By DAVID MOON, Moon Capital Management
I wish I could bring myself to vote for John Kerry for President.
We have a looming crisis and I am afraid only a democrat can fix the
problem. Like Nixon going to China, this is probably a feat that can only
be accomplished by a democrat with deep, long-standing credibility with the
Terrorism may be the most immediate threat to the United States, but the
coming catastrophe in the Social Security System is the largest. During
the last hundred years, the U.S. achieved unprecedented increases in economic
growth and personal prosperity. Without significant change to the Social
Security system, the next hundred years will be an entirely different story.
The only way to avoid financial catastrophe is drastically reduce overall
benefits. Increasing taxes is a theoretically possible solution, but the
future cost of the current system is too large to permanently solve the problem
by continuing the robbing-Peter-to-pay-Paul plan. Eventually, we are going
to run out of enough Peters. If the current benefit levels are to be
maintained, eligibility must be limited. If eligibility only requires
reaching a certain age, benefits must be reduced. We must do one or the
The average American pays more in payroll taxes than he does in income
taxes. Adjusting for inflation, the maximum payroll tax increased 1,200
percent in the last 50 years. In 1945, 45 workers supported each Social
Security recipient. Within 25 years, it will drop to two.
By 2041, the current system will be insolvent. If the current benefit
schedule remains in place, present tax rates will only pay 73 percent of the
benefits in 2042, declining to 65 percent in 2077. To maintain the current
level of benefits, the payroll tax would have to equal 19.92 percent of total
national payroll. Many people struggle to put five or ten percent of their
pay into their own 401(k). Imagine the government taking 20 percent of
your salary to pay for someone else's retirement.
In 1935, the Social Security system began as a safety net for indigent
elderly. It was not considered a guaranteed right. (In 1960 in
Flemming v. Nestor, the U.S. Supreme Court ruled that no one had a contractual
right to receive Social Security benefits, regardless of how long they had been
paying into the system.) Franklin Roosevelt, the system's political
architect, bragged that Social Security was one of the few instances of the
federal government acting specifically for the sole interest of the 'poor and
lowly.' While governor of New York, FDR instituted means testing for its
state-sponsored general pension.
Means testing could go a long way toward avoiding the coming fiscal
collision, but it would be politically difficult. Democrat strategists
love to warn that republicans want to hurt seniors and take away their Social
Security and Medicare. Imagine the rhetoric if a republican did actually
propose a step ' no matter how small ' in that direction.
Only a democrat could to it.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).