Death and Taxes

Benjamin Franklin famously wrote that “in this world nothing is certain but death and taxes.” The current chapter is about both. If you are like most readers of this book, you are at the very beginning of your working life, and you have probably given little thought to your retirement. In the early years of work, you might be asked to make some decisions regarding a company pension plan, but it is still unlikely that you will spend much time thinking about how you will live when your working life is over. This is normal; none of us is very good at imagining at the age of 20 what our life will be like when we are 70. (Even at the age of 30, or 40, or 50, it is hard to imagine life at age 70.) One message of this chapter, though, is that even though it is hard to think that far ahead, it is also smart to try to do so. From the very beginning of your working life, you will be making decisions that affect your life in retirement. And from the very beginning of your working life, those decisions will—or should—be influenced by something called the Social Security system. Social Security was born in the Great Depression. Many people suffered tremendous economic hardship in the 1930s. As part of President Franklin D. Roosevelt’s New Deal in the 1930s, the US government established several systems to alleviate such hardships. Social Security—one of the most important—was designed to provide financial assistance to the elderly. More than 170 other countries, big and small, rich and poor, also have social security systems. To take a few random examples, you will find social security in operation in Mexico, France, the United Kingdom, Kiribati, Laos, Azerbaijan, Chile, Andorra, Burkina Faso, Egypt, Cyprus, Paraguay, and Slovenia. The Social Security system will give you money when you are older, but it takes money from you when you are working. So even if it is hard to think about the effect that Social Security will have on your income in the distant future, it is very easy to see the effect it has when you are working. Workers are required to make Social Security contributions—one of the many kinds of tax that we all pay—with the promise that they will receive reimbursement from the system when they are older. The state of the US Social Security system is therefore something that you should think about long before you receive payouts. Decisions about your personal saving and consumption right now are, or at least should be, directly influenced by your current tax contributions and expectations of your future Social Security payouts. Opinion polls reveal that Social Security is one of the most well-supported government programs in the United States. Yet the casual reader of the newspapers could be forgiven for thinking that the system is perpetually in crisis. In the 1980s, for example, there was discussion of serious difficulties with the funding of Social Security. A commission headed by Alan Greenspan (who later became chairman of the Federal Reserve Bank) identified problems with the system and recommended a large number of changes, including some increases in Social Security tax rates. These reforms were supposed to ensure the solvency of Social Security well into the future.