Economy & Business

Social Security Makes Millennials Less Financially Responsible

Its paycheck deductions leave many young workers short, forcing them to borrow.

In the Los Angeles Times, Michael Hiltzik argues that Social Security has “never been more relevant, or more needed.” While it’s important to compensate retirees who have paid into the system all their lives, Social Security is neither relevant nor needed for America’s next generation. We should help Millennials by phasing out this outdated program.

Millennials have a reputation for being heavily indebted and fiscally irresponsible. Phasing out Social Security could help my generation fix both issues.

Social Security taxes away 12.4 percent of each American’s paycheck. In theory, half of this tax is paid by the employee and half by the employer. However, both halves are really taken out of the employee’s paycheck, because employers factor both taxes and wages into the cost of hiring a worker; the higher the taxes, the lower the wages they pay out. If Microsoft budgets $75,000 for a new software engineer, then Social Security means the tech giant will pay 6.2 percent less in salary than it would otherwise. This isn’t just neoclassical economics theory: economist John Britain, a senior fellow with the Brookings Institute, has demonstrated empirically that employees pay both parts of the Social Security tax.

Millennials also struggle with substantial debt. In a survey of one thousand Millennials by ORC International, almost 66 percent reported at least $10,000 in student-loan debt, with over half of those reporting debt of $30,000 or more. Another survey by LendEDU found that 36 percent of my generation have maxed out our credit cards.

Paying off this debt is difficult: The average 29-year-old makes only $35,000 per year. A 12.4 percent tax makes it even harder to pay rent and still make a dent in your debt. This tax is especially pernicious because of the high interest rates that Millennials face. Student-loan interest rates range from 3.4 percent to over 7 percent per year. In 2014, the average credit-card interest rate was over 15 percent.

Faced with the choice of putting a portion of his income into a retirement account with paltry returns or paying down his credit-card debt, a savvy Millennial would choose the latter. Unfortunately, Social Security forces him to do the former.

Social Security also erodes Millennials’ opportunities to save, leaving our generation with less of a safety net and forcing us to take out more debt to deal with unexpected expenses. Seventy-two  percent of young adults have less than $1,000 in the bank. In this environment, an unexpected expense — for instance, a car engine that blows on the way to work — can’t be paid for and will likely need to be put on a credit card.

Social Security was intended to help Americans finance their retirements, but the data suggest that young workers would be better off doing almost anything else with that money. A report by the Urban Institute, a liberal think tank, found that workers earn a paltry rate of return on their Social Security investment. A young woman born in 1995 who starts working at 22, making $47,800 per year, will pay $466,000 into the program by the time she retires (the Urban Institute, like the Brookings Institute, assumes that the employee will pay both her share and her employer’s share). She’ll only receive $569,000 in current dollars — which means a 22.1 percent increase over 43 years. And that’s assuming that Social Security benefits don’t fall, even though funding shortages make that a real possibility.

Social Security was intended to help Americans finance their retirements, but the data suggest that young workers would be better off doing almost anything else with that money.

If she put her money into a typical retirement account, by contrast, she would receive over twice as much: $1.3 million by the time she retired. The government prevents us from responsibly investing in our retirement, instead forcing us to invest at low returns.

Many progressives fear that if we didn’t have Social Security, we wouldn’t save enough for retirement, leaving us destitute in our golden years. This scenario is unlikely. Many Americans think they hardly need to save for their retirement at all because that’s what Social Security is for. The Motley Fool, a financial website, notes that “an estimated 61 percent of retirees rely on their benefits to provide at least half of their income.”

Without Social Security to offer Americans a false sense of security, most people would save more for retirement. A study published in the prestigious American Economic Review found that for every additional dollar that households expect to earn from Social Security benefits, they save $0.60 less. The more we believe that we can rely on a government program, the less incentive we have to rely on ourselves.

In fact, without Social Security, Millennials might even have a more comfortable retirement, because we would be investing our money in more lucrative accounts. If the young woman didn’t pay Social Security, and instead put 60 percent of that money in an investment account, she would have over $800,000 by the time she retired.

Critics allege that Millennials are financially irresponsible because so many of us have been coddled. To the extent that that’s true, the last thing we need is a government-mandated retirement program designed (poorly) to take care of us. Let’s phase out Social Security and let Millennials stand on their own two feet.


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