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Social Security Is More than Unsustainable

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It seems that Russia is having the same problem as the United States when it comes to its government retirement system: the system is unsustainable because the number of retirees receiving benefits is growing faster than the number of workers supporting the system.

Soon after his inauguration for a fourth term as president of Russia, Vladimir Putin spoke about his plans to cut poverty, boost economic growth, improve medical care, and increase life expectancy. When asked whether the retirement age would be raised, Putin gave an evasive response:

As for the retirement age … I’ve always taken a highly cautious and careful attitude to it…. One of the key goals that I have set to the Cabinet is to increase the pensioners’ incomes, and it should be a significant increase … another important goal is to decrease by half the number of those below the poverty line. We should find out in the nearest future which measures the Cabinet will come up with to solve this key task…. I want to emphasize again: the key goal of the whole system of pensions is to significantly increase the level of welfare and incomes of pensioners.

Just one week later, however, Russian Prime Minister Dmitry Medvedev announced — on the first day of the World Cup in Russia, when the country was focused on soccer — that beginning next year, the retirement age would be gradually raised from 60 to 65 by 2028 for men, and from 55 to 63 by 2034 for women.

Medvedev said that “the measure was extremely necessary, as the proportion of working people against the retired was gradually falling and the balance of the national pension system was under threat.” “Without raising the retirement age the state cannot honor its social obligations,” he explained. The measure would also “help to fulfill President Vladimir Putin’s order to raise the state pensions and living standards in general.”

The Russian parliament’s lower chamber — the Duma — approved the first reading of the bill on July 19 by a vote of 327-102 while about 200 people protested outside. The bill must be approved in two more readings and by the upper chamber — the Federation Council — before being sent to Putin for his signature or veto.

It was no surprise that the Russian president’s approval rating declined in the wake of the plan to raise the retirement age. Opinion polls show that around 90 per cent of the Russian population oppose the changes to the pension plan. It is no wonder that at the end of August, Putin gave a televised address to the nation in which he announced a softening of some of the proposed changes to the retirement age.

Putin proposed raising the retirement age for women by only five years (to age 60) instead of eight years. He also proposed that “mothers with multiple children should be granted early retirement, depending on the number of children they bear.” Russians “who would have been able to retire in the next two years should be allowed to apply for pension benefits six months before reaching the new retirement age.” Nevertheless, demonstrations have occurred across the country as Russians protest against the proposed plan. It should be noted that in Russia, the average life expectancy for men is only about 67 — two years above their proposed new retirement age.

In the United States, the retirement age for men and women is the same. The full retirement age was 65 for many years. However, in 1983, the full retirement age was gradually raised for Americans born in 1938 or later. For those born between 1943 and 1954, the full retirement age is 66. For those born in 1960 or later, the full retirement age is 67. Early retirement with reduced benefits is available for those who have reached age 62, no matter what year they were born.

Whether in Russia or the United States, the effects of raising the retirement age are the same:

  • less total money spent by the government
  • less total money in the pockets of beneficiaries
  • a greater chance that one might die before being eligible for benefits

Unlike most other countries in the world that have some form of a Social Security system, in Russia there is no employee contribution. Employers must pay a tax of 22 percent on each employee’s salary, up to a maximum of 1,021,000 rubles, plus 10 percent of any excess over this cap.

In the United States, the Social Security tax rate is 12.4 percent (split equally between employer and employee) on the first $128,400 of employee income. One must pay Social Security taxes for a minimum of 40 quarters to be eligible.

This leads Americans to believe that they are “entitled” to receive Social Security benefits because they “earned” them by “contributing” to the system over the course of their working life.

Nothing could be further from the truth.

There is no connection between Social Security taxes paid and benefits received.

There is no contractual right to receive Social Security benefits.

Social Security is not a personal retirement account.

The Social Security trust fund is a government accounting fiction.

Social Security is a government welfare program not a government retirement program.

All Social Security taxes collected are immediately deposited in the federal treasury and spent by the government.

Congress can increase Social Security taxes at any time without increasing Social Security benefits.

Congress can raise or eliminate the wage base upon which Social Security taxes are figured at any time, thus effectively raising Social Security taxes.

Congress can pay Social Security benefits in perpetuity regardless of the amount of Social Security taxes that are collected.

Congress can reduce Social Security benefits at any time.

Congress can increase the taxes owed on Social Security benefits at any time.

Congress can raise the retirement age, again, as it did in 1983.

All it comes down to is that part of the payroll tax collected under the Federal Insurance Contributions Act (FICA) is listed on pay stubs as being taken for Social Security. That’s it. If the taxes extracted from Americans’ paychecks were called simply “payroll taxes,” then the notion that Social Security is a right and an entitlement would vanish overnight. Social Security would simply be viewed as welfare for seniors.

But Social Security is more than unsustainable. It has a bigger problem than whether there are enough workers to support retirees.

It is neither constitutional nor the proper role of the federal government to set up, maintain, or fund retirement, disability, survivor, or pension plans for nongovernment workers.

Whether in Russia, America, or any other country, the conclusion is the same: Social Security is an intergenerational, income-transfer program that takes money from those who work and gives it to those who don’t.

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