A flash point for Social Security

On August 5th, Social Security trustees released their report showing that permanent annual Social Security deficits will begin in 2015, when next year’s high school seniors graduate from college.

Since there are more than 50 million Social Security beneficiaries, and their numbers are growing faster than the number of taxpayers, there will be intense, politically irresistible pressure to continue paying benefits by raising payroll taxes and income taxes.  But taxes won’t be enough to save Social Security, because Medicare and Medicaid are also going broke, and payments on all the debt are skyrocketing.

Social Security was set up to have each person pay for somebody else’s benefits.  Current payroll taxes go to pay current Social Security benefits, and nothing is set aside for the future retirement of people working now.  In the past, when current payroll taxes exceeded current benefits, the Social Security Administration used the surplus to buy special issue U.S. Treasury bonds.  The surplus was mingled with the government’s general funds and immediately spent on other programs.  Now that Social Security is in deficit, the Social Security Administration will start redeeming those bonds, and the Treasury will draw on current revenues other than payroll taxes.  Current Social Security beneficiaries believe they are entitled to their checks, but their total benefits tend to exceed the taxes they paid, and in any case their taxes were spent years ago.  The money is long gone.  There is no investment fund, no lockbox.

The flash point for Social Security could come when hard-pressed taxpayers conclude that even though they’re paying monstrously high payroll and other taxes to support current beneficiaries, Social Security will be broke before they get any benefits.  Nobody will be supporting them as they supported other people.

Outraged taxpayers will probably realize that they cannot both provide for themselves and continue paying for everybody else.  It’s a good bet that they will start trying to make up for lost time by building up their savings as rapidly as possible.  Since it would be hard to increase income dramatically, it would be necessary to dramatically cut taxes they’re paying for other people.  Probably increasing numbers of taxpayers will work off the books, in the underground economy, beyond the government’s greedy hands.  By the time these things are happening, there could already be a flourishing underground economy due to inflation, price controls, wage controls, profit controls, exchange controls, import restrictions, rationing and other regulations.  More people will do business in cash to avoid leaving a paper trail.  There could be a resurgence of barter.