Social Security is in trouble, no doubt about it. It is in political trouble. The most cited problem of Social Security is that the ratio of workers to retirees is changing. There are fewer workers relative to retirees, currently 3.3 to 1 and 2 to 1 in 2040. Social Security estimates tend to support that it will not get much worse than that.

It is true that the support of the baby boomers, being a disproportionately large age group and coincident with substantial increases in life expectancy, could not be sustained under the old pay as you go system. The chairman of the Federal Reserve, Allan Greenspan, ostensibly saw the problem coming. He, in a political capacity, advised Social Security to increase Social Security taxes on baby boomers in 1982. That happened and baby boomers have been paying higher taxes than their forbearers ever since, to "save up" for their benefits beginning in about 2015.

It was not a conceptual problem then, but has become one. Where do you invest very large amounts of money? The best, safest saving vehicle in the world was and is the U.S. government bond. Unfortunately for the baby boomers, the U.S. government has lost the political will to repay those bonds. Since default is not a likely option, the U.S. government will probably try and print money, or monetize the debt, to repay it. This will devalue the benefits received by the baby boomers and essentially significantly reduce the benefits that the Trust was supposed to fund. So the whole accelerated payments program will have become a sham and will have amounted to a regressive income tax on the working class.

The money set aside by the baby boomers in the Social Security Trust Fund is a significant percentage of the total collections of the SSA. In 2004 SSA collected $566 billion and paid out $421 billion, $145 billion went into the Trust Fund, 25%. Of that $145 billion all of it is being used for current operations of government. The U.S. Budget in 2004 was $2,293 billion. So, if Social Security Trust Fund accumulations were to be ceased, your taxes would go up 6% to make up the shortfall, as if anybody in government cares right now. If the Social Security Trust Fund is not going to be honored by government, let’s just stop collecting the extra 25% now, before we throw more any more money into a government that does not honor its obligations, raise income taxes and get on with it. This will bring the next problem, worker to retiree ratio, into sharper focus.

The real conceptual problem is out past 2040, when the Trust Fund runs out and the worker to retiree ratio is 2 to 1. People entering the job market today will, at the end of their working life, begin to see shortfalls in Social Security funding when they retire. Currently, projections show that at current FICA tax rates, benefits from SSA could be reduced by 25% beginning in about 2060. The obvious solution would be to raise FICA taxes but the political realty is that no one wants to do that. It is not fair that a worker will have financed his parents retirement at 100% of benefits and will only receive 75% when he retires. Something conservatives have exploited shamelessly.

The good news is that if people don’t become immortal and keep having babies the worker to retiree ratio will level off. The bad news is that if Social Security fails to support people in their retirement, the whole social engineering purpose will be lost. People will start having babies again to ensure their own retirement. It is not even arguable.

All the proposals for fixing Social Security so far have been targeted to mitigating unfairness. Some of them haven’t had any material superiority to trying to lengthen a rope by cutting a foot off of one end and tying it to the other end. The only way to get Social Security benefits into the hands of retirees now and in the future is through FICA or income taxes.

So the answer to fixing Social Security never has been anything but philosophy. The Social Security Administration has numerous plans to mitigate the transition of the baby boomers into the future when fewer people are working. What they lack is control over the political climate that has trended toward naked politically conservative self interest in the last decades. The fix is to answer the question: Is Social Security worth it? Is it worth a gradual doubling of the FICA tax by 2060 to become once again a pay as you go system?

According to the Bureau of Labor and Statistics, the median hourly wage of Americans is $13.01 or $27,039 per year or $2,253 per month. Half the population makes more and half make less. Federal taxes on that amount are $3,698. State taxes would be another $811, not enough to be effectively deductible. $3,698 plus $811 is $4,509. $27,039 minus $4509 equals $22,529. So the median take home pay is about $1,877 a month, excluding FICA.

Since inflation will be factored into any savings plan automatically, it is not important to adjust the numbers for inflation. At the end of a savings plan, the amount saved will be nominally higher, but the buying power should be about the same. Say a person is very frugal and spends about $500 an month on rent, $195 on utilities, takes the bus to work for $30, $300 on food, buys clothes at the Goodwill for $15, has employer paid health insurance and no dependents, the person might be able to save $877 a month. After 40 years at 3% interest after taxes, the median earner could have $812,000.

If a person manages to save $812,000 during his lifetime and retires, he could withdraw about $3,423 a month, at current interest rates, for 30 years before all the money was gone. Good for him.

Since personal consumption is nominally two thirds of the economy, if everyone was as frugal as the exemplary individual above, the GDP would shrink by nearly a third. Savings would be so abundant, and not inflationary because no one is spending, that interest rates and prices would collapse. And the frugal individual above would probably lose his job and his savings interest would plummet to nothing.

An extreme scenario to be sure, but illustrates the unintended consequences of conservative Social Darwinism. Put another way, if people start being strictly responsible for their own retirement, it will cause as much or more pain to the economy as raising the FICA tax. Again, think of the rope. If you withdraw money from the consumer part of the economy in the form of personal savings, it will probably have considerably more negative impact on the economy than collecting and redirecting money back into the economy through raising the FICA tax. You can’t make the rope longer by cutting off one end and tying it to the other.

Besides, it is a pretty good deal. If a person making the median wage saved an amount equal to his yearly social security, $3,380, after 40 years at 3% interest he would have $142,000. If he then started withdrawing money in equal payments spread over his remaining lifetime, say 30 years, he could withdraw about $355 a month. By contrast the benefit accrued from paying the same amount in Social Security will entitle him to $937 a month. How do they do that? They do it by absorbing the risk of tens of millions of people. Most people won’t live 30 years after retirement, but no one person can behave as if he won’t. This is the largely unsung beauty of Social Security, it is a giant lottery that you win by living longer than anyone else.

The other beauty is this, Social Security is not a personal asset. If a person has a catastrophe an all his assets are consumed to pay for it, Social Security remains intact. It keeps coming while your savings would be wiped out. There is no annuity or life insurance policy that can provide that kind of safety net.

Of course it is a certainty that conservatives want it both ways. They don’t care if people save or not, or if people end up living in poverty, as long as commerce is not affected and wages don’t rise. What the raising of the FICA tax amounts to is an across the board raise in pay for Americans. That is why conservatives are scrambling to conjure a dire future for Social Security. Will an across the board raise effect the economy? Yes, it will probably make the economy better, at the immediate expense of business, but to the benefit of business in the long run, as raises always have.

Is it better then to "encourage" people to save for retirement or to forcibly make current wage earners pay for current retiree’s benefits, with the so far ironclad promise that they will benefit in kind? Maybe we should just keep talking about which end of the rope it will be better to cut off and tie to the other end.