I have no intentions to sugarcoat any of the following, and I will not make mincemeat of logic solely for the purpose of glamorizing the supposed protector of the middle class (government). The rich get richer and the poor get poorer thanks to none other than Social Security.
The Poor Aren’t Saving
From the top of the working middle class to the bottom-rung of the socio-economic ladder, the average American simply isn’t saving a single dime. I covered this in depth in another article titled “Solving the Retirement Crisis.” You needn’t read it as I’ll be talking about the most important stuff here.
Basically, the middle class has no money for retirement. On average, the middle class has saved $29,000 to retire. Oh yeah!
Thirty years ago (with the cost of hiring rising due to FICA increases) we realized that things had changed, especially the cost of hiring, and that placing both your current income and retirement plan in the hands of one entity isn’t such a good diversification strategy. So, employers started promoting “defined-contribution plans” in lieu of “defined benefit plans.”
In theory, it’s a great idea to let everyone run their retirement; savers get to plan according to their own personal needs, and the company can provide a reasonable amount of benefit to the employee for saving. The shift, however, resulted in more people taking home their money and spending it than taking it home and investing it.
We see even now that the best way to get people to save is to force it–Opt-out 401ks see multiples more participation than non-opt out 401ks–but in the 1980s we forced companies to swap forced defined benefit plans in exchange for unforced defined contribution plans.
FICA Tax: It Makes the Poor, Poor
Let’s examine the data, because it really shows the full picture:
Now compare that to another timeline surrounding the popularity of defined benefit plans. Thanks to BankRate for this information:
- Defined benefit plans (pensions) grew in participation through the 1960s and 1970s, before topping in the mid-1980s. The mid-1980s was a time when FICA jumped considerably.
- Where 40 percent of workers were offered a pension in the mid-1980s, only 20 percent of private sector workers receive them today.
- Those who still have access to pensions are finding that companies are cutting or freezing the benefits, or limiting benefits to protect from longer-living workers.
Who would have thought? Pension programs and their benefits have been cut as the cost to employ workers steadily rises due to rising FICA tax burdens. It was Reagan actually, the supposed supply-sider, who enacted the most antisupply-side/trickle down economics policy history has ever seen.
But why is this bad for John Q. Public?
- It isn’t as if there are any assets in the Social Security trust, but we will pretend there are. (Note: The Social Security trust holds US Treasuries, so basically, inside the “lockbox” are just IOUs, which the government says are worth trillions.)
- There is a very big difference between the performance of your average pension plan—pensions can own a variety of assets ranging from stock, to corporate debt—and your average Social Security holdings, which are US Treasury-exclusive.
If I wanted to make someone poor—and I mean, really, really poor—I would require that they invest 15.3% of their income into the lowest yielding asset class in the world: US Government debt.
Where pensions might earn 6% in any given year in triple-A corporate debt, Treasuries yield maybe 3-4% per year.
So, in effect, the Middle Class is forced to save 15.3% of their income in the lowest yielding asset classes. On the other hand, the rich, who don’t feel quite the same pinch in terms of tax rate regression, save a smaller percentage of their assets in that joke of a program called Social Security. Thus, they can save a larger amount in other, higher-yielding asset classes.
But wait, there’s more! Look what happened when FICA taxes trudged higher in the 1980s; not only did investors pile into US Treasuries, but they did so right before the largest and longest bull-run in the history of the US financial markets!
This shouldn’t even be a debate. Social Security is not making anyone better off, and it certainly isn’t the benefactor to the poor that politicians purport it to be. The program is, in many ways, the best way to make sure that no one from the working class ever has a shot to live the American dream. Incentives still matter.
- Decline of pensions is directly related to the rise in FICA taxation. As with all tax changes, there was a period where pensions declined with no substitute.
- The middle class invests a greater percentage of their disposable income into low-yielding US debt (Social Security) than do the rich. Thus, the rich grow their money faster than the poor.
- The rise in FICA taxes, and subsequent fall of defined-benefit programs, came at a time just before the largest bull-run in equities in recent American history.
Want to read more about the decline in pensions? Weakonomist has a great read on the subject: The problem with pensions.