When it was enacted, the nation’s elderly were in dire straits. The Depression devastated their incomes and savings; over fifty percent were poor, more than the rest of the population. Even if they were willing to take it (and many were not), only a small percentage received government aid.

Social Security changed all that. It enabled the elderly to get help through a program that resembled a pension, not public assistance. What they paid during their working years, many believed, came back with interest after they retired. Largely because of this help, the elderly’s poverty-rate is now below ten percent, much less than that of the rest of the population.

Yet, it was always a fiction that the elderly received only what they had paid for. Social Security was designed so that taxes collected from the current generation of workers financed the benefits going to retirees and gave them more than what they had contributed. As long as the ratio of workers to retirees was high, this fiction did well. But the ratio has been steadily declining, meaning either higher taxes or other sources of revenue will be needed in the future to provide what retirees think they have earned.

A better course would be to get Americans to save more during their working years, to create, in other words, a real pension plan. There are many ways of doing so. But none will succeed until the octogenarian Social Security gives up the illusion of its youth.

Sources:

Poverty-rates during the Depression
“Social security and elderly poverty,” National Bureau of Economic Research
Current poverty-rates
Worker-retiree ratios

This week, in fact, we finally finished paying the 2014 bill. According to the Tax Foundation, a Washington think-tank, April 21 was “Tax Freedom Day,” the day when Americans as a whole have earned enough since January 1 to pay our entire federal, state, and local taxes this year. That is three days later than last year.

Adding what we will have to borrow (and pay off in future taxes) worsens the picture. “Deficit Day,” as the Tax Foundation calls it, will be May 6 this year. Last year, it was May 8, reflecting a little progress in budget-cutting.

In Indiana, tax freedom came earlier than in about half the states: April 16. But our neighbors in Illinois won’t get there until April 28, largely because they pay more in state and local taxes.

To be sure, Tax Freedom Day this year was about the same as it was fifty years ago. So, it looks like we are now working roughly the same number of days we did in the 1960’s for a far more extensive set of public services.

But that is an illusion.

Because American incomes have risen rapidly since the 1960’s, we are paying vastly more in taxes than we used to in the same amount of time. Not even a series of tax-rate cuts has managed to slow down the growth of government revenues for very long, or reduce the number of days we have to work for them.

When Justice Holmes wrote about the value of taxes, Tax Freedom Day was in February. Are we really more civilized now?

Sources

Holmes quotation 
Tax Freedom Day