The Objectivist Response to Social Security

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The Objectivist Response to Social Security

by Ari Armstrong, December 20, 2004

President Bush, backed intellectually by the allegedly free-market Cato Institute, wants to replace part of Social Security with mandatory, regulated accounts. Obviously, national political control over savings is not compatible with free markets. Thus, it's a good bet that Ayn Rand, the self-proclaimed radical for capitalism, would not have approved. Yet some leaders within Objectivism -- the philosophical movement founded by Rand -- lend support to Bush's plan.

The heart of the problem seems to be a slippery treatment of the term "privatization." Normally that term is taken to pertain to private property, which people can then develop, use, and trade on the voluntary (free) market. But Bush and the analysts at Cato apply the term "privatization" to money that workers nominally own but that is significantly controlled by the national government. Rand made perfectly clear what she thought of such politics. In Capitalism: The Unknown Ideal, she writes, "[W]elfare-statists are not socialists... they want to 'preserve' private property -- with government control of its use and disposal. But that is the fundamental characteristic of fascism" (page 211).

Perhaps another element of the problem is a lack of understanding regarding the central planning involved with Bush's "privatized" accounts. In fact, every plan that recommends such accounts involves significant government oversight of the investments (as Bush intimated December 16). The individual worker is not free to use the money as he or she sees fit. Instead, the worker is forced to save a certain amount of money, and that money is subject to a host of restrictions. Such restrictions are necessary, given the logic of mandatory savings. The assumption of mandatory savings is that workers are too stupid or irresponsible to plan for their own retirement -- thus, they must be forced to save. That central assumption also requires "sensible" oversight of the savings. If people are stupid or irresponsible, they can't just be permitted to do with that money whatever they want. They must be required to invest the money, not just spend it on goods and services. And only particular investments are suitable.

Mandatory, regulated accounts are completely unnecessary to true reform. Part of Bush's plan is essentially a sort of "opt-out" plan in which workers pay less money to the Social Security tax, and in exchange they receive fewer benefits. An opt-out plan may cover part or all of Social Security. In any case, an opt-out plan can be implemented without the mandatory, regulated accounts. The accounts are superfluous. People could simply be allowed to keep more of their money without any restrictions. Bush's plan, then, is really a two-staged one. Stage one is letting workers opt out of Social Security. Stage two is imposing a new national program of forced savings subject to rules set by national politicians. Bush's plan is best described as a new national program that coincides with an opt-out reform of Social Security.

People from various quarters have suggested that replacing Social Security with mandatory, regulated accounts is somehow a step in the direction of liberty. Yet this argument rests on the incorrect assumption that mandated accounts are essential to an opt-out plan. The only reason that many people today confuse the two distinct political proposals is that for over a decade supposedly free-market reformers have improperly linked them. If, for that same length of time, proponents of mandatory accounts had instead pushed to phase out the system, that reform would today be much more widely recognized as a viable option. For example, José Piñera, "co-chairman of the Cato Institute Project on Social Security Choice," praises Chile for replacing its Social Security program with mandatory, regulated accounts. Piñera brags that he "discussed our reforms with Mr. Bush as long ago as 1997 when he was governor of Texas."

If we lived in a free market, would any Objectivist advocate forced savings and national control over investment? Of course not. Perhaps part of the thinking behind support for mandatory accounts is that, if we were forced to choose between Social Security and mandatory accounts, the later would be marginally preferable. But that's irrelevant. Social Security and mandatory accounts are false alternatives. Advocates of the free market should support neither. Instead, the proper course is to criticize both statist programs and advocate economic liberty.

Even in cases where we face an incremental step toward liberty, the proper strategy is to explicitly endorse complete economic liberty and then fight for as much liberty as possible in the given political climate. Unfortunately, even this bare minimum requirement to explicitly condemn mandatory, regulated accounts is not being met by many free-market commentators. But mandatory, regulated accounts are not an unambiguous move toward liberty. They are instead the replacement of one statist program with another. Is the new statist program better in some sense? Only an ambiguous case can be made that it is. The assumption behind mandatory, regulated accounts is that people are fundamentally stupid and/or irresponsible. With that pretext for economic intervention, there is no logical limit to the state's control over our lives. Thus, mandatory, regulated accounts pose a grave danger to economic liberty. They are insidious. At best, replacing Social Security with mandatory, regulated accounts is a dangerous game. Phasing out the system in whole or in part, by contrast, is an unambiguous move toward liberty, and it's far safer.

The Ayn Rand Institute (ARI) has published commentary about Social Security that is mostly good, except that it often refrains from condemning mandatory, regulated accounts and sometimes even seems to endorse them.

In a 2000 release, Richard Salsman endorses an opt-out plan that does not entail mandatory, regulated accounts. Salsman's opt-out plan is immediate and it eliminates the entire system (rather than just a portion of it). He states, "In the coming year the U.S. government could easily issue bonds in the amount of the total Social Security liability ($8.1 trillion), deposit the bonds in the accounts of all current retirees and payers of the payroll tax, abolish the payroll tax, and close the system. The bonds could be freely traded or sold to meet retirement needs. To pay interest on the bonds and eventually repay them, government could sell assets..."

I have argued against such an opt-out plan because I worry it would be implemented badly. Salsman's opt-out plan entails a debate about selling off assets. Politicians would strongly disfavor selling off assets, and instead they would try to pay off the liability through tax increases or deficit spending (future tax increases). Thus, I favor a phase-out plan, such as incrementally reducing benefits or steadily increasing the age at which benefits are paid. However, both an opt-out plan (one free from mandatory accounts) and a phase-out plan can be consistent with the principle of economic liberty. Both can serve to eliminate Social Security without replacing it with another national program.

Unfortunately, in his more complete statement, Salsman gives Bush too much credit. Salsman writes, "To his credit, Bush concedes Social Security is bankrupt and he proposes a partial privatization, with 2 percent of payroll taxes diverted to private accounts. Workers could keep more of their earnings, invest it in markets and own their assets. But it's not nearly enough. The system should be abolished." This seems to suggest that Bush's plan restores some economic liberty but not enough. Thus, Salsman obscures the fact that Bush wants to replace (part of) Social Security with mandatory, regulated accounts. Salsman seems to have fallen for Bush's bait-and-switch regarding the term "privatization."

In an earlier essay, Salsman rightly criticizes the direct government investment of Social Security dollars. He writes, "Under [Bill Clinton's] plan, Washington would on average own 5% of the stock of major companies -- more than enough to exert significant control. Corporate decisions will then be made not by objective business criteria, but through political horse-trading." But the same political pressures will be exerted over Bush's mandatory, regulated accounts, though possibly to a lesser degree. Salsman argues against any sort of government investing: "The stock market is not a means of rescuing Social Security. The fraud of a Ponzi 'savings' plan cannot be mitigated by the added fraud of [a] government-directed 'investment' scheme. Instead, we should demand that Washington return to us, via tax cuts, any temporary 'surpluses,' so that we can save and invest our own incomes. Then, we should insist that this dishonest system known as Social Security be gradually dismantled." Salsman's comments against Clinton's plan also defeat Bush's plan.

In a 2000 release by ARI, Andrew Bernstein harshly criticizes Bush's plan for Social Security. Bernstein states, "Bush has proposed giving individuals 'permission' to partially opt out of Social Security. He doesn't recommend eliminating this unjust, immoral, wasteful, statist program. Why? Because, according to his own position statement, Bush regards Social Security as a 'defining American promise that must be kept.' If this doesn't indicate how little Bush values individual freedom, nothing does."

So if Bush obviously doesn't value individual freedom, why does Bernstein seem to support Bush's plan in a 2004 release? The release notes that most "Americans favor a shift from the government-run Social Security program to private accounts." But are these actually private accounts, or are they the accounts Bush has in mind, accounts that are mandated and regulated by the national government? The release doesn't make the distinction. Bernstein states of this ambiguous plan, "Morally, the injustice of forcibly taking money from young working people to pay retirement benefits to the elderly will end... [F]reeing taxpayers from the burden of financing Social Security, leaves them with greater choice: they can spend part or all of their additional income to improve their lives in the present -- or they can save part or all of it for their retirement." However, Bernstein's claim of complete individual choice over the funds is incompatible with Bush's plan or any variant of it. Bernstein's remarks admirably permit only letting people keep more of their own money. However, in the modern political climate the term "private accounts" is often understood to mean Bush's plan. Because ARI's release fails to make the distinction and to explicitly condemn mandatory, regulated accounts, the release seems to back Bush.

Robert Tracinski offers a third example. He is the editor and publisher of The Intellectual Activist (TIA), an independent "Objectivist Review" for "[a]nalyzing current political, cultural, and philosophical issues from a pro-reason, pro-individualist perspective." In his daily review over the last few weeks, Tracinski has made numerous supportive comments about Bush's plan. He has made similar comments that are available at ARI's web page.

For example, in a 2000 article, Tracinski praises Bush's plan and blasts Bush's opponents on the left. Tracinski makes two errors. First, he offers false alternatives. Just because Bush's leftist critics are wrong, doesn't mean Bush is right. Second, Tracinski obscures the fact that by "privatization" Bush means accounts mandated and regulated by the national government. Tracinski writes, "George W. Bush's proposal is a good start, but we should privatize Social Security completely." Tracinski thus implies that Bush's plan is partial privatization, which is incorrect. According to the correct definition of privatization, which implies a free market, Bush's plan is the exact opposite of privatization.

Fortunately, every Objectivist writer I've come across gets the fundamentals right: those who earn money should have the political freedom to do with it what they want. The error is one of misapplying the general principle to the specific case of Bush's plan. Objectivists are generally careful to define their terms. I'm confident that, once they consider the proper definition of the term "privatization," they'll realize it is the precise opposite of what Bush is promoting.

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Ayn Rand and Incrementalism

Rand offers a direct statement against all forms of interference with retirement in Journals of Ayn Rand, page 415. Rand is describing an unvirtuous character: "[W]hen she said it's right that she should be compelled to pay for her own social security, by force and law; it's better for her since she'd never have the character to save or provide for her future voluntarily. This is an admission of weakness and, again, the attaching of one's own sin to the rest of the world. Like this: I deserve to be pushed into line by means of a whip -- therefore it's all right for others to be whipped, too, whether they deserve it or not." Rand's comments apply equally to today's Social Security system and to mandatory, regulated accounts.

The difficulty is figuring out how to move from today's welfare-state, mixed economy to economic liberty. Nobody expects the transition to happen overnight, which means that incremental moves toward liberty must be endorsed. But there are at least two requirements for endorsing an incremental policy, within Rand's framework. First, complete economic liberty must be supported explicitly. Second, the incremental policy must in fact move toward liberty. I have argued that replacing Social Security with mandatory, regulated accounts is at best an ambiguous move and probably an exceedingly harmful one.

Rand had some blunt things to say about compromise. Two of her essays explicitly deal with compromise: one contained in Capitalism: The Unknown Ideal, the other in The Virtue of Selfishness. In the first work she writes, "In any collaboration between two men (or two groups) who hold different basic principles, it is the more evil or irrational one who wins" (page 145). In the second work she writes, "There can be no compromise between freedom and government controls; to accept 'just a few controls' is to surrender the principle of inalienable individual rights and to substitute for it the principle of the government's unlimited, arbitrary power, thus delivering oneself into gradual enslavement" (page 68).

Yet Rand did not rule out incremental policies. A clear example of this is in The Objectivist, February 1969 (page 596 in the book). Rand writes, "A consistently proper stand... would require the total repeal of the law forbidding abortion. This is not likely to pass at present, but the kind of amended laws that have been proposed would represent a great step forward, would save many lives and alleviate an incalculable amount of human suffering -- provided they include a clause which permits legal abortion when the pregnancy endangers a woman's physical or mental health."

Rand thus meets the two noted requirements for incremental reform: she states a principled view and accepts a proposal that clearly moves in that direction. (Rand is writing in a time of absolute prohibition of abortions.)

Rand also adds a third requirement to any appropriate incremental reform. She writes, "A clause including the protection of a woman's mental health, is essential to a meaningful abortion-law reform. Without it, any reform passed would be worse than none: it would be a pretense that might delay actual reform for another 86 years." Thus, the additional requirement is that the reform be significant rather than trivial and likely to cut off future reform.

Mandatory, regulated accounts fail all three tests. One cannot consistently support mandatory, regulated accounts (i.e., forced savings) and economic liberty. Mandatory accounts do not unambiguously move toward liberty. Moving from Social Security to mandatory accounts also threatens to cut off meaningful reform in the future.


For additional analysis, please see Social Security: Collected links.

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