What's Wrong with Social Security and How to Abolish It
by Ari Armstrong, December 2, 2004
A brief commentary about phasing out Social Security is also available.
What is Social Security?
As the Social Security Administration reviews, President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935.
Social Security is a mandatory redistribution of wealth from workers to the retired elderly. Currently, Social Security imposes a regressive tax of 12.4% on all income up to $87,900. (For those on payroll, half the tax is paid directly by the employer and the other half is deducted from the paycheck, though how the tax is split is a trivial matter.) The program redistributes nearly half a trillion dollars every year. It is the "federal government's largest spending program, accounting for nearly 22 percent of all federal spending."
Currently, the 12.4% tax raises more funds than are paid out in benefits. That's expected to change in 2018, when benefits will exceed tax revenues (under current rules). The so-called "trust fund" is basically a giant shell game. The money is not actually invested in any real economic sense, but instead it is spent indirectly on other government programs. As Michael Tanner notes, "That surplus is used to purchase government bonds -- the only purpose to which it can be put. The purchase of those bonds generates general revenue for the federal government and that money is spent on the operations of the federal government." Once the deficits begin, the "fund" can only be repaid by cutting other government program or raising general taxes.
When people collect Social Security benefits, they are not getting "their" money back. Their money has already been transferred to and spent by previous retirees. Instead, recipients are taking money directly out of the pockets of the working poor and middle class.
While Social Security is often compared to an "insurance" program, it is not one in its primary function. In an insurance program, willing participants pay money to offset the risk of some future damage or disability. An insurance company has to maintain sufficient assets to pay those who need to collect. Social Security, on the other hand, pays benefits by forcibly taking money from unwilling participants. The core principle of insurance is that a number of people pay into a common pool sufficient funds to pay the few who fall into trouble. Social Security, on the other hand, takes money from all workers and pays it to all retirees (minus handling fees). There is an element of the Social Security system that covers disability, and that's analogous to an insurance program. But that could and should be treated as a separate issue. Under discussion here is the core of the Social Security program, which is a massive transfer of wealth from workers to retirees.
Because Social Security depends on taking money from future unwilling workers, not on any real savings or investments, it is in essence a giant Ponzi scheme. If anyone but the government tried to run a program like Social Security, the person would rightly be sent to prison.
Why is Social Security Headed for Crisis?
As Henry Hazlitt notes in The Conquest of Poverty, "From 1937 to 1950, Social Security was financed by a combined tax rate of only 2 percent... on wages up to $3,000 a year. Since then both the rates and the maximum wage base have been increased every year" (1973, page 88). A big reason for this massive expansion of the tax is that benefits were increased and expanded, as Hazlitt notes. (Just Facts also describes some of this history.)
Another reason for the continued growth of the program is the increase in life expectancy. People live several years longer now (on average) than they did when Social Security first paid out benefits.
The most pressing problem with the system, though, is the Baby Boom population bubble. So long as the number of workers relative to the number of retirees stays the same, the burden on workers remains constant. But over the next few decades the number of retirees will rise substantially relative to the number of workers. The result will be trillions of dollars of unfunded promises. The gap between money collected by the Social Security tax and money promised to beneficiaries can be bridged only in two basic ways: place a higher financial burden on workers or reduce benefits. There's no way around that basic fact, besides wishful thinking.
What's Wrong with Social Security?
At the most basic level, people have a fundamental, inalienable human right to dispose of their earnings as they see fit. Social Security forces people to pay 12.4% of their earnings to the national government, which then redistributes most of the money to the elderly. Thus, Social Security undermines economic liberty and the free choice of citizens.
Supporters of Social Security argue politicians are doing workers a favor by forcing them to participate in the program. After all, everyone who pays into the system also gets benefits (unless the person dies first). The pro-Social Security argument is faulty for two reasons. First, individuals should be free to decide for themselves whether a particular retirement program is worthy of participation. Second, the benefits promised by Social Security are paid for by unwilling workers, even children and those not even born yet.
In some sense, Social Security has the tacit approval, or at least the tolerance, of much of the population. Thus, some significant portion of those who pay Social Security benefits can be said to participate in it willingly. However, this fact does not legitimize the system. It is willing participation in taking money from unwilling workers. A large segment of the population does not wish to pay into the Social Security system, and thus those people's rights are subject to constant violation.
The only plausible argument in favor of Social Security is that it ensures the elderly don't slip into poverty. Obviously, while many people never retire and remain in good health far beyond the common retirement age, some elderly people suffer from a variety of physical ailments that make continued work difficult or impossible. Disability is more common among the elderly.
Perhaps some argue that people of a certain age "deserve" to retire, regardless of health. It's difficult to see what reasons might make this so. Who is to determine this magical age at which people "deserve" to be able to take money by force from workers? The only sense in which a person can be said to "deserve" retirement is when that person has made the common-sense preparations to save for it. Those who believe people of a certain age "deserve" to be able to retire at others' expense are perfectly free to contribute voluntarily to such a fund. So again the only plausible argument for Social Security is its ability to keep the elderly out of poverty.
But the argument about poverty simply does not serve to legitimize the modern Social Security system, which after all takes money from the poor and gives it to the rich. The best way to ensure the working poor become the retired poor is to rob them of 12.4% of their income every paycheck. Those who favor a mandated anti-poverty program for the elderly should support a means-tested welfare program targeted only to the elderly poor. Anything more than that just doesn't make any sense, and is in fact counter-productive, even from the welfare-statist perspective.
Thus, within the bounds of reason, the debate over Social Security should be between those who want to completely eliminate it and those who want to replace it with a welfare program limited to helping the poor. There is simply no good reason to support the modern Social Security system. It's a ridiculous, asinine program contrary to every principle of good government. The only possible intellectual reason to support Social Security is a belief that centralized power is good for its own sake. Why, then, is the status quo supported by the mainstream? Inertia plus special-interest group warfare explain it. (Plus, by demographic coincidence, those currently taking benefits vote in higher proportion relative to those most damaged by the system, young workers.)
In addition to massively violating individual rights, Social Security also undermines financial responsibility and real savings. You get more of what you subsidize. Social Security subsidizes mindless consumption. In general, a strong culture consists of self-responsible citizens who plan long-range. Social Security thus undermines a culture of responsibility and encourages dependence on the national state.
Can it Ever Be Morally Justified to Accept Social Security Benefits?
Receiving Social Security benefits does not consist of getting "your" money "back." Instead, it consists of taking money from current workers. Can this be justified?
In an admittedly ambiguous sense, money children pay into the system goes to their parents who receive benefits. Thus, it seems to be acceptable to receive benefits, only if there's somebody paying for benefits who would rather the benefits go to a specific recipient. In a convoluted way, it's possible that a worker pays the Social Security tax, the benefits go to the worker's parents, then the parents eventually will the money back to the child.
But nothing about this changes the fundamentally coercive nature of Social Security. As Ayn Rand suggests, only those who advocate the elimination of the system can morally receive benefits.
What Are the Categories of Reform?
That Social Security must be reformed is obvious. That it should be fundamentally reformed, for reasons beyond the pending demographics problem, is unchallengeable (by reasonable people). The question, then, is whether Social Security should be reformed by getting rid of it or by replacing it with a means-tested welfare program.
From the welfare-statist perspective, reform seems fairly obvious: cut benefits to everyone except the poor and reduce the Social Security tax accordingly. (I suppose welfare-statists might prefer the residual money instead be directed toward other relatively poor demographic groups.) Whether benefits are cut only for future recipients or for current recipients too is a matter of practical politics. There is, from the welfare-statist perspective, no strong reason why wealthy retirees should continue to collect benefits.
Champions of the free market point out that all mandatory charity programs violate economic liberty. On the free market (and to a limited extent in today's mixed economy), jobs are readily available and capital accumulates quickly to increase real wealth and standards of living. Insurance is widespread, offering relief from catastrophic medical emergencies and long-term disability. Furthermore, voluntary charity is more than adequate to take care of the few who nevertheless slip into poverty. Thus, the proper goal is to eliminate Social Security and replace it with liberty, not another government program.
Is there a moral responsibility to ensure that those taking benefits or soon to be taking benefits continue to receive those benefits? Again, Social Security is purely a transfer scheme. An analogy to the mafia may be drawn. Let's suppose the mafia tells Albert, "I'm going to take $100 per month from you, but in 20 years I'll take $100 per month from Burt and pay it to you." Albert doesn't like this deal, and he would prefer to dispose of the money as he wishes. However, the mafia makes him an offer he can refuse only in exchange for concrete boots. Let us further suppose that Albert plans his retirement around the anticipated future payment. However, when the mafia tries to collect money from Burt, Burt calls the police, who arrest the mafia leaders and throw them in jail. Does Burt somehow have a moral responsibility to Albert simply because Albert was previously the victim of theft and planned his finances on the assumption of benefiting from future theft? How this analogy differs from Social Security (other than the concrete boots) is not obvious.
Here's another example. Let's say Carman pays Dolores for a car, but before Dolores delivers the car the police arrest Dolores for stealing the car and return the car Erin, the car's rightful owner. Does Erin owe Carman for the money that Carman paid to Dolores? If not, it's difficult to see why the recipients of Social Security have a right to the benefits. The recipients of Social Security benefits are advantaged by the political analog of theft -- the forcible transfer of wealth.
But legality is but a subset of morality. If the law is just, everything that is illegal is also immoral, but many acts that are immoral are perfectly legal. So plausibly the moral thing to do is to make sure that those elderly who planned their retirement around Social Security and who would otherwise fall into poverty keep getting some funding. This sentiment is probably widespread in the culture, which is a good reason to suspect a system of voluntary charity could easily replace the Social Security system immediately. After all, workers would suddenly gain the equivalent of a 15% raise. One of the things many workers would do with some of this money is make sure the elderly are taken care of.
Thus, abolishing Social Security immediately is perfectly moral, and there's every reason to believe the elderly poor would be provided for.
Yet this seems politically unfeasible. Generally, people are skeptical of far-reaching political changes. Thus, Social Security would more easily be phased out. There are two basic ways this could be accomplished. First, the age at which benefits are paid could be increased constantly. For example, every year the pay-out age could be increased by three months. So long as the pay-out age increased faster than life spans, the program would eventually dissolve. Second, benefits could be cut for current or future beneficiaries. Notably, benefits for current recipients could be maintained whether the age is raised or benefits are cut for future beneficiaries. However, means-testing benefits for current beneficiaries (that is, cutting benefits for wealthier recipients) would also be a good reform.
Of course, if benefits were merely held to the rate of inflation, eventually the size of the program would remain constant but shrink relative to the size of the economy. If benefits were frozen in nominal dollars, the program would shrink over time in terms of real wealth. Better yet is to cut benefits incrementally.
It's probably easiest to pick one sort of phase-out reform and exclude any changes in benefits to current recipients. A great program would be to raise the pay-out age by three months every year, meaning that every 20 years the pay-out age would be increased by five years. Another great program would be to annually cut benefits for new retirees by 1% in nominal dollars. In either case, Social Security would be phased out in about a century.
The phase-out plan does raise another moral question, though. If it's immoral to benefit by the forcible transfer of wealth from others, doesn't the phase-out plan extend such immorality for many years? The phase-out plan maintains the principle that Social Security is fundamentally bad and should be abolished. However, at some point consideration must be given to political forces. Adopting a phase-out plan in five years is far better than fighting for immediate abolition for the next five decades.
What About Bush's Plan?
Those who support free markets will advocate the phase-out plan in some variation. What, then, are we to make of the personal accounts advocated by President Bush, many conservatives, and even some leaders at the Cato Institute? The mandated accounts are irrelevant to real reform of Social Security, and they are an assault on market liberty.
Some argue that "replacing" the current Social Security system with a system of personal accounts -- albeit personal accounts that are mandated and regulated by the national government -- is an improvement. Such an argument rests on a massive confusion (or, in some cases, on a massive fraud).
Some additional background is needed. A poor alternative to the phase-out plan is the opt-out plan. Under the opt-out plan, workers are allowed to pay less money to Social Security, and in exchange they get fewer benefits once they retire. The opt-out plan could start small and expand over time.
There's one central problem with opt-out plans: they don't reduce benefits in the short run, yet they decrease revenues from the Social Security tax. Thus they result in a deficit that must be made up elsewhere. (Again, the so-called "surplus" merely subsidizes other government programs.)
Thus, the opt-out plan rests on a fraud. It promises to let workers pay less in taxes, but in fact it will impose the exact same tax burden (in the short run), just with different taxes. The phase-out plan, on the other hand, explicitly endorses decreased benefits, and it promises to cut the Social Security tax as benefits decline. Under the phase-out plan, there's no false promise of having your tax cut and eating it, too.
Anything the opt-out plan can do, the phase-out plan can do better. There's simply no good reason to favor the opt-out plan over the phase-out plan.
To the opt-out plan, Bush adds mandatory, regulated accounts. If the first mistake is to disregard the short-term deficits of the opt-out plan, the second mistake is to think mandatory accounts are somehow a necessary or desirable element of reform.
In fact, mandatory, regulated accounts are the precise opposite of free markets. Again, people have a fundamental right to use their income as they see fit. Forcing people to invest a certain percentage of their income is a violation of individual rights.
Mandatory accounts are also highly dangerous. The mandated investments will certainly be influenced by politics. Mandatory investments are a huge step toward direct government control of the economy. Those who claim mandatory, regulated accounts are somehow consistent with liberty are deluding either themselves or others.
Obviously the mandated personal accounts are paternalistic: they assume national politicians have to force people to save for retirement. Mandated accounts also limit the individual's control over his or her income and thus make that income less valuable. Whatever limited choice might be allowed over the personal accounts, it's still not the liberty of using the money at the earner's discretion. The essence of Bush's proposal is coercion.
Bush's plan encourages some people to confuse choice with liberty. The argument is that, because people are allowed to "choose" to replace some Social Security benefits with an account, and also "choose" to some degree how that money is invested, that's an improvement. However, more choices do not automatically imply greater liberty. For example, a criminal might simply kill a victim and then steal the money. An enlightened criminal, though, could offer a choice: "Your money or your life." An even more concerned criminal could offer three choices: "Your money or your life or your car." Choice is a great aspect of the free market, but choices limited by central planners are not indicative of liberty. Even slaves can make some choices.
A couple sources highlight the problems with Bush's plan. In a story for the New York Times (reprinted in the Denver Post on November 28), Richard W. Stevenson writes, "The White House and Republicans in Congress are all but certain to embrace large-scale government borrowing to help finance President Bush's plan to create personal investment accounts in Social Security, according to administration officials, lawmakers and independent analysts."
The Report of the President's Commission on Social Security (December 21, 2001) describes three similar reforms, and apparently the second is most popular. The Report pretends, "Model 2 establishes a voluntary personal account without raising taxes or requiring additional worker contributions." The Report admits, "In exchange for the account, traditional Social Security benefits are offset by the worker's personal account contributions compounded at an interest rate of 2 percent above inflation." And here's the kicker: "Temporary transfers from general revenue would be needed to keep the Trust Fund solvent between 2025 and 2054." So how, precisely, are "transfers from general revenue" consistent with the promise of establishing an "account without raising taxes?"
Chapter 2 of the Report, "Administration of Personal Accounts," makes clear the nature of the proposal. Here are some snippets from the "Summary of Findings:" "Personal accounts can be administered in an efficient and cost effective manner," "The Governing Board," "Investment allocations should be allowed to change not more than once during a 12-month period," "A standard fund should be established for those individuals who do not select a fund in Tier 1," "Pre-retirement access to funds in personal accounts should not be allowed."
These are the "voluntary" accounts. And freedom is slavery.
This is Bush's "ownership society." Owned by the state, precisely.
Mr. President, you can keep your mandatory "voluntary" accounts, your doublespeak, your Governing Boards, and your Tier 1 investment allocations. I don't want or need your "help" to invest my money. What I want and need is liberty.
For additional analysis, please see Social Security: Collected links.