The theory behind Social Security: a federal insurance program that provides benefits to retired persons. In reality:
Americans were led to believe that Social Security was like a retirement account and that money placed in it was, in fact, their property. Shortly after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis (1937). The court held that Social Security was not an insurance program, saying, “The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.”
Thus, workers have a percentage of their taxes confiscated ostensibly to be saved for their own retirement. You pay in while you work; you receive benefits once you retire. In reality, you simply pay in while you work and directly fund the current crop of retired individuals. From the worker to the retired. And when you retire, the current crop of workers will simply pay for you. And as the retired population continues to grow, and because Social Security is not a small sum to be considered just a “supplement” to your retirement, it is heading towards insolvency (i.e. it will be paying out more in benefits than it brings in).
So what’s the problem? Practically speaking, both Social Security and Medicare begin making payments to old folks at age 65. Why age 65? In the 1930’s, when Social Security was adopted through New Deal legislation, life expectancy at birth was only 58 years old due to high infant mortality rates. 65 years old, however, was the life expectancy for the average person who attained adulthood. And since you don’t begin paying into Social Security until you reach “adulthood,” that was the number chosen to begin receiving benefits. That’s right: at the time Social Security was conceived, the program was designed so that of the people who paid into Social Security (adults), roughly half of them would die before ever reaching the age of collection. That is, 50% of the population would pay in during their time in the workforce and never see a penny paid back out to them. This alone insures the crop of workers will always far outnumber the crop of retired persons. And, considering that one worker can only actually pay a small percentage of his own earnings to support a retired individual (since the worker has to support himself and his immediate family, as well), having a workforce that far outnumbers the retired is necessary. What’s more, of the other half of working individuals who actually reached 65, the majority of them did not live extended periods of time collecting government money. Life expectancy in the 1930’s for someone who reached 65 was 78. Thus, while 50% of the population paid in and never even received any benefits, the 50% who did receive benefits did so as a steadily declining percentage as they were rapdily becoming deceased.
Today, the at-birth life expectancy is a little more than 77 years, and the life expectancy for someone who reaches 65 is 83. Thus, large numbers of people that the program was not designed to accommodate collect Social Security and Medicare – and what’s worse, they do so for longer periods of time. The age for collection is still 65. More people are living to be 65, and that higher percentage of people who make it to 65 are living much longer, too. Since nothing has been changed, the program is slowly heading for the red. Check out this article for more info.
And why are we redistributing so much money from worker to retired individual anyway?
It turns out that half the federal budget is spent on programs primarily serving senior citizens, such as Social Security, Medicare and Medicaid. But let’s look at a few comparisons between younger Americans and older Americans. More than 80 percent of those older than 65 are homeowners, and 66 percent of them have no mortgage. Homeownership is at 40 percent for those younger than 35, and only 12 percent own their home free and clear of a mortgage. The average net worth of people older than 65 is about $230,000, whereas that of those younger than 35 is $10,000. There’s nothing complicated about this; older people have been around longer. But what standard of fairness justifies taxing the earnings of workers who are less wealthy in order to pass them on to retirees who are far wealthier?
Thus, not only is raising the retirement age and slashing benefits practically necessary, it is also fair. Why doesn’t it happen?
There’s no justification, but there’s an explanation. Those older than 65 vote in greater numbers and have the ear of congressmen.