The biggest problem with all pensions is this: Putting aside money. When private employers don’t put aside the money (or at least put aside enough money), the plan is said to be underfunded. I’m referring here to defined benefit plans. There are many unhappy airline pilots who have $1,800 monthly defined benefit pensions when they expected $9,000 monthly. The pilots’ unhappiness is due to underfunding and because airline employers robbed Peter to pay Paul. Social Security is a defined benefit plan.
When government does not put aside enough money, Social Security is said to be underfunded.
The idea that Social Security is underfunded is ludicrous. I’ve been putting in money since age 14, as have my employers. Government, though, is not about saving money and earning interest. The U.S. treasurer does not waltz down to the bank each morning and deposit the Social Security inflows so that they earn interest. The government saves no money. The government spends the money and sends IOUs to Social Security.
I receive Social Security now, as does my wife. However, because I still work, I pay tax on my Social Security. So, I contributed for years (lots of years!), and my employers contributed for years (lots of years, too!), and now I must pay tax on what is received. For the government, this is one great deal. For me, not so hot. Here’s my question: When I pay tax on my Social Security, where does the tax go? Does it go back to Social Security? Knowing the government, I’d bet not. I bet it goes into the general revenue fund. Truthfully, I don’t know the correct answer to this question. Does any reader? If the tax collected on Social Security earnings went back into Social Security, it would probably go a great way toward making the program solvent. However, the government may have never figured this out, or it figured it out early on but needed the funds for other things. (Alaskan bridges come to mind.) And now we are squarely back in the soup, the issue of robbing Peter to pay Paul.
The government is good at scaring people about Social Security going bust, but the truth may have more to do with financial mismanagement than anything else. Social Security is an easy fix, as is any sick defined benefit plan. What is worrisome is Medicare, and I’ll let my friend David Saltzman resolve that issue. Thank goodness I’m not the health insurance columnist.
Have a groovy week.
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