Using Kerry to save Social Security

By DAVID MOON, Moon Capital Management
May 23, 2004

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 retiree community/constituency.

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 other.

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).

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