The Coming Financial Collapse of Social Security; P. Ferrara

Consequently, by the end of the year, Congress and President Carter dramatically increased Social Security taxes and trimmed benefits. Payroll tax rates increased repeat edly through 1990,for a total increase of 30 percent. Moreover, the maximum income to which this tax rate applied was increased sharply from $16,500 at the time, and in dexed to increase every year thereafter. Today this maximum taxable income is $57,600. The American people were assured over and over by President Carter, the Social Security Administration, and the rest of the Washington political establishment that these changes guaranteed the financial soundness of Social Security' 'for the rest of this century and well into the next one." 1 But by 1980 Social Security was already in deep financial trouble again. The governMr. Ferrara is afel/ow at the Heritage Founda tion. He is the author of Social Security: Pros pects for Real Reform (Cato, 1985).

ment's annual financial report for the pro gram showed that without a change in the law, the program might not be able to pay its promised benefits as early as 1981.2 To address this second financial crisis, a bipartisan commission headed by Alan Greenspan developed a package of tax in creases and benefit cuts enacted early in 1983. The truth is that if the economy had continued to perform as it had in the 1970s, with high inflation and periodic sharp reces sions, the system would have collapsed again within four years. But price inflation was sharply reduced in the 1980s, and the economy continued to grow for about eight years after 1982 without a recession, and then slid into a relatively shallow slump. Consequently, another quick collapse was avoided. But Social Security's long-term financial problems are another question. A key strat egy of the Greenspan Commission was to develop a large surplus in the Social Secu rity trust funds from 1990 to about 2010, to be used to help finance the retirement of the huge baby boom generation starting after 2010. However, the latest government pro jections show the expected surplus shrink ing into relative insignificance. Moreover, the so-called Social Security trust funds in any event are not a store of financial re438 serves that can assure the future ability of the program to pay its promised benefits.

Repeated financial crises are an inherent feature of the Social Security system. The Social Security trust funds are essentially a sham that cannot assure future financial security. Today's young workers will never receive the benefits currently promised to them by the program. An Inherent Problem Most people seem to imagine that Social Security operates like a traditional fully funded retirement program. In such a sys tem, the tax payments of current workers are saved and invested to finance their own future benefits. As a result, a huge financial reserve is built up sufficient to finance ac crued benefits at any point in time. This reserve is used to finance benefits during retirement years, while current workers at that time will be building up their own re serves to finance their own future retirement. Social Security, by contrast, fundamen tally operates on a pay-as-you-go basis. The tax payments of current taxpayers are not saved and invested to finance their own future benefits. Rather, most current tax payments are immediately paid out to fi nance the benefits for current retirees. Fu ture benefits for present taxpayers are to be paid out of the future tax payments of future workers when today's taxpayers are in re tirement. Consequently, large cash reserves to finance benefits are never developed in such a system.

Such a pay-as-you-go system is quite vulnerable to any adverse development that may upset the delicate balance between expected future taxes and expected bene fits. If unemployment rises, revenues from the payroll tax willfall from expected levels. Ifprice inflation accelerates, indexed benefit payments willincrease faster than expected. If retirees live longer than expected, benefit expenditures will again grow faster than projected. If the birth rate drops, fewer workers will be available to pay promised benefits in the future that are already paid for and relied on by current workers. These 439 and many other possible developments can quickly tip a pay-as-you-go system into financial crisis, leaving it without sufficient funds to pay promised benefits. None of this is a concern in the first generation under a pay-as-you-go system. When such a system is begun, a full gener ation of taxpayers begins to pay taxes, but there are no beneficiaries entitled to benefits based on past tax payments. In a fully funded system, these initial tax payments would have to be saved and invested to finance the future benefits of current work ers. But, of course, these initial tax pay ments are not saved and invested under a pay-as-you-go system. Consequently, in the start-up phase of such a system, there is no concern over bankruptcy, or the inability of the program to pay promised benefits. To the contrary, the system is awash in un claimed funds, and the only issue is how much to payout in virtually free windfall benefits to early retirees. Since the first retirees pay little or nothing for their bene fits, it is easy to pay them only what can be comfortably paid out of the initial incoming revenues. The beneficiaries will be grateful for the windfall benefits they receive.

After the first generation under such a system, however, this situation completely reverses. The retiring generation will then have paid taxes for an entire lifetime and will have built up enormous benefit claims. At this point, there are no more unclaimed surpluses and no more free benefits to pass out. The issue instead becomes whether taxes from current workers will be sufficient to finance promised benefits. If not, then Congress must raise taxes or cut benefits, in stark contrast to the vote-buying spending sprees of the first generation. During its first 40 years, Social Security was in its start-up phase, and short-term financial solvency was not an issue. Instead, free windfall benefits were paid out to retirees. But by the mid-1970s, sufficient benefit obligations had accrued to make financing a problem. Adverse economic developments soon developed to tip the system into finan cial failure. Inflation soared in the 1970s, 440 THE FREEMAN • NOVEMBER 1993 sharply increasing benefit payments in dexed to inflation. At the same time, peri odic sharp recessions caused unemploy ment to rise and wage growth to fall, sharply reducing expected revenues. The combina tion of these economic difficulties caused the first two financial crises of the system described above. The primary cause of the third wave of financial collapse of Social Security, however, will be demographic, as discussed further below.

The Trust Fund Fraud Even if Social Security attempted to de part from the principle of pure pay-as you-go financing and developed a substan tial trust fund reserve, future benefits would not be any more assured because of the essentially fraudulent nature of the Social Security trust fund system. Any remaining Social Security revenues after benefits are paid are lent to the federal government in return for new, specially issued government bonds which are held by the Social Security trust funds. The federal government then spends the borrowed Social Security reve nues on other programs. The Social Security trust funds hold no assets other than these government bonds. When Social Security revenues are insuf ficient to finance current benefits, the gov ernment bonds held by the trust funds are to be turned into the federal government for the cash needed to finance the benefits. But the government holds no cash or other assets to back up the Social Security bonds.

The trust fund assets are claims against the federal government, government IODs which will have to be financed out of in creased federal taxes or increased federal borrowing. In other words, the trust funds are part of the national debt which must be paid when Social Security needs the money. As a practical matter, these Social Secu rity trust funds are nothing more than a statement of the amount that Social Security is legally authorized to draw from general federal revenues in the future, in addition to payroll tax revenues. Therefore, if the So cial Security trust funds hold $1 trillion at some point, that statement even if true, would not mean that the Social Security system is financially sound. Quite to the contrary, it would mean that Social Security .would have an additional $1 trillion claim against the taxpayers, in addition to the claim against them for payroll taxes. Because the Social Security trust funds do not hold any real assets, just a claim against future tax revenues, a growing trust fund by itself does not mean that paying for the retirement of future generations will be any easier economically. It just means that more of this burden will be met out of income taxes and federal borrowing rather than payroll taxes.

The inherent financial problems of Social Security could be successfully addressed if the system were changed so that it accumu lates reserves in a fully funded system and those reserves are invested in productive assets in the private sector. But that would require the government to own so much of the private sector through the Social Secu rity trust funds that it would fundamentally change our entire economic system in an unacceptable way. Consequently, financial problems of Social Security can be solved only by shiftirig to a private system of decentralized investment accounts con trolled by workers individually or through voluntarily organized groups. The Looming Retirement of the Baby Boom Generation As indicated above, the primary cause of the next foreseeable financial crash of Social Security is a destabilizing demographic problem. The huge baby boom generation is now entering middle age. Around 2010, this huge generation will start to retire, causing Social Security benefit expenditures to rise.

This generation will continue to have a major effect on Social Security spending for the following 40 years. But something has happened to make matters worse. Starting in the early 1960s, after the development of the birth control pill, birth rates in the United States declined precipitously. With the legalization of aborTHE COMING FINANCIAL COLLAPSE OF SOCIAL SECURITY 441 tion in the 1970s,the fertility rate, or lifetime births per woman, fell below 2.0 in the early 1970s. It continued to decline to a low of about 1.7 per woman, eventually stabilizing at these low levels until the end of the 1980s. As a result, the baby boom was followed by a baby bust. This means that at the same time the huge baby boom generation will be retiring, causing benefit expenditures to soar, the generation of workers that is sup posed to finance their retirement payments out of current taxes will be relatively small.

The devastating impact of this demo graphic double whammy on Social Security is shown by the Social Security Adminis tration's own long-range financial projec tions. We can examine these projections under the most widely cited intermediate set of assumptions. Table 1(on the following page) shows the results under these projec tions if we combine all three trust funds financed by the payroll tax-the Old-Age and Survivors Insurance trust fund (OASI), the Disability Insurance trust fund (DI), and the Hospital Insurance trust fund (HI). These three trust funds together are referred to as the OASDHI trust funds. With the huge baby boom generation entering its peak-earning middle-age years, and paying Social Security taxes on its earnings, the program should be doing quite well financially right now. Indeed, as indi cated previously, the government's plan is for Social Security to depart somewhat from its usual pay-as-you-go policy during this period and accumulate some substantial trust fund "reserves" to help finance the retirement of the boomer generation.

But Table 1 shows that under the' 'inter mediate" assumptions, tax revenues for all three trust funds combi~ed start to fall short of benefit promises in 2005, only twelve years from now. The federal government must cover these deficits by raising taxes, cutting other spending, or increasing the total federal deficit and federal borrowing. Besides tax revenues, the Social Security trust funds receive imputed interest income on their trust fund bonds. But since the federal government must pay the interest on the bonds, which it does by issuing addi tional bonds to Social Security in the amount of such interest, that interest does not help the government pay its promised Social Security benefits. To finance these benefits, the federal government must come up with the full amount of cash needed to close the deficit between Social Security taxes and Social Security expenditures. Ef fectively, the Social Security trust funds must begin redeeming some of their bonds for cash to cover these deficits, though counting the additional bonds received for interest each year the total trust fund assets may continue growing for a few more years.

As shown in Table 1, this annual Social Security deficit grows to almost $40 billion per year in constant 1993dollars by 2010. By 2015,this annual deficitgrows to $120billion in 1993dollars. By 2020,the annual deficit is an incredible $226.5 billion in 1993 dollars. The federal government again must either raise taxes, cut other spending, or increase the total federal deficit and federal borrow ing by these amounts in order to pay all promised Social Security benefits, even be fore the Social Security trust funds are exhausted. The financial impact of the long term Social Security financing crisis will start to hit less than a dozen years from now. But that is not all. The federal government finances about 75 percent of Medicare Part B, also called Supplementary Medical In surance (SMI), out of general revenues rather than payroll taxes. SMI pays doctors' bills and other health expenses, while Medi care Part A, or Hospital Insurance (HI), which is financed entirely by payroll taxes, provides coverage for hospitalization.

Table 1 also shows the projected amount of this general revenue contribution for 8MI each year. The federal government must come up with these funds each year as well through either federal taxes, reductions in other spending, or increased government borrowing. The general revenue contribution this fis cal year for SMI is about $48 billion. But Table 1 shows that by 2005 this will almost double to about $91 billion in constant 1993 dollars. By 2010 the general revenue con442 THE FREEMAN • NOVEMBER 1993 Table 1 General RevenuesNeeded for Social Security and MedicareBefore CombinedTrust Funds Are Exhausted IntermediateAssumptions Annual Deficits Between Tax Revenues and Expenditures for All Social Security Trust Funds Combined (OASDHI) Constant 1993 Dollars (Billions) Annual General Revenue Total General Revenues Subsidies for Medicare Required for Social Part B Security and Medicare Constant 1993 Dollars Constant 1993 Dollars (Billions) (Billions) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2.5 6.6 12.1 19.4 28.9 38.7 50.4 65.5 82.6 100.2 121.7 139.8 159.6 180.8 90.6 95.8 100.3 104.6 108.7 112.3 119.3 125.7 131.7 137.2 142.2 149.5 156.2 162.3 93.1 102.4 112.4 124.0 137.6 151.0 169.7 191.2 214.3 237.4 263.9 289.3 315.8 343.1 Source:Calculatedfrom 1992AnnualReportoftheBoardofTrusteesoftheFederalOld-AgeandSurvivorsInsuranceandDisability InsuranceTrustFund (April3, 1992);1992AnnualReportofthe BoardofTrusteesofthe FederalSupplementaryMedicalInsurance Trust Fund (April 3, 1992).

tribution for SMI will grow to about $112 billion. Counting the $39 billion deficit in Social Security, this adds up to a total general revenue burden on the Federal gov ernment that year to finance all promised Social Security and Medicare benefits of about $150 billion in 1993 dollars. This is again before the Social Security trust funds are even exhausted. By 2015, this general revenue require ment to pay promised benefits grows to $263.9 billion in constant 1993 dollars. Pay ing all promised benefits in that year for Social Security and Medicare alone would consequently create a total federal deficit almost as large as today's federal deficit, unless taxes are raised or other spending cut. By 2018, the general revenue drain to pay all promised benefits would grow to $343.1 billion in 1993 dollars. Counting the imputed interest on the gov ernment bonds held by the Social Security trust funds, all three trust funds combined actually hit their peak in nominal dollars in 2011, as shown in Table 2. In constant 1993 dollars, the combined trust fund assets in 2011 would total about $915billion. Yet, this is only 75 percent more than current Social Security trust fund assets, which will total about $525 billion for all four trust funds combined this year. Moreover, as also shown in Table 2, the projected trust fund assets in 2011 would only be sufficient by themselves to cover about one year and four months of projected Social Security expen ditures. Yet, the current Social Security trust assets of $525 billion are sufficient to cover about one year and four months of projected benefit expenditures as well.

Therefore, relative to the size of Social Security and the general economy, the total trust fund assets at their nominal peak in 2011 will not be significantly larger than today. Indeed, the largest the trust funds ever grow relative to expenditures under these projections is only one year and nine months worth of expenditures in 2005. Consequently, the government seems to THE COMING FINANCIAL COLLAPSE OF SOCIAL SECURITY 443 *Assumes continued revenue from Taxation of Social Security benefits and trust any remaining funds needed to pay benefits are raised by insuring payroll tax rates. Source: Calculated from 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (April 3, 1992). Table 3 Total Social Security Tax Rates Needed to Finance All Promised Benefits After Trust Funds are Exhausted* (Current Rate is 15.3%) Intermediate Assumptions deteriorate further, making the specter of the financial collapse of Social Security even more immediate.

After 2011, the projected Social Security trust funds decline, as the deficit between taxes and expenditures begins to exceed the annual interest on trust fund bonds paid by the issuance of new bonds. The federal government must continue to raise funds to cover the entire deficit between taxes and expenditures during this period, in the amounts shown in Table 1, effectively re deeming trust fund bonds equal to the entire deficit amount each year. The total combined trust funds would be exhausted under these projections by 2019. Paying all promised Social Security benefits after that time would require huge payroll tax increases sufficient to close the deficit between taxes and expenditures in the sys tem each year. The necessary tax increases are shown in Table 3. Paying all benefits promised to young workers entering the work force today would require a total Social Security payroll tax rate of about 27 percent, compared to 15.3 percent today. In other words, projected revenues, even un der the intermediate assumptions, would be Table 2 Projected Reserves for All Social Security Trust Funds Combined Intermediate Assumptions As a Percent Constant of Annual Nominal 1993 Social Security Dollars Dollars Expenditures (Billions) (Billions) (OASDHI) 1993 524.3 524.3 1330/0 1994 596.1 575.3 1420/0 1995 670.1 622.5 149% 1996 746.7 667.0 155% 1997 825.6 709.2 160% 1998 907.6 749.5 165% 1999 992.1 787.5 169% 2000 1079.0 823.8 172% 2001 1169.1 858.4 174% 2002 1259.8 887.2 175% 2003 1350.4 913.9 176% 2004 1440.9 938.4 176% 2005 1531.9 961.3 177% 2006 1616.3 972.3 172% 2007 1690.8 976.6 168% 2008 1754.5 974.4 162% 2009 1807.0 966.6 157% 2010 1847.6 953.0 151% 2011 1850.2 914.8 139% 2012 1810.6 859.6 125% 2013 1726.2 788.1 110% 2014 1594.3 701.0 95% 2015 1411.9 598.6 79% 2016 1143.6 464.7 59% 2017 785.3 306.4 37% 2018 232.2 87.1 10% 2019* *Total trust funds combined are exhausted in 2019.

Source: Calculated from 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (April 3, 1992); 1992 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (April 3, 1992). be failing to accumulate substantially larger Social Security trust funds. In fact, every year the projected growth in Social Security trust fund accumulations is getting smaller and smaller. What was cited as the incred ible projected Social Security trust fund surplus a few years ago is now an incredible shrinking Social Security trust fund surplus. Within a few more years, we can expect the projected Social Security trust funds to 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 20.25% 22.61% 24.470/0 25.45% 25.82% 26.02% 26.38% 27.04% 27.860/0 28.600/0 29.170/0 444 THE FREEMAN • NOVEMBER 1993 sufficient to cover only about half of prom ised benefits.

So far we have only discussed the' 'inter mediate" projections. We must examine as well the projections under the so-called "pessimistic" assumptions. These assump tions are actually quite plausible. The "in termediate" assumptions assume regular price inflation of 4 percent per year, after a period of ups and downs, while the "pessi mistic" assumptions assume regular price inflation of 5 percent per year. The interme diate assumptions similarly assume regular unemployment of 6 percent per year, while the pessimistic assumptions assume unem ployment of 7 percent per year. A critical assumption for projected payroll tax reve nues is the rate of growth of real wages. The intermediate assumptions assume real wage growth of 1.1 percent per year, while the pessimistic assumptions assume real wage growth of 0.6 percent per year. Actual expe rience in recent decades has been roughly halfway between these two assumptions.

Another critical assumption for future revenue is the fertility rate or rate of lifetime births per woman. The intermediate as sumptions assume an ultimate regular rate of 1.9 while the pessimistic assumptions assume a regular rate of 1.6. Actual expe rience over the last 20 years has again been generally between these two rates, with experience in most other Western industri alized countries even lower. Still another major assumption is life ex pectancy in retirement. The intermediate assumptions assume life expectancy at age 65 grows about 20 percent over the next 75 years. The pessimistic assumptions assume that such life expectancy grows 40 percent for males and 32 percent for females over this period. No one can know for sure, but given the potential developments in high technology medical care and other advances over the next 75 years, the pessimistic as sumptions certainly seem quite plausible and may even underestimate the real possibilities.

Indeed, from 1940to 1990, lifeexpectancy at age 65 grew about the same rate for males as assumed in the pessimistic assumptions and at an even faster rate for females. Under these quite plausible "pessimis tic" assumptions, tax revenues for all these trust funds combined start to fall short of benefits in 1996, only three years from now, as shown in Table 4. In that year, the federal government would have to come up with an additional $16.1 billion in 1993 dollars to pay promised benefits. The shortfall grows to $45.9 billionin 2000, and $100 billionin 2006, again in 1993 dollars. Table 4 also shows that the annual general revenue contribution for SMI would grow to $77.6 billion in 1993 dollars by 2000. Count ing the $45.9 billion Social Security deficit in that year, the total general revenue burden on the federal government to finance all promised Social Security benefits is $123.5 billion in today's dollars. By 2006, just over a decade from now, this total general reve nue requirement grows to $205.3 billion, again even before the trust funds are ex hausted.

All three Social Security trust funds com bined actually hit their peak in nominal dollars under these projections in 1999, as shown in Table 5. In constant 1993 dollars, the combined trust funds would total $527.6 billion in 1999, about the same as today. Indeed, the projected total 1999 trust fund assets would be sufficientto cover just over one year of benefit expenditures by them selves, compared to one year and four months for the current trust funds. Conse quently, under these projections, the ex pected Social Security trust fund buildup to help fund the retirement of the baby boom generation never occurs. The combined trust funds under these projections would be exhausted in 2007 just 14 years from now. Paying all Social Security benefits in 2010 would require an increase in the total Social Security payroll tax rate of about one-third, to about 20 percent from the present 15.3 percent, as shown in Table 6. By 2020, the total Social Security payroll tax rate would have to almost double to about 27 percent. In other words, total Social Security revenues by that date just 17 years from now would only be sufficient to pay about half of all Social Security benefits. In later years, paying all THE COMING FINANCIAL COLLAPSE OF SOCIAL SECURITY 445 Table 4 General Revenues Needed for Social Security and Medicare Before Combined Trust Funds Are Exhausted, "Pessimistic" Assumptions Annual Deficits Between Tax Revenues and Expenditures for all Social Security Trust Funds Combined (OASDHI) Constant 1993 Dollars (Billions) Annual General Revenue Total General Revenues Subsidies for Medicare Required for Social Part 0 Security and Medicare Constant 1993 Dollars Constant 1993 Dollars (Billions) (Billions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 16.1 20.9 27.6 36.5 45.9 54.7 62.8 71.1 80.4 89.8 100.0 61.3 64.5 68.7 73.0 77.6 82.1 85.8 90.5 95.2 100.6 105.3 77.4 85.4 96.3 109.5 123.5 136.8 148.6 161.6 175.6 190.4 205.3 Source:Calculatedfrom 1992AnnualReportofthe Boardof Trusteesofthe FederalOld-Ageand SurvivorsInsuranceand Disability InsuranceTrust Fund (April3, 1992);1992AnnualReportof the Boardof Trusteesofthe FederalSupplementaryMedicalInsurance Trust Fund (April 3, 1992).

benefits promised to young workers enter ing the work force today would require a total Social Security payroll tax rate of over 40 percent, an increase of almost three times the current rate of 15.3 percent. In other words, projected Social Security revenues Table 5 Projected Reserves for All Social Security Trust Funds Combined "Pessimistic" Assumptions 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007* Nominal Dollars (Billions) 513.1 574.6 629.9 664.9 694.8 715.7 722.9 713.3 684.8 631.5 551.9 444.7 308.4 121.6 Constant 1993 Dollars (Billions) 513.1 540.0 557.7 561.7 559.0 548.4 527.6 495.7 453.3 396.6 329.8 253.4 167.4 62.8 As a Percent of Annual Social Security Expenditures (OASDHI) 128.0% 131.0% 131.0% 127.0% 123.0% 116.0% 109.0% 99.0% 88.0% 74.0% 60.0% 45.0% 29.0% 10.5% *Total Trust Funds combined are exhausted in 2007. Source:Calculatedfrom 1992AnnualReportofthe BoardofTrusteesofthe FederalOld-Ageand SurvivorsInsuranceand Disability InsuranceTrust Fund (April 3, 1992); 1992 Annual Reportof the Board of Trusteesof the Federal Hospital InsuranceTrust Fund (April 3, 1992).

446 THE FREEMAN • NOVEMBER 1993 *Assumes continued revenue from Taxation of Social Security benefits and trust any remaining funds needed to pay benefits are raised by insuring payroll tax rates. Source: Calculated from 1992 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Fund (April 3, 1992). Table 6 Total Social Security Tax Rates Needed to Finance All Promised Benefits After Trust Funds Are Exhausted* (Current Rate Is 15.30/0) "Pessimistic" Assumptions under these assumptions would be sufficient to cover only about one third of promised benefits. But even this is not the worst plausible scenario. Economic performance in the 1990s could be like the 1970s, with unem ployment rising and real wages falling be hind rapidly rising inflation. At the same time, high-tech medical breakthroughs could rapidly advance old-age life expect ancy beyond even the "pessimistic" as sumptions, while fertility rates could fall to Western European levels at or below the pessimistic assumptions. Some or all of these quite possible developments would create even more gaping deficits, and re quire even more draconian tax increases to pay promised benefits.

But tax increases approaching two to three times current levels could never be adopted. Indeed, the current payroll tax is already far too high, seriously hampering economic growth and limiting job opportu nities for today's workers. The payroll tax is basically a tax on employment. To the extent it is borne by employers, it discour2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 19.78% 22.97% 26.97% 31.49% 35.52% 38.38% 40.08% 41.21% 42.54% 42.28% 46.33% 48.18% 49.90% ages them from hiring. To the extent it is borne by workers, it discourages them on the margin from working as much as oth~r wise. The overall result is fewer jobs, less work, and slower economic growth. Here, as elsewhere, the result of taxing something, in this case employment, is that there is less of it. Indeed, one study estimated that just the payroll tax rate increases that went into effect in 1988 and 1990, raising the total payroll tax rate from 14.3 percent to 15.3 percent, ultimately eliminated one million jobs and reduced GNP by $25 billion per year. 3 In a society supposedly deeply con cerned about employment opportunities, the tax burden the government places on employment is absurd. The debate should be over payroll tax cuts, not increases. In any event, increases of the magnitude nec essary to pay promised Social Security ben efits in the future are clearly economically and politically infeasible.

As a result, today's workers will never receive the benefits currently promised to them by Social Security, even though they are paying thousands of dollars each year for such promised benefits, and will do so for their entire careers. Conclusion The long term financial crisis of Social Security is not the only problem justifying the abolition of the system. The program's payroll taxes are now so high that even if all the promised benefits are somehow paid, these benefits would still represent low, below-market returns, on the thousands of dollars today's young workers must pay into the system each year for their entire careers. For most young workers the benefits would represent a real rate of return of around 1 percent or less, and to many the return would be close to zero, or even below zero. These workers could now receive much higher returns and benefits investing through the private sector. Average-income workers could accumulate over half a mil lion dollars in today's terms by retirement, and more than a million for two-earner THE COMING FINANCIAL COLLAPSE OF SOCIAL SECURITY 447 average-income families, for the same sums now paid into Social Security. This makes the inevitable inability of Social Security to pay even the currently promised inadequate benefits all the more troubling.

The Social Security benefit structure is also rife with inequities, paying some work ers much less in returns on their tax dollars than others. Indeed, many workers are forced to pay for benefits under Social Security that they can never even qualify for or receive. Most fundamentally, Social Se curity deprives workers of the freedom to control the large sums they are now paying into the system each year. The long-term financial problems of Social Security should not be allowed to obscure these many other critical problems. Social Security's financial problems, as well as the other problems discussed above, can ultimately be solved only by shifting to a fully funded system of private savings and investment. Such a system would avoid the inherent vulnerability of pay-as-you-go fi nancing and accumulate a vast reserve of economically productive private sector as sets to back up benefits. Through such a system, young workers could also obtain the much higher returns and benefits now available to them through the private market, in the process accumulating large family nest eggs in their retirement accounts. Workers would also have control and freedom of choice over the large sums they would pay into and accumulate in such a system. The same market returns would be available to everyone, and workers could tailor their benefit packages to suit their personal needs and preferences. They would never ~ave to pay for benefits they did not need or could not even qualify for.

Such private systems have been adopted in recent years in Chile and, in part, in Great Britain, and have been broadly popular in both countries. There is no reason why such a system could not be adopted in the United States as well. D 1. This statement was quoted over and over again from the 1978 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (Washington, D.C.: U.S. Government Printing Office, May 15, 1977), p. 3. 2. 1980 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability In surance Trust Fund (Washington, D.C.: U.S. Government Printing Office, June 17, 1980). 3. Aldona and Gary Robbins, Effects of the 1988 and 1990 Social Security Tax Increases, Institute for Research on the Economics of Taxation, Economic Report #39, February 3, 1988. Politicized Medicine The right to health care services and benefits, which so many are proclaiming today, is merely the right to seize income and wealth from other individuals through the body politic. The essays in PoliticizedMedicineprovide the reader with a thorough understanding of why fur ther government intervention into health care will make matters worse.

Essays include: "The Economics of Medical Care," "Free Medicine Can Make You Sick," "Why I Left England," "Socialized Medicine: The Canadian Experience," and "National Health Care: Medicine in Germany, 1918-1945." 175 pages, $14.95 paperback (Please add $3.,00 for shipping and handling.) THEFREEMAN IDEASON LIBERTY THE POLITICS OF THE "FAIR SHARE" by Gary North D aniel Patrick Moynihan, U.S. Senator from New York and former Harvard professor, has told the press not to blame Congress for spending too much money, since "we can't do anything about it." Don't blame those who are leading the nation into a debt disaster? Don't blame them because they cannot stop them selves? Senator Moynihan may have been indulging in verbal playfulness-enhancing his reputation for being a kind of mischie vous Irish leprechaun. What he is saying, however, is that those who pass the legis lation should not be held politically account able. Because the voters continue to return these people to office, it appears that the voters agree. Worse, it appears that the voters want more of the same. They may say that they want Congress to stop spend ing in general, but they are not willing to say that Congress should stop specifically.