The insolvency of Social Security has haunted Washington for years. The death knell of this financial apocalypse is the looming retirement of the so-called ‘Baby Boomer’ generation. When this occurs, retirees will discover that the government squandered their savings long ago.

The program was first ratified by FDR in 1935, along with other misguided Keynesian flops. FDR’s ‘Brain Trust’ – a vast left-wing conspiracy – convinced the president that enormous government spending and economic intervention would restore growth to the American economy. This liberal cadre was oblivious to the wedge that their punitive taxation created in the economy, keeping both Americans and the government poor. Although the Supreme Court courageously overturned much of the radical ‘New Deal,’ it upheld Social Security as an acceptable “promotion of the general welfare” amid unprecedented economic contraction.

Several years later, in 1939, FDR passed the ‘Federal Insurance Contribution Act’ (FICA), which created a special payroll tax of 6.2% on employee and employer income. Currently, the income is capped at $102,000. The ‘Social Security Trust Fund’ was also opened the same year.

LBJ needed money for his ‘Great Society,’ and so began the fatal practice of opening Social Security surplus to general Congressional spending. This conduct – considered criminal mismanagement in the private sector – ensured eventual bankruptcy. He also added Medicare – another trillion dollar disaster – to the payroll tax.

In the 1970s Congress, having gorged itself on the trust fund, generously voted to increase benefits. However, a dismal financial outlook (the decade’s ruinous stagflation stoked uncertainty) compelled President Carter to reform. But like most things of the Carter administration, those fixes spectacularly failed.

In 1983, National Commission on Social Security Reform (chaired by Alan Greenspan) presented a sobering set of recommendations. They urged President Reagan to accelerate increases in the tax schedule, raise the retirement age of full benefits, to make Social Security payments taxable income, and to shield the fund from the general budget.

Now, Social Security pays $610 billion (21% of Federal spending) annually. Many politicians have sank their careers venturing Social Security reform. Amazingly, total reform can be easily achieved without any benefit loss or tax hike. This miraculous solution is privatization – turning Social Security from a system of social insurance to a pension plan. However, the political class has always undermined such efforts, preferring to keep America fearful and dependent on Washington.

After payments to current beneficiaries our financially incontinent Congress spends the FICA surpluses in its general budget, rather than saving it for future beneficiaries. After spending the surplus, the government deposits Treasury bonds in the Social Security Trust Fund, to be repaid later. This creates the illusion of solvency.

Tax receipts currently exceed expenses, so Social Security has been able to absorb such raids. Unfortunately, the further narrowing of the payee/payer ratio will result in a program deficit (expenses exceeding receipts) by 2017. By then, Congress will have expropriated $4.3 trillion from Social Security. To stay solvent, the bonds held in the Social Security Trust Fund must be redeemed. However, Treasury securities are paid from the general budget, meaning Americans will be be taxed again to cover Congress’ failure.

This was the ultimate outcome of Social Security from its inauspicious beginning. As long as it is a system of ’social insurance’ (i.e. pay-as-you-go), a narrowing ratio of payee to payer without prudent surplus investment requires the deceit of bond illusion. These bonds can only be redeemed by 1) raising FICA taxes, 2) cutting government spending, 3) selling government assets, or 4) borrowing money. None of these measures are final, though, and will all necessitate future contingencies.

Without recourse to bond illusion, Social Security is a simple pyramid scheme. In a pyramid scheme, the first round of investors is repaid by the second round of investors, and so on. However, each successive round must contribute more than its predecessor. Without this growth losses occur, the fraud is revealed, and the con man vanishes. In Social Security’s case, the recent generations have not equaled the previous Baby Boomers, signaling the end of the scheme. Of course, the government’s way of fleeing to sunny Mexico is to disguise its failure through the issuance of taxpayer-covered bonds. This way, the mirage of Social Security is preserved.

Privatization is the only true answer to the Social Security crisis. An individual’s FICA taxes would be deposited into a private account, from which the payee would receive an annuity upon retirement. The payee could even control how their account was invested, if at all. By designing Social Security this way (as an IRA or 401(k) plan) long-term solvency would be guaranteed without having to consider any of the measures listed above. Taxes could be kept minimal, government spending maintained, assets retained, and further debt avoided.

Barack Obama – the Pied Piper of 2008 – subscribes to the shortstighted responses dreaded by the American taxpayer. Instead of risking genuine change and permanently preventing Social Security’s collapse, Obama proposes the stale idea of higher taxes to merely postpone – yet perpetuate – the system’s long-term defects. Raising taxes now does nothing to address the chronic insolvency of the system, and ensures that future generations will have to face even greater problems. This is an cowardly and disappointing decision from a politician who has staked his career on an uplifting message of hope, change, and dreams.

Specifically, Obama wants to ‘uncap’ the payroll tax, applying it to all income over $250,000. Remember that Social Security is financed through FICA, which is a payroll tax of 6.2% levied on the first $102,000 of employer and employee income. Incomes over this cap paid a “maximum” tax and received a “maximum” benefit. Even those with incomes vastly exceeding $102,000 are confined to the maximum benefit.

Obama believes that this regressive structure (the tax goes from 6.2% to 0%) is unfair, since wage-earners beneath the cap must pay the tax on their entire salary, while wage-earners above the cap only pay the tax on a percentage of their salary. This is not economic or financial reasoning, but plainly populist pandering.

There was a principled reason for the regressivity. FDR envisioned Social Security to be “a base upon which each one of our citizens may build his individual security through his own individual efforts.” That is, the object of Social Security was not wealth redistribution, but savings. A taxpayer’s benefits were to be somewhat proportional to what he paid in taxes.

Obama’s Social Security proposals sever the link between tax payments and benefits. Households making over $250,000 would face a staggering 12.4% tax increase without any corresponding rise in benefits. Thus, Social Security is transformed from a retirement program to yet another welfare program, courtesy of the richest 3%. In fact, Obama’s payroll tax hike will send the future Social Security “returns” of these wealthy taxpayers to 0% or below. The rookie senator either does not understand the financing basics of Social Security, or has ulterior political motives.

Remember that Congress routinely spends the FICA surplus in its general budget. Any new surplus from the uncapped tax would be eagerly devoured by legislators, who would then issue more Treasury securities to mask their greed. Even if Congress declined to raid the trust fund, Obama’s aptly Orwellian “contribution” would only pay half of the projected shortfall. And even this half is meaningless, because Obama would do nothing to prevent he emergence of future shortfalls. His long-term policy fails to attack the actual disease, and his short-term policy does not even fully treat the symptoms.

Obama ignores the systemic flaws of Social Security, exploiting the crisis to advance his precious agenda of steep progressive taxation and massive income redistribution. His slavish devotion to petty politics of wealth envy and class warfare not only jeopardizes the retirement planning of millions of Americans, but also embarks upon a terrible precedent certain to enervate the spirit of top taxpayers.

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