The Under-30s Should Demand an Opt Out of Social Security

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The Under-30s Should Demand an Opt Out of Social Security
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I created this as a simple copy of a GAO chart

I don’t know anyone under the age of 30 who thinks Social Security will be there when they retire.  (For that matter, I don’t know many middle-agers who expect to draw from it either.)  And yet the under-30s dutifully pay their 12.4 percent payroll tax every paycheck with little complaining.  It’s high time they stand up, push back and demand they be allowed to opt out.

While millions of Americans have been snookered into thinking Social Security is solvent, and will be for years to come—see the comments from my recent piece on the Social Security Trust Fund—young adults haven’t been fooled.

Washington Post reporter Lori Montgomery—one of Washington’s best—recently published an excellent exposé in the Post on Social Security’s financial struggles, and they are legion.

Montgomery points out that in 2010, when a sagging economy significantly reduced tax revenues, the government paid out more in Social Security benefits than it collected in payroll taxes, for the first time since 1980.

Since President Obama’s multiple stimulus packages and deficit spending have had little or no positive impact on the economy, Social Security will again spend more than it takes in this year—about $46 billion.  And the payroll tax holiday—a 2-percentage point reduction in workers’ share of the payroll tax, from 6.2 percent to 4.2 percent, passed last December—means an extra $105 billion was never paid in to the system.

Montgomery concludes, “Social Security is sucking money out of the Treasury.”  But wait, that can’t be because there is $2.6 trillion in the Social Security Trust Fund.  Why doesn’t the government just draw down on that account?

Again, Montgomery gets it absolutely right: “The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.”

Our under-30s perceptively understand that all of the financial game playing bodes ill for their chances of getting Social Security when they retire.  And the truth is it’s already a bad deal for my generation, the baby boomers.  Just look at the numbers.

Urban Institute economists Eugene Steuerle and Stephanie Rennane calculate that a single man earning the average wage in his working life and retiring in 2010 at age 65 will have paid $294,000 in lifetime Social Security taxes and can expect to receive $265,000 in lifetime Social Security benefits.*  Not what you’d call a heckova deal.

Of course, Social Security is social insurance rather than a personal retirement account, and so it uses a formula to cross-subsidize certain beneficiaries.  That same male in a one-earner family would contribute the same but could expect $447,000 in lifetime benefits because of the non-working spouse.  But I don’t begrudge them that extra money.  A worker who had invested his payroll taxes in a broad-based mutual fund could expect to have significantly more money at retirement than he paid in.

The crime isn’t that some people get more in benefits than they contribute; the crime is that so many people—including those who die early—don’t get back nearly what they paid.  And the under-30s know they are at the forefront of that swindle.

It’s time they stand up and demand a better deal.  Let the candidates know that if they want the “youth vote” in 2012, they have to support an under-30 opt out of Social Security—while fulfilling the government’s promise to current retirees.

Of course, allowing the under-30s to opt out would put a serious strain on the government’s ability to pay current retirees, since, as Lori Montgomery explained above, that $2.6 trillion surplus in the trust fund, created by current retirees and baby boomers, has all been borrowed.

However, the opt-out could take several forms to reduce the immediate fiscal impact on the government’s ability to pay current retirees.  The government could, for example, let the under-30s keep the 6.2 percent they contribute to Social Security while the government continues to take the 6.2 percent employer contribution.  That would still be a much better deal than the under-30s expect to get from Social Security, which is nothing.  And probably a better deal than what the government promises they will get.

If that split approach isn’t feasible, the under-30s could demand a separate, personal, voluntary, tax-free retirement account where they can deposit part of their income in exchange for giving up their claim on most or all of their Social Security benefits—which they don’t think they'll get anyway.

While it’s too late for my generation, and probably too late for those just entering middle age, it isn’t too late for the under-30s, especially if they make it a 2012 election issue.  It is economically and morally wrong for them to pay payroll taxes their entire working lives with the expectation of getting … squat.

They should stand up and demand the politicians let them opt out of Social Security.

Merrill Matthews is a resident scholar at the Institute for Policy Innovation in Dallas, Texas.  Follow at http://twitter.com/MerrillMatthews

* Steuerle and Rennane explain: “The ‘lifetime value of taxes’ is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation).  The ‘lifetime value of benefits’ represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits.”

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