Tuesday, December 23, 2008

Social Security: a Sacrifice That Shouldn't Be Made

President-elect Barack Obama, upon taking office, will focus on reviving the economy. A massive $850 billion plus stimulus package appears likely. While the nation’s immediate problems are undeniably important, he must bear in mind the long term: specifically, Social Security.

America’s retirement systems are largely evaporating. The defined benefit pension plan will soon be less well known than the Brontosaurus. Many employers are putting a halt to employer matches to 401(k) plans; and many employees can’t get those matches anyway because they can no longer afford to contribute to their 401(k) accounts. Many are borrowing from their accounts or making early (and heavily taxed) withdrawals in order to make ends meet. The IRA account has become largely irrelevant, since it has so many limitations that only moderate or low income earners can obtain its full tax benefits—and they haven’t got the extra income to contribute. Besides, with stocks and corporate bonds both down, there isn’t much for 401(k) plans or IRAs to invest in.

Meanwhile, the Federal Reserve and the Internal Revenue Code both pummel savers. The Fed keeps interest rates low and the tax laws treat interest and interest-like dividends paid by money market funds as ordinary income, making sure that the thrifty and prudent are duly punished for their lack of recklessness. What incentive do you have to save for retirement?

Of course, you could always invest. But, in what? Real estate could have recently lost over 50% of your investment in some markets. Stocks could have recently lost you over 40% in virtually all markets. Your fate as an investor is in the hands of rich and powerful people on Wall Street, who seem to prefer boosting their already enormous current incomes at the expense of your long term welfare. And that’s where you stand even if you weren’t investing with Bernie Madoff.

Social Security is the last retirement system standing. It’s saved millions of elderly from poverty, and serves as the foundation of retirement for most Americans. Whatever else the federal government does, it must preserve Social Security. Social Security has never provided more than a modest income, and it won’t be able to do more in the future. But significantly cutting benefits will only rearrange how we pay for the costs of retirement. Younger people will end up supporting parents, aunts, uncles and maybe grandparents. And even if they don’t, they’ll be taxed to pay for the municipal shelters and soup kitchens that will give Grams and Uncle Horace a warm place to sleep and a little something to eat. And, perhaps most importantly, a Social Security system that will keep its promises to today's 25-year olds gives them hope for the future. One of the great illusions of the free enterprise system is the idea that we can stand alone as individuals. Maybe Daniel Boone could look at the world that way. But even by Kit Carson’s time, the fate of solitary mountain men trapping and hunting in the Rockies was tied to Eastern clothing fashions.

FDR’s attempts to stimulate the economy out of the Great Depression had limited success at best. In 1938, the U.S. was still gripped by stagnation and high unemployment. But he hit a home run by enacting Social Security. It, like federal deposit insurance, is one of the economic cornerstones of the nation. If the system truly must be changed (a conclusion that depends heavily on the assumptions one makes), better that the early and full retirement ages be pushed back than benefits be cut. It would be harsh and heartless to reduce benefits for folks in their 70s, 80s and beyond, when they would be much less able to work, if they could work at all. The United States will be in for some tough times in the next few years. Ensuring the vitality of Social Security will do much to build confidence in our futures.

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