Social Security's Promises are a Fraud

Alex Epstein wrote a great post at the blog Principles in Practice titled Retire Social Security. He makes a strong case for the immorality of the Social Security system, something almost never argued in the mainstream media (or almost anywhere outside of Objectivist circles really.)

But I especially liked his debunking of the promises of the Social Security system as a fraud:

Social Security is commonly portrayed as benefiting most, if not all, Americans by providing them "risk-free" financial security in old age.

This is a fraud.

Under Social Security, lower- and middle-class individuals are forced to pay a significant portion of their gross income—approximately 12 percent—for the alleged purpose of securing their retirement. That money is not saved or invested, but transferred directly to the program's current beneficiaries—with the "promise" that when current taxpayers get old, the income of future taxpayers will be transferred to them. Since this scheme creates no wealth, any benefits one person receives in excess of his payments necessarily come at the expense of others.

Under Social Security, every aspect of the government's "promise" to provide financial security is at the mercy of political whim. The government can change how much of an individual's money it takes—it has increased the payroll tax 17 times since 1935. The government can spend his money on anything it wants—observe the long-time practice of spending any annual Social Security surplus on other entitlement programs. The government can change when (and therefore if) it chooses to pay him benefits and how much they consist of—witness the current proposals to raise the age cutoff or lower future benefits. Under Social Security, whether an individual gets twice as much from others as was taken from him, or half as much, or nothing at all, is entirely at the discretion of politicians. He cannot count on Social Security for anything—except a massive drain on his income.

Dishonest Social Security Ads Again

A few weeks ago I meant to blog on a nice brief item from Michael Tanner on some recent Social Security ads. After discussing some of the ads' falsehoods, Tanner writes:

Perhaps even more disturbing than the actual falsehoods is how the ads ignore Social Security's looming financial crisis. Social Security will begin running a deficit in just 11 years. Of course, in theory, the Social Security Trust Fund will pay benefits until 2040. That's not much comfort to today's 33-year olds, who will face an automatic 26 percent cut in benefits unless the program is reformed before they retire. But even that figure is misleading, because the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.

Even if Congress can find a way to redeem the bonds, the Trust Fund surplus will be completely exhausted by 2040. Then, Social Security will have to rely solely on revenue from the payroll tax -- and that revenue will not be sufficient to pay all promised benefits. Overall, the system's unfunded liabilities -- the amount it has promised beyond what it can actually pay -- now total $15.3 trillion. Yes, that's trillion with a "T." Setting aside some technical changes in how future obligations are calculated, that's $550 billion worse than last year. By failing to act last year, Congress handed our children and grandchildren a bill for another $550 billion.

Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has simply become a bad deal for younger workers, providing a low, below-market rate-of-return. In fact, many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money.

But the most important problem with the current Social Security system is that workers don't own their benefits: Workers totally depend on the good will of 535 politicians to determine what they receive in retirement. Any politician, regardless of party, with the courage to address these issues should be celebrated, not vilified.

It is perfectly reasonable to disagree with various Social Security reform proposals, including personal accounts. But Social Security is too important to be left to demagoguery. At a minimum, we should expect the truth about the choices we face.

Mr. Wake, social security is doing fine

Susan didn't change her name to Stone when we got married. Nonetheless, she sometimes gets junkmail addressed to Susan Stone (instead of Susan Wake). Even funnier is when I get things addressed to Tom Wake.

I got one recently, from something called The National Committee to Preserve Social Security and Medicine (they have a website, but I don't want to link to it). This must have been a mass mailing, or I'm on a random list of US citizens who got it, because nothing I am affiliated with could lead them to believe I'd support their views.

Not only was it mistakenly sent to a "Tom Wake", but the contents of it really made me laugh. The basic position of this organization is that radical changes to the Social Security (and Medicare) system are not needed. In particular, they are against any "privatization" schemes, including the one proposed by Bush, but no doubt including any such idea. Included was a letter that I can just sign my name to and send directly to my representative, telling him how much I want to keep SS the same and that he should listen to the views of this committee organization.

The laughable thing here is that in a 6-page letter they don't once discuss any financial difficulties that SS and Medicare are facing. They attack privatization, but don't offer any other ideas or solutions to the looming problems. It would be one thing to be against a particular idea, and instead propose others. But they don't propose anything, because they don't even mention the problems in the 6-page letter at all! One must assume that they favor raising taxes to cover the future shortfall, but of course they don't want to say that in their fundraising letter! Instead, we get howlers like this:

"But I do know that Social Security was put in place by President Franklin Roosevelt in 1935 as a kind of "chain of trust" between generations to keep older Americans from experiencing devastating poverty. And I am confident that it is in that spirit that you and/or your spouse undoubtedly contributed to Social Security for many, many years..."

Umm... I wouldn't be so confident if I were you. In fact, I doubt very many people -- besides members of this committee perhaps -- contributed to SS "in that spirit".

Scary Entitlement Numbers

The Feburary 20 issue of Business Week has an editorial titled "Recognizing the Entitlement Peril" which reports some startling numbers. Anyone who pays the least attention to the news in the US knows by now that Social Security is in trouble and will be insolvent within a generation. What is less well known, because less often reported, is the financial crisis facing Medicare. Here is the most striking quote from this editorial:

Indeed, if we do nothing, the big three programs [SS, Medicare, Medicaid] are forecast to eat up nearly 20% of America's gross domestic product by 2040, roughly the share consumed by all federal spending today. In other words, without entitlement reform or huge tax increases, we would basically just be able to fund the big three after shutting down the rest of Washington (including the Pentagon).

Putting it that way makes the situation pretty clear.

It so happens that back in November I clipped a similar item from Business Week, and put it in my "For when I start a blog" folder. This one was "Spending is Out of Control" from the November 14 issue, and was written by none other than David M. Walker, Comptroller General of the U.S. ("the nation's top auditor and chief accountability officer"). Here is the most striking aspect of his article:

Less well known, the federal government's long-term liabilities and net commitments, such as those relating to Social Security and Medicare, have risen from just over $20 trillion in fiscal 2000 to more than $43 trillion in fiscal 2004, in large part because of the passage of the Medicare prescription drug bill in December, 2003. This translates into a burden of more than $150,000 per American and $350,000 per full-time worker, up from $72,000 and $165,000 in 2000, respectively. Those amounts are growing fast because of continuing deficits, our aging society's longer lifespans, slower workforce growth, and compounding interest costs.

Yikes. We each "owe" $350,000. He goes on to say:

That's why it's time to get serious about our nation's fiscal future. The federal government should provide more clarity about where we are and where we are headed from a fiscal perspective. It also should reimpose meaningful budget controls on both the tax and spending sides of the ledger and begin a long-overdue review of all major federal spending programs, tax policies, and operating practices. Believe it or not, much of the government is on autopilot and based on economic, security, workforce, and other conditions that existed in the 1950s and 1960s. It is time to rationalize and modernize the mission, programs, policies, and operations of the federal government to reflect the challenges and opportunities of the 21st century.

I agree with most of that. The issue of tax cuts and their effect on government revenues is debateable: by reducing certain taxes, you improve the economy, which generates more value and wealth, which is then a broader base that is taxed... so that is a matter of economic curves and maximization points. But certainly we should review all government spending, esp. if "much fo the government is on autopilot and based on... conditions that existed in the 1950s and 1960s."

Sadly, even doing as Walker advises will only improve the situation somewhat. Improving government effeciency and modernizing how it works for the 21st century is no doubt a good idea, a good first step. But more important would be to ask -- and properly answer -- basic philosophical questions about what the proper functions of government are, that is, ask what its proper scope should be instead of always arguing about its "size" in terms of dollars spent or people employed.