How to Save Social Security

The Social Security Administration estimates that the government trust fund supplementing the payment of benefits to retirees will be exhausted in a dozen years. The trust fund was built up over decades when the revenue brought in from FICA taxes exceeded benefits. That reversed a few years ago and now the trust fund is being drained. When it runs out, we'll be left with two difficult alternatives: either benefits to retirees must be cut, or FICA taxes increased.

In other words, our Social Security program is already insolvent with expenditures exceeding receipts; it is in its final stages of unraveling. The frightening aspect of this problem is that Congress could manage to put the job of finding a solution off for another ten years or so. It's easier for a politician to ignore problems that will occur in the future than it is to create a problem for themselves in the present.

The best tax base is "where the money is." At the beginning of the 20th-century, when Henry Ford decided to pay his workers the outrageous wage of $5 an hour, reasoning that he'd be creating his own customer base, it gave rise to a growing middle class. The growth of wages was "where the money was" for the first three quarters of last century. But something happened in the 1970s that changed all that.

In the mid '70s the growth of wages began to diverge from the growth of production. The average workers' production continued to grow over the next few decades, but their wages remained flat. Automation was beginning to take its toll on our economy. We were learning to make more with less workers - which is a good thing in a modern economy.

When people don't need to put as much effort into producing real goods and services, they turn to other activities. Thus, the rise of financialization. We learned to make money through derivatives, synthetic securities, arbitrage and so forth. The numbers speak for themselves. Today our GDP stands at $18 trillion, while we collectively earn $16 trillion - many think of this as being the size of our "real" economy. In the meantime, however, financialization has created an economy that dwarfs the real economy. The number of payments made each year in our total economy exceed an astounding $5,000 trillion. That's 5 quadrillion dollars a year.

More than 300 times the size of our real economy, this new monetary economy is overlooked by our present system of taxation. Instead of increasing FICA taxes to 15% or even 18% of our wages, we could stop taxing wages altogether - no more FICA taxes - and instead implement a minuscule tax of 0.02% on every payment. That would be 20 cents on every payment of $1,000, and Social Security would be solvent again.

That's an interesting twist on things. Letting workers keep more of their wages would stimulate the economy, as would providing for a sound retirement for everyone. And when the economy does well, the total volume of payments also spikes. A win-win for everyone.

Learn more at my website www.TheEconomistsTale.com.