Boomers Fleecing Generation X/Y with Social Security
by Thomas A. Firey
December 3, 2001
Thomas A. Firey is managing editor of Regulation, the quarterly review of business and government published by the Cato Institute.
Generation Xers and Gen-Yers like me have a hard time showing interest in what goes on in Washington. We've grown numb from the endless tirades and shrieking alarms of blowhard politicians. If they can't think fairly and honestly about important political issues, why should we bother to try?
But we Gen-X/Yers had better end our apathy – and soon – or we'll spend the rest of our lives paying for it. Members of the generation that came before us – the Baby Boomers – are trying to pull a scam under the guise of "protecting" Social Security. If they succeed, we – and our children – will be the poorer for it.
Who is in danger? Everyone realizes that Social Security is in trouble. But few people understand what that trouble is and whom it will affect. Understanding that is the key to understanding the Boomers' scam.
Right now, Social Security is in great shape. This year, like so many years previously, hundreds of billions of dollars will pour into the program from FICA and payroll taxes, and only some of that money will immediately go back out as benefits to retirees. The rest will be exchanged for government bonds, which the federal government will pay back – with interest – to Social Security in the coming years. Despite what some people say about the federal government "raiding Social Security," the bond buying is a good thing: The interest brings more money into Social Security that will support the program in the years ahead. Unfortunately, things will change in the next decade, when the Boomers who now pay Social Security taxes will retire and start collecting benefits. Beginning in about 2016, so many people will be collecting Social Security that the money needed to pay benefits will be more than what workers at that time will pay in Social Security taxes. That is, more money will be going out than will be coming in to Social Security. Fortunately, the program will be able to cash in the government bonds that it is now buying, and will use the repaid principle and interest to keep up the payments.
However, that can only support Social Security for a couple more decades. The bonds will all be cashed in by about 2038, just as we Gen-Xers (whose Social Security tax money will have bought many of those bonds) approach retirement age. Hence, the pending Social Security crisis does not involve today's seniors – there is (and will be) plenty of money to take care of them and most everyone now 60 or over. The crisis involves those who will be drawing money out of Social Security in the coming decades and those who will be paying into it. In other words, the crisis involves the Boomers and we Gen-Xers and Gen-Yers, as well as our children.
Boomers' bargain Ever since we Gen-X/Yers began working, we've paid 12.4 percent of our earnings to Social Security – half taken directly from us through the "FICA" tax on our paycheck and half taken indirectly through the payroll tax. In the coming years, Congress will likely increase that tax rate to more than 17 percent to avert the 2038 catastrophe. What is more, Congress will likely increase our Medicare tax rate (which is now a mere 2.9 percent) because that program faces a similar – but even more severe – crisis as Social Security.
In contrast, the Baby Boomers got a bargain on Social Security. When they entered the workforce in the late 1960s, they paid only 6.5 percent of their earnings – in both direct and indirect taxes – to Social Security and they paid nothing to Medicare. For about half of their working years, the Boomers paid 10 percent or less of their earnings to Social Security and less than 1.25 percent to Medicare. Only from 1990 on, when the Boomers had already worked for a quarter-century, did they start paying 12.4 percent to Social Security and 2.9 percent into Medicare – the same percentage that we Gen-X/Yers have paid our whole lives.
In other words, the Boomers are getting a bargain through Social Security: They will pay a considerably smaller percentage of their income into the program than we Gen-X/Yers, yet they will receive significantly more in benefits than we will, and we will pick up much of their cost. Then, when we retire, there will be no money saved in Social Security to pay for our retirement because the money that we paid in will have gone to the Boomers. Instead, the only money that will be there for us will be the money that Gen-Y and younger workers will be paying in at that time, and that will be nowhere near enough to provide the benefits that we will provide the Boomers. That leaves us Gen-X/Yers with a difficult choice (one that the Boomers have avoided, even though the effects of the choice would have affected them less): Either we must raise Social Security taxes on ourselves now or cut the benefits that we are to receive in the future.
Keeping us from getting ahead The Boomers' scam does more than just condemn us to high taxes and low benefits while securing their bargain retirement income. Because so much of our future earnings will go to the Boomers' Social Security, we will be less able to save for retirement, find it harder to leave an inheritance to our children, and invest less in research and development that would lead to medical breakthroughs and technological innovations. Those difficulties will be hardest for the people who would benefit most from savings, wealth creation, and medical advances: the poor and minorities. A majority of African-American males, for instance, will not receive back from Social Security the money they will pay in over their lifetime. They and their children would be better off if they put their Social Security tax money in a coffee can and buried it in the backyard, instead of paying into the program and waiting to collect benefits. The rest of us, typically, will receive back the money we pay in along with a small amount of interest (providing that we don't die early), but we would receive a lot more money (and other benefits) if we had invested the same money over our lifetimes – even if we're poor investors!
If they don't fix it, we will The Boomers are now working hard to protect their scam. Many Boomer-elected politicians are claiming that it is "too risky" to change Social Security to give Gen-X/Yers the option to invest a small portion of their Social Security savings for retirement. Others are arguing that changing Social Security would somehow hurt the poor and minorities, even though they are the groups most hurt by the Boomers' scam. One Boomer politician, Rep. Jerrold Nadler (D-N.Y.) has even gone so far as to claim that Social Security should be left alone because it is in no trouble at all.
The Boomers need to be warned: We Gen-X/Yers are catching on to their scam. More and more of us are seeing through their phony claims and are recognizing their generational cash-grab for what it is. And, if the Boomers don't reform Social Security now, then they will have no right to complain when we Gen-X/Yers put and end to their scam in the future.
This article originally appeared in The Houston Chronicle on December 3, 2001.