A Solution to the Social Security Ponzi Scheme
The social security issue is looming larger and larger, yet no one seems to care to fix it
Social Security was implemented during the FDR presidency with the intention to help the old retire. At the time, FDR was very clear that it ought to be a system where you get what you pay in. Over the years, congress has butchered the original system and replaced it with a “redistributive” system. Today social security is a pay-go system, meaning that you pay as you go. The younger generation pays for the older generation, and that goes on. There’s just one catch, the pay-go system requires the working generation to be larger than the retired generation.
Now as the baby boomer generation is retiring, demographic trends are such that the retired population will weigh far heavier upon the working generation than ever before.
Having a lower ratio of taxpayers to social security, without tax increases or other interventions, means that social security is destined to run a large deficit.
Current estimates estimate that the social security “trust fund” will run out of money by 2035. I put trust fund in quotes, because there is no trust fund, that money is just an I-Owe-You from the U.S. Treasury Department.
To fund the Ponzi scheme, projections are showing it will cost massive tax increases.
This is all very grim, but there are solutions to this particular government externality. My personal favorite solution is to liberalize the immigration system, to allow many more immigrants in, on a few important conditions.
Abolish the Minimum Wage
Abolishing the minimum wage is absolutely necessary to allow the flow of unskilled immigrant labor to start a life. Otherwise, if the added value of their labor is less than the minimum wage, they will never find employment.
Eliminate the Welfare State
All entitlements would cease to be doled out, but current promises would remain. From there, liberalizing the immigration system can be used to destroy the welfare state. The immigrants would have to agree upon entering the U.S. to pay a higher tax rate to help pay off those who have been promised welfare. This way, the current beneficiaries are still given what they are promised, and the next generation doesn’t have to shoulder the burden of the generational Ponzi scheme.
End Tariffs and Quotas
A final major requirement for this plan to work, is to end all tariffs and quotas. Enacting tariffs and quotas, makes goods more expensive in America, but it also means that there are fewer opportunities - jobs for foreigners to make a living by trading with America. This would make immigration less necessary to have a better life and would lessen the pull factor for immigration.
In theory, this plan would work. However, in practice it’s more complicated. The incentive structure of the government is not built such that they spend what they need, but rather, they spend what they can take. Increasing immigration to pay off the welfare state would need a careful review, probably an amendment, to prevent the politicians from getting their hands on it. If this can be done, the welfare state can be removed in a rather painless way. This method benefits everyone, the promises of the welfare state are intact, the next generation doesn’t need to suffer for the sins of the government, and immigrants are more easily able to get into America with only a slight tax increase that many would take in a heartbeat in exchange for becoming an American. In economic terms, this solution is Parteo optimal. It only needs a way to reign in the government…