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Social Security was established by Franklin Delano Roosevelt in 1935 (at a
mere 2% tax) to combat poverty among the elderly. It was founded on the
economic principal that as long as incomes and the workforce continued to
grow, so too would each successive generation guarantee its elders a secure
retirement. Changes in the system--mere "tinkering," according to advocates of an overhaul--have come in the form of ten tax hikes since 1950, some from the executive branch, some from Congress. In 1983, Ronald Reagan imposed the largest hike ever and temporarily suspended COLAs. Unbelievably (unless you look at the delusional environmental policy enacted during that period) the President announced we were set for another 75 years.
Norman Ornstein of the American Enterprise Institute pointed out in a 1992
New York Times op-ed piece that the [U.S.] Social Security tax is
regressive in not just one, but three, ways: "It has a flat tax
rate: the same marginal rate for those who earn $1 as for those who earn $1
million. It has an earnings cap, so those who earn $10,000 actually pay a
higher percentage of their earnings than those who earn $100,000. And it is
a tax on earned income, wages and salaries, exempting income from interest
and investments, and thus becoming a tax on employment itself." Ornstein
could have added a fourth regressive element: Whereas a married couple with
only one worker would have a maximum of $51,300 subject to this tax, a
two-earner couple would each be accountable up to this amount.
Although few [Gen-X] households earn this much, the overall incongruities
apply at all income levels."
Most of the other industrialized countries now have a mix of policies: some people are on so-called "old-age" pension plans--like ours--that are determined by how much a worker made and therefore paid during his or her working years. Others, generally poorer workers, get flat-rate packages. But there is a drive to streamline things, and Chile's two-tier or "double-decker" approach is getting a lot of attention lately. Faced in the mid-1970s with the same cut-benefits-or-increase-taxes option now being considered in the U.S., General Augusto Pinochet decided to abandon the payroll-tax-financed system. Chile's poorest pensioners now receive a flat stipend (funded by the government's general revenues), and everyone else puts 12% of their salary into any of 24 government-managed but market-driven investment funds. It seems to be working: Chileans' retirement benefits have gone up by 40%. Countries looking toward adopting their own double-decker plans include those with postwar traditions of social responsibility and entitlement programs, like Australia, Sweden, Canada and Argentina, but also Japan and other countries with a less liberal foundation. The common factor seems to be that populations are getting older and pension plans are drying up--like they are in the U.S.
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