Social Security was instituted in 1935 as a way of caring for Americans who, due to the Stock Market Crash of 1929 or the effects of the following Great Depression, had either seen their savings wiped out or depleted, or lacked the capacity to accumulate any savings in the first place.
Social Security was originally intended as a more palatable version of the State pension system common in Europe, hence the name “Social Security” instead of the socialist-colored “State Pension.” It was supposed to be semi-voluntary, and restricted to those who had no private pension or other retirement plan. The original handout from 1935 declared that the system would be funded by employer and worker contributions, starting at 1% each, and rising to a maximum of 3% of total wages. Repeated several times in the handout was the phrase, “It will NEVER be more than this.”
Further, the deliberate impression was given that the Social Security System was an investment. On the contrary, it was clearly designed as a “pay-as-you-go” system, with current recipients receiving payments paid by current taxpayers, with any surplus put into government bonds, i.e., borrowed by the government and spent, to be paid back later out of future additional tax revenues. (In other words, the system either pays out of current receipts, or taxes the citizens twice for every dollar paid out – plus interest.)
To make matters worse, eligibility was extended to more and more people and classes, driving up the costs of maintenance as well as the overall amount of the entitlement. The income taxed was restricted to the rather vague category of “earned” income, meaning that dividends and capital gains – as fully “earned” as any wage – are not taxed. Neither does the personal exemption apply to Social Security; a wage earner pays taxes on the first dollar he or she earns, making the system designed to succor the poor extremely regressive – meaning that the poor are taxed to support themselves … after raking off a percentage to support the government.
Clearly this is a system in need of serious reform. One of the better proposals is called “Capital Homesteading for Every Citizen,” the title of a book available on Barnes and Noble and Amazon, as well as free in .pdf from the web site of the Center for Economic and Social Justice, CESJ, www.cesj.org. Capital Homesteading would:
1. Merge the Social Security tax rate into the general tax rate.
2. Reform the tax system, eliminating most deductions but raising the standard exemption plus permitted deductions to around $25,000 or $30,000, so that a typical family of four would not pay any taxes of any kind until aggregate family income reached around $110,000.
3. Make Social Security purely need-based, possibly transforming it into Milton Friedman’s “negative income tax.”
4. Institute an intensive program of expanded capital ownership, allowing people to accumulate income-generating assets in a tax-deferred manner, financing the purchase with low- or no-interest loans extended by the Federal Reserve System through the commercial banks. (In other words, personal retirement accounts, but not restricting it to retirement income. The income should be available when needed, and not subject to punitive taxation at any time.)
With these “simple” reforms, not only would the Social Security System be put on a sound financial footing, but the country as a whole and every citizen in it would benefit.