Inflationomics

A Second Social Security System?

When the Social Security System was established in 1935, it was sold to the public as old-age or retirement “insurance.”  The idea was that the (usually younger) working people would contribute enough to the system to cover the payments to the (usually older) retirees who hadn’t contributed anything toward their retirement.  In short, it was a transfer system from workers to retirees…from those who had an income to those who didn’t have an income or were “poorly” paid…from those who could afford to pay into the system to cover those who couldn’t afford to pay into the system.  Thus, in reality, it was a tax on incomes…the same income on which income taxes are levied.  As one might expect, over the years, the number of recipients has expanded relative to the number of supporters.  Spouses and minor children of retirees were added in 1939.  Disabled workers were added in 1954.  Medicare was added in 1965 and benefits for various beneficiaries have increased numerous times since then.  The maximum amount of earnings to be taxed has also increased over the years from $3,000.00 in 1937 to $113,700.00 in 2013.

Which brings us to the imminent problem (79 years later): nowadays the baby boomer generation is retiring and there are fewer working people depositing funds into the system (per retiree) than there used to be.  Furthermore, the money that was collected was not invested in capital-generating assets, but was used to purchase U.S. government debt instead.  Today, it is similar to a Ponzi scheme about to collapse.  All that stands behind the system is the U.S. government’s ability to tax and create dollars out of thin air.  The question becomes: which will occur first, the Social Security System having to be greatly revamped/going bankrupt or the U.S. dollar losing its purchasing power, thus impoverishing recipients and donors alike?

More recently, we have established Obamacare, which was sold to the public as a health “insurance” system for all Americans.  It was set up to require people who would normally pay less for health insurance (young and healthy people) pay in at inflated rates to subsidize people who need health insurance (older and sickly people)…in short, another tax/transfer system like Social Security.  Once again, the U.S. government will subsidize (through tax credits) the people who can’t afford the additional expense.  The CBO estimates the average marketplace subsidy per subsidized enrollee will be $5,290 in 2014.  Of course, as with everything the government touches, costs will go up over time…there’s no incentive to keep costs down!

What will happen in time (less than 79 years)?  Either the premiums (and fines of non-participants) paid by the healthier members of society will have to be raised greatly (defeating the purpose of providing affordable health insurance to all Americans), or the benefits to the health care recipients will have to be greatly reduced (perhaps in the form of poorer service or no service when you need it)…or the government will once again step into the middle of the situation and nationalize health care, as they did with Social Security and the postal service.  In short, Obamacare will either have to be greatly revamped or eliminated (but taxes once enacted are rarely repealed), and everyone will become poorer either directly from higher expenses, or indirectly through fewer health care opportunities.

Happy Obamanation!

Robert Jackson Smith

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