If the point of Social Security is to take money from the poor to give to the rich, it’s working.
As the young pay Social Security taxes, the old collect benefit payments and live in relatively low poverty. The poverty rate for those aged 18 to 64 is 13.6 percent, nearly 50 percent higher than the 9.5 percent rate for those over age 65, according to the Census Bureau. Those aged 65 to 74 live in even lower poverty at 8.3 percent. Americans 75 and older are still less impoverished than working-age Americans at 11.2 percent.
The average federal tax rate paid by elderly households is 13 percent, according to the Congressional Budget Office. For the lowest fifth of income earners, elderly households pay an average rate of 1.6 percent. Meanwhile, non-elderly childless households pay an average effective federal tax rate of 20 percent, with the bottom fifth paying 7.7 percent. Non-elderly households with children pay lower average tax rates due to child tax credits, deductions and exemptions.
The elderly typically have lower incomes than some working age groups, but they have had decades and decades to build up savings and financial assets to live off of. The young, who finance Social Security, lack that advantage.
One major issue with Social Security is the way it’s funded. Workers pay Social Security taxes that go into a Social Security Trust Fund, and the money in that Trust Fund is disbursed to the elderly. This often leads people to say they paid into the system and deserve full benefits. However, just because Social Security taxes are paid into the system does not mean that retirees receive the same amount they paid in. Benefits are calculated according to income levels, but current workers fund Social Security payments for current retirees, not their own retirement in the distant future. The money that current retirees paid into the system was spent years ago because the program was flawed from its creation.
With Social Security set to become insolvent in 2034, it is clear the system needs reform.
Ideally, an individual’s Social Security tax payments could be placed into some kind of personal account that could be invested as the individual desires. This would be particularly beneficial for younger workers. Short-term economic fluctuations, such as recessions, become largely irrelevant over the course of 40 to 50 years of working, investing, and saving. It would also mean that when workers pass away before retirement age, their Social Security contributions would not be all in vain. Their nest egg could be passed on to a spouse or their descendants.
Alternatively, government could abandon the pretense that Social Security is an insurance program and admit that its pay-as-you-go financing makes it more similar to a welfare program. Although Social Security and Medicare taxes get their own lines on paystubs, other federal programs that Americans frequently benefit from do not, such as national defense or transportation.
To be fair, today’s young workers will live most of their lives in a better world than the elderly have. Life expectancies should continue improving, as should technology and the economy. But this is rarely, if ever, used as a justification for the way Social Security is financed, nor does it make the system sustainable.
Social Security isn’t working for today’s most-impoverished generations. It’s time to stop robbing poor workers and instead empower their Social Security taxes to work for them.
