workers be allowed the freedom to choose among these private-sector alternatives as substitutes for at least some of their Social Security coverage if they prefer?

Requiring today's workers to rely so heavily on Social Security rather than allowing them the freedom to choose from the broad spectrum of private alternatives is, in my view, the foremost restriction on economic freedom in American life today.

Such heavily mandated reliance on the program usurps a large part of the role of the private alternatives, replacing them to that extent with a socialized government monopoly. This in turn adds up to an enormous load of federal spending. Social Security, including Medicare, already accounts for over half of federal domestic spending, and almost one-third of total federal outlays. Adding national defense and debt interest in with Social Security accounts for about seventy percent of total federal spending. Social Security has grown far beyond what would be seen as a proper role for government if we were designing a new system today.

The heavily mandated reliance on Social Security makes even less sense today because the program is outdated for today's young workers and will not serve them well.

The biggest problem for today's young workers is that the payroll taxes have now climbed so high that even if Social Security pays all benefits currently offered to these workers, they will still be receiving low, below-market returns (or effective interest rates) on taxes paid into the system over the years, close to zero or even below zero in real terms for many workers. This has been documented in recent studies for the National Chamber Foundation, the Cato Institute, and the National Center for Policy Analysis. Today's young workers can now receive higher returns and benefits through the private alternatives.

This can be seen by again contrasting the taxes paid by today's young workers with those paid by today's elderly. Those retired today paid, at most, $60 in 1949, $189 in 1958, and $348 in 1965. Consequently, their benefits today represent a high return on these past tax payments.

But take a worker entering the work force today paying close to 8,000 and more each and every year for his entire career. Even if such a worker receives all his promised Social Security benefits, he win still be receiving a bad deal under the program in return for these high annual tax payments.

What sense can it possibly make to require today's young workers to rely so heavily on Social Security in the face of the low returns offered to them by the program today? …

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