9 years ago: Nedra’s Christmas Club

August 12, 2004, on this blog: Nedra’s Christmas Club

[Associated Press reporter Nedra] Pickler seems to think of Social Security as a federally run Christmas Club. Or like a series of federally mandated IRAs — one for each citizen — that the government runs on our behalf.

In her scheme, your Social Security number functions like an account number. Your payroll taxes are deposited into your own personal Social Security account, from which you will be paid benefits when you retire.

Thus it is possible — in this imaginary scheme — to take a portion of younger workers’ payroll taxes and instead of depositing it into this federally run account, to allow those workers to deposit this portion in some other, “higher return” federally run account. Such a scheme would be neither social nor secure, but that’s not the point here. The point is that this isn’t how Social Security works.

The payroll taxes of younger workers do not go into “retirement accounts” that will someday provide the benefits for those younger workers. The payroll taxes of younger workers go to pay current benefits to those Pickler calls “today’s seniors.” The younger workers, when they get older and become tomorrow’s seniors, will in turn collect benefits paid for by the payroll taxes of the younger workers of the future.

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