Many years ago, before I entered the workforce, I understood that Social Security is not a retirement program. It is a tax, whose proceeds are used to pay retirement and other benefits. The difference is subtle but important.
In a real retirement plan, the money collected from you and/or your employer is invested over time. In a defined-benefit plan, there is a commitment to pay you in the future at a specified rate. In a defined-contribution retirement plan, the money is held in your name and invested. But in either case, the money is invested in a productive enterprise, so that it will grow, and the amount paid in at the beginning is driven by the amount to be collected at the end.
Under Social Security, the money that you and your employer pay is lent to the rest of the government and spent. The money that you ultimately receive in benefits is paid by current workers. The vaunted ‘trust fund’ is an accounting fiction. And the politicians who vote for new goodies can just as easily vote to take them away.
I didn’t know about defined-benefit and defined-contribution plans in 1979, when I was finishing high school. But the rest of it, I knew back then.
And it wasn’t a deep dark secret: I read about it in books from the library and bookstores.
The government wants us to believe that Social Security is a pension plan. They even send out statements every year with the benefits that we might receive, if the politicians don’t change their minds. But it isn’t so.
Now, I’m roughly halfway through my working life. With the recent discussions over the Social Security tax, it’s really clear that it’s fake. (The employee share of Social Security tax was cut by a third a couple of years ago, as a temporary measure. The cut was continued after raucous debate, as it was the only tax cut that reached the majority of ordinary Americans. A real pension plan, driven by the need to pay people in the future, would never do that.)
Yet people still believe that Social Security represents a commitment for their retirement.
Now that I’m halfway through my working life, I would have liked to believe that Social Security would be there for me.
But now I’m sure that I will ultimately retire in a coffin.