Why do so many seemly intelligent people say so many stupid things? Granted, I myself have been known over the years to make both stupid comments and remarks I have later regretted saying, not that I am implying I’m a smart person, however, the latest example of such foolishness occurred in an article that appeared in my local newspaper this past week by New York Times columnist David Brooks. In his article concerning federal government revenue, spending and the proverbial fiscal cliff near economic disaster, Mr. Brooks stated that the typical American couple pays $109,000 into Medicare yet receive $343,000 in health benefits, thus in his words the hypothetical couple receives “free money.” Many other commentators have made similar comments in the past regarding Social Security taxes paid versus retirement benefits received as well.
Just looking at the numbers that Mr. Brooks presented, one would tend to think this is why Social Security and Medicare are both nearly bankrupt. However, two words completely repudiate Brooks and every other commentator who makes similar assertions: compound interest. Maybe it’s my mathematical background with a degree in accounting from Ohio State University; however ask any homeowner how much they borrowed from a bank to finance their dream house versus how much they actually paid back. As a general rule of thumb, a homeowner usually pays back three times what they borrowed during the course of a thirty-year mortgage. If, for example a person borrows $150,000 to buy a home, they would eventually pay back $450,000, if not more during the course of thirty years worth of mortgage payments. Granted, the term of the loan and interest rate applied greatly affects this example, but this assumption is generally true over thirty years.
The real reason why Social Security and Medicare are both going bankrupt is that Congress has routinely spent all surplus revenue it takes in every year in the form of FICA taxes instead of investing these funds in very conservative investments such as U.S. Treasury bonds. With the average American working nearly fifty years before reaching retirement age, if the federal government had invested their payroll taxes paid in treasury bonds or similar investments, both Social Security and Medicare would be solvent for decades to come, if not forever.
Compound interest is a great thing if you are on the receiving end of the debt; however, if it is you who are paying it, interest greatly increases what you eventually pay back. Compound interest earned on FICA taxes paid, if properly invested during the past seventy-seven years that Social Security has been in existence would have eliminated the financial dilemma now facing Congress.
Steven H. Spring