Compare and Contrast

November 27, 2002

In a new column, Scott Burns of the UPI syndicate explains that "Social Security return can't match private investment."

The Great Depression was a financial crisis, Burns says, and "The solution was Social Security... Put a small tax on all workers. Use it to provide a basic income for all retirees. So from 1937 through 1949, the combined employer/employee tax of 2 percent of the first $3,000 of wages cost each worker $30. It also cost his employer $30."

"[T]he benefits were amazing," Burns says. "For workers born in 1880 and retiring in 1945, the 'return' was about 32 percent."

"Unfortunately, it didn't stay that way... Today, the employment tax, which includes Medicare as well as retirement benefits, takes 15.3 percent of the first $84,900 in wages."

"As the tax rate has risen, the 'return' from Social Security has declined. For the retirees of 1955, the 'return' was just over 15 percent. By 1965 it was under 10 percent. By 1995 it was under 3 percent. And by 2005 it is expected to be less than 2 percent. We are entering a period in which actual returns in the private economy are better than 'virtual' returns of Social Security."

"By one set of calculations, the net value of all payments peaked in 1981. It declined sharply for retirees of 1985 and continued to decline. Those who retire in 2005 will be the first Social Security retirees who will have paid in slightly more than they are likely to receive in benefits. If you were born after 1960, the prognosis is worse: You will lose an amount similar to the amounts gained by the first 50 years of Social Security retirees."

Assuming an expected 17.6 years of life after retirement, what "would take 31 percent of income ... would take only 12 percent of income to do the same with private earnings."

Burns concludes that real market returns are the only solution to Social Security's deficiencies. "Invested for real (instead of virtual) returns, our employment tax dollars might earn enough to keep up with our increasing life expectancy."

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