by Dale Coberly




I wrote a post the other day trying to explain what the CBO’s number
meant when they said it might be necessary to raise the payroll tax
an extra 3.5% to pay for Social Security for the next seventy five
years. I was very disappointed, frightened even, by the responses I
got. Here is another way to try to explain it.

The following is a fairy tale. The numbers are made up to be made
simple. But they are meant to be realistic.

Our grandparents, or maybe your great-grandparents lived on incomes
of about 25 thousand dollars a year… in “our” dollars. That is,
they got by on about half of what we have in “real” dollars. Out of
this 25 thousand, they tried to save about ten percent for when they
got old. There was no Social Security. They hoped to earn enough
interest on their savings to keep up with inflation.

Let’s say they succeeded. So, they set aside 25 hundred dollars a
year for about 40 years and reached the age of sixty-something with
about a hundred thousand dollars in the bank. This hundred thousand
had to last them the rest of their lives. They were now too old to
work, or no one would hire them. They only expected to live another
ten years or so.

So, that meant they had about ten thousand dollars a year to live
on. And with care they could do that, but forget the Love Boat.
After a few years, if they were feeling strong they might start to
worry that they would live longer than ten years and run out of
money. So they had to cut back and try to live on less than ten
thousand a year, just in case. Of course, if they were not feeling
strong, medical bills might eat up their money even faster than ten
thousand a year.

Lot’s of old people didn’t make it. They ran out of money sooner,
or later. Had to move in with their son in law or ended up in the
poorhouse or sleeping in doorways.

And that was IF they had been able to save that ten percent of their
wages their whole working lives. Most people did not. Here, it’s
funny, I remark, that the realists among the Economics 101 crowd
never seem to notice that it is a real fact of human life that most
people are unable to save enough of their money, even when they have
enough to save. The realists just start talking about building
character by forcing the imprudent to learn to live within their
means. You see, “greed” is “natural” human behavior and it explains
all economics; it is, in fact “good.” But “improvidence” is a sin
and must be punished.

Anyway, there they were. Having been provident and lived carefully
and saved ten percent of a not very generous wage; and not having
been wiped out by a depression, or a bank failure, or inflation, or
illness, or bad planning, they were lucky to be able to live on
their savings and die just at the same time their savings ran
out…. and of course luckier still if they died before then and
“left something for the kids.”

Well, just about everyone’s luck ran out in 1930. Things got so bad
that Congress let Mr Roosevelt enact a program that was called Social
Security. (They also let him find a way to insure bank accounts,
surely a kind of socialism, so that at least losing your savings
because of a bank failure became a thing of the past.)

Now the funny thing is that since Social Security was enacted and the
government began to tax and tax, and entrepreneurs were driven out of
the country, real wages for people have at least doubled.

So today we have us, the forever young, making fifty thousand dollars
a year. Of course out of that we have to pay about 3000 dollars for
“Social Security.” Most people don’t even think about it. But some
people are so bitter about taxes that they keep pointing out that,
NO, it’s “really” SIX thousand dollars because “the boss’s share of
the payroll tax is really the worker’s money.” They don’t take the
next step of pointing out that in that case you are not making Fifty
thousand a year, you are making Fifty Three thousand a year, so that
after you pay the “six thousand” you have forty seven thousand
left… exactly what you had left when you thought you were making
fifty thousand dollars and paying a three thousand dollar tax.

Okay, so now you have to struggle along on only forty seven thousand
a year… a little more than twice what grandma and grandpa had after
they put $2500 of their 25 thousand dollars in the bank for their old
age. But it’s so unfair, you say, to have to pay a tax of three
thousand a year, or six thousand. Because, after all, you EARNED
that fifty thousand, or fifty three thousand. On the other hand,
today, with the Social Security tax, even if you can’t manage to put
any of that 47 thousand you have left after paying the tax into
savings or investments that don’t let you down at the worst possible
moment, you will still have enough money in the “bank” (a bank
called Social Security) to pay you about twenty thousand a year for
as long as you live… no need to worry about living longer than your

As I said, most people don’t even think about this. Until someone
starts shouting “Social Security is Broke, Flat Bust, Trillions of
Dollars in Debt!” Then when little mr coberly tries to point out
“wait a minute, what all this shouting means is that we will need to
save… through the Social Security “tax” … another thousand
dollars a year (or two thousand if you insist on calling the
employer’s share “really” the employee’s money)”… all you can
think is IT’S NO FAIR. How can you be expected to live on only 46
thousand a year?!! Even if the reason for the extra thousand dollar
“tax” is that you will be living longer than your grandparents and
the money is needed to buy groceries and pay rent for several more
years than you previously expected to live. And when little mr
coberly tries to point out that actually you won’t have to live on 46
thousand, because the extra tax can be increased a little at a time
so that by the time you need to pay that extra thousand a year you
will be making an extra twelve thousand a year… well, it’s still
“NO FAIR!” how can you be expected to live on only 57 thousand a

But, this is a modern fairy tale, so I have to add that it is
entirely possible, though not likely, that the economy could fail to
grow, or at least that wages would fail to grow, and you might have
to take that extra thousand dollars of tax out of a wage that is the
same as or less than your current fifty thousand. So, gee, it really
is the end of the world if you had to iive on only 46 thousand a year
in order to save enough to be able to live 20 years, or more, in
reasonable comfort after you are too old to work.

Must be some way. Hey, here’s an idea. Lets get rid of Social
Security entirely. We can always make a million dollars on the stock
market by investing our Social Security tax! Or maybe, wait a
minute, even better, we can let the rich guys make a million dollars
on the stock market and then we can tax THEM and make them pay for
our comfortable retirement. Yeah, that should work.