Social Security: Reply to Critics

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Social Security: Reply to Critics

by Ari Armstrong, December 29, 2004

The Denver Post ran a perspective article of mine about Social Security on Sunday, December 26. A few people wrote or called with various objections. Here I summarize the criticisms and offer a reply. I've covered much of this ground before, but apparently addressing the same points in numerous contexts is useful.

Objection: Older workers have paid "into" Social Security for many years, and thus it would be unfair to cut off their benefits.

Reply: The phase-out plan does not cut off benefits for older workers, and it need not cut benefits at all for those currently taking benefits. Thus, phasing out Social Security would provide a fairly smooth transition with a minimum of disruption to all parties.

As a strategic matter, I do not think benefits for most current recipients should be cut in real terms. It would be acceptable to means-test benefits for current recipients, though, such that the elderly rich no longer receive them. This is optional. It's important to note, however, that benefits for current recipients increase every year. If these benefits were set to grow at a slower rate (only with inflation), that would go a long way toward reducing the long-term financial burden of Social Security.

The adjustment of benefits, however, is not a matter of "fairness." Social Security is thoroughly unfair to all parties, and now the only question is how to reduce the burden of the program with a minimum of damage to all segments of society.

The fundamental error is to think of Social Security as something like a bank. It is not the case that workers put money "into" Social Security and then draw that money out in the future. Instead, workers pay the Social Security tax -- 12.4% on all income up to $90,000 as of 2005 -- and that money is directly transferred to current recipients and other government programs (via bonds).

Thus, Social Security is a financial burden placed on younger generations, and even those not yet born, by voting generations. Social Security is not an investment program in any meaningful way -- it is a program to transfer wealth by political force from workers to the elderly. Fairness has nothing to do with it.

Objection: "The government needs to pay back all the money" that has been taken from Social Security.

Right now, Social Security runs a surplus. That money buys bonds, which means it goes to fund other government programs. That money is gone. It cannot be paid "back." The only way bonds can be paid back is by taxing the future income of workers.

Some have suggested that the surplus go instead into stocks and other real investments. That would be horrible because it would give the national government too much influence over business. From within the parameters of Social Security, it never made sense to run a surplus: instead, the tax should have always been adjusted to just cover benefits.

The noted criticism reifies the government. It's not as if there's some guy sitting in Washington who took the money and stuck in his bank account. It's not like a petty crime, in which the assets of the criminal can be used to repay the victim. Of course, if somebody wanted to suggest seizing the assets of every member of Congress who ever voted to increase Social Security spending, and using those assets to partially repay the victims of the tax, I would not strenuously object.

Objection: People won't save adequately for retirement, and therefore the government must provide Social Security or force them to save.

Reply: Social Security is mostly to blame for this lack of savings. Social Security takes 12.4% of the income of (practically) every working poor and middle class person in America. Obviously this makes it much tougher for people to save. And the boomers expect to collect Social Security benefits, which reduces the incentive to save.

On the cultural level, Social Security trains people to be irresponsible. It encourages people to believe that they're not responsible for planning for the future, because the government has already taken care of everything. Thus, Social Security undermines the virtues of productivity, long-term planning, investment, and, ultimately, responsible citizenship.

Given the opportunity, most people will use their income wisely most of the time. Why should those of us who are responsible be held hostage to the few who are irresponsible? As Ayn Rand wrote, those who believe they "should be compelled to pay for [their] own social security, by force and law" assume that they would "never have the character to save or provide for [their] future voluntarily." Such people attach their "own sin to the rest of the world."

Objection: Forced savings controlled by Congress would be "better" than Social Security; thus, one can reasonably support Bush's mandatory, regulated accounts.

Reply: I've addressed this argument at some length. To summarize, my argument is basically three-fold. First, I'm not convinced that mandatory, regulated accounts are an improvement. Letting Congress control such a large pool of investment would be very dangerous. Second, mandatory, regulated accounts are a new statist program irrelevant to the reform of Social Security, so there's no reason to support them (from a free-market perspective). Third, even if we assumed mandatory, regulated accounts were somehow an improvement over Social Security, they would be a slight improvement likely to prevent real free-market reform in the future.

We must distinguish the prudent move for the individual trapped in the system from the prudent move for free-market advocates. As Rand argued in the context of student loans, one may morally take government handouts, only insofar as doing so is considered a partial recovery of one's own taxes and one explicitly opposes the program. If Bush's plan passes, the prudent move for the individual will be to take the 2% and place it in the mandatory, regulated accounts. But that has nothing to do with what free-market advocates should endorse and fight for. Mandatory, regulated accounts are fundamentally at odds with the free market, and thus they must be opposed on principle.

Here's a variant of an analogy I offered previously. Let us say that a patient is brought in to an operating room, where two doctors await. Unfortunately, the doctors have not been told what condition they are supposed to try to fix, or even if the patient is actually diseased.

One of the doctors says, "Prepare the patient for the removal of the left leg."

The other doctor replies, "Wait a minute: there's no reason to remove the left leg, so we should just let it be."

"But amputations are the most successful sort of operation ever invented -- so prep the patient!"

"But look, removing a healthy leg cannot be deemed a success, just because it would work surgically. We can't remove the leg."

"Well, okay, you have a point. So let's remove the left arm instead."

What would we say of the second doctor if he agreed to remove the healthy left arm? We would call him crazy -- perhaps as crazy as the first doctor. Yet Social Security is an indefensible national program that taxes 12.4% of the income of practically every working poor and middle-class American. It's morally similar to amputating a healthy left leg. Those who want to replace Social Security with mandatory, regulated accounts are doing something like trying to amputate a healthy left arm instead. "Look! Under our plan the patient will have so many more choices! He can jump around, run, and dance! What an improvement!" But forced savings controlled by Congress is also indefensible. There's no reason to support it and every reason to oppose it.

Objection: Mandatory, regulated accounts are "politically feasible," whereas the phase-out plan is not.

Reply: Political feasibility is not a metaphysical given. Something is feasible or not only because it is advocated, or not, by a culture's leading intellectuals. If everyone who now supports forced, nationally-controlled savings would instead support a phase-out plan, then a phase-out plan would be feasible.

Inherently, the phase-out plan is more feasible. It does not require any new taxes or deficit spending. It does not create the problem of trying to figure out how Congress will control the accounts or how people will contribute to them.

The only reason that mandatory, regulated accounts are today considered "feasible" (or even considered at all) is that alleged supporters of the free market have advocated them for many years. The advocacy of mandatory, regulated accounts constitutes a tragic moral and intellectual failure.

Objection: The piece in the Post claims, "Currently the Social Security tax... takes in more money than is paid out in benefits. Where does this extra money go? It buys government bonds, which means the money goes to pay for other government programs. The only way these bonds can be paid back in the future is to raise general taxes." However, raising general taxes is not necessary: the bonds could also be covered by cutting other government spending.

Reply: The criticism is correct but trivial. If other government programs should be cut, they should be cut regardless of what happens to Social Security. The key point is that, when the bonds are repaid, they can only be repaid out of general taxes, which will necessarily be higher than they would be without the bond repayment.

Perhaps I would have avoided the objection if I'd stated, "The only way these bonds can be paid back in the future is by taking money from general taxes."

Objection: "It seems with each passing year, compassion for those less fortunate diminishes. We become more and more a country of greed and self-righteousness. Fancy slogans and false crises have replaced truth, integrity, thoughtfulness, and caring. The bottom line is that Social Security was never designed as a wealth generating program. It was designed to ensure that those at the bottom of the income ladder had at least some income when they retire, eliminating massive numbers of elderly people living below the poverty line."

The critic implies that "greed" is bad, and it is behind the drive to reduce the burden of Social Security. This perspective is mistaken for several reasons. First, rational self-interest within the context of respecting others' rights is good for the individual and good for others as well. The essence of market exchange is mutually beneficial interaction. Second, the critic assumes that only the government can provide welfare through political force, when in fact people in a free-market system are perfectly free to donate money to others through voluntary charity, and they often do so. Third, "greed" in the negative sense precisely describes Social Security. It is malicious, a grave moral sin, to rob the working poor and middle class of 12.4% of their income.

Is Social Security necessary to keep the elderly out of poverty? I've argued that it isn't. But the argument about poverty, even if true, doesn't justify the current Social Security system, in which money is taken from the poorest workers and given even to millionaires. At most, the leftist argument about poverty justifies a dramatically reduced program that helps only the poor. Reducing the onerous Social Security tax would be the best way to help the poor. The fact that the left won't even endorse converting Social Security to an anti-poverty program suggests the motive of the left is anything but helping the poor. Instead, the motive seems to be to use Social Security as a political football to screw the poor and the young and win the votes of the elderly.

A note on this term "self-righteous." Should we not strive to be righteous? Is "self-unrighteousness" an improvement? What the critic seems to be suggesting is that Americans often act righteous but aren't. A better term, then, would be "pseudo-righteousness." On the matter of Social Security, it is clear that the left is pseudo-righteous, because their program is a massive violation of economic liberty that harms especially the poor.

Without Social Security, people would keep that extra 12.4% of their money. Nothing could be more useful for preparing for the future. Surely some of that money would also be spent on voluntary charity. (I've addressed the matter of the poverty line elsewhere.)

I am heartened that both "conservatives" and "liberals" (as those terms are abused today) dislike my position on Social Security. Neither camp has offered a good argument against my analysis, which strongly suggests that it is correct.

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

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