Misconceptions About Social Security
Dr. Judd W. Patton
Social Security is headed for bankruptcy!
No one disputes this fact, too many retirees to workers in the future. The
dispute is over what to do - you know - reform proposals. Proposals range from
raising the retirement age, to raising the payroll taxes, to cutting benefits,
to eliminating the limit on earnings subject to the payroll tax, to having
government trustees invest a portion of the Trust Fund in private assets, to
letting individuals invest a portion of their payroll taxes into their own
retirement accounts or into stocks, bonds, and mutual funds. The debate is on!
In the spirit of intellectual inquiry and academic
interest in a genuine reform of Social Security, the following six
misconceptions are offered to clarify the discussion.
Social Security Taxes are Contributions
Not! From its inception in 1935, Social Security - officially known as Old Age
and Survivors Insurance (OASI) - has been compulsory. Try telling your employer
you plan to end your "contribution" and see how voluntary it is! The
Federal Insurance Contribution Act (FICA), is a misnomer of the first magnitude.
Social Security payroll taxes are taxes.
More importantly, Americans do not have a legal right to these taxes. In 1960 in
Flemming vs. Nestor, Mr. Nestor sued the Federal government claiming he had a
right to collect Social Security benefits since he had paid
his Social Security "contributions." The U.S. Supreme Court ruled that
he, and all workers, have no such property right. "I paid in, I
contributed, and therefore I deserve my benefits," is, therefore, a common
mis-belief among Americans. Congress can change, as the current debate reveals,
any and all criteria as to benefit amounts, tax rates, retirement age, etc. They
can cut or eliminate benefits regardless of workers' so-called
Social Security is Constitutional
This misconception is easy to identify and confirm. Blow the dust off your
United States Constitution booklet, and go to Article I, Section 8. Our
Founders enumerated 20 powers or areas for the Federal Government.
All other areas "are reserved to the States respectively, or to the people" (Amendment
10). Can you find a power giving the Federal government the responsibility to
care for the retirement welfare of American citizens? I will give you five
minutes to find the answer! For the record, there is no such power and no such
amendment has ever been passed giving such authority. Social Security is unconstitutional.
Workers pay Only One-Half of Social Security Payroll Taxes
Well, it is true that workers today pay 6.2% of their earnings (up to an
earnings limit of $72,600) and the employer pays the 6.2% as well. Yes, that
adds up to 12.4% in payroll taxes. (Self employed pay 15%.) But as economists
often say, "There ain't no such thing as a free lunch." That 6.2%
"mandated benefit" is not free; it forces employers to reduce workers'
market- determined salaries or fringe benefits. Otherwise, the mandated cost
would inflict losses on employers, causing unemployment. In other words,
mandated benefits simply replace market- determined benefits and/or monetary
compensation. Economically this means that workers, in fact, pay the full 12.4%. The bottom
line is don't be fooled: It's your money the employer is sending to Washington,
Social Security is a Government Insurance Program
Superficially, Social Security appears to be just a government pension plan for
the elderly. Rather, it is a pyramid or Ponsi scheme. It is not
based on sound principles of insurance. Private insurance companies invest the
premiums of their customers in stocks and bonds and other income-producing
assets. Real wealth is created. Later, the earnings from that wealth is used to
pay annuities or pensions. But Social Security is not a savings-and-investment
program. Social Security taxes (premiums?) create no wealth. The payroll taxes
are not invested, but are used to pay current retirees and survivors under the
program. It's called a pay-as-you-go system. Some call it an intergenerational
income-transfer program. It is indeed!
Now understand this, please. A pyramid or Ponsi scheme (illegal in all 50
states) works under the unsound and unethical principle that early investors are
paid handsome returns with cash taken from later investors. As long as more and
more investors (suckers) are attracted, the scheme works and appears to be
successful. Eventually, however, the system collapses with the inevitable
decrease in the number of new investors. In like
manner, Social Security seemed to work well in the early years when there where
few eligible retirees and lots of workers. A person retiring in 1940 could get
an inflation-adjusted return of 135%!! But as the ratio of workers to retirees
has declined over the decades, so has the average expected return, now 4% in
1999. A minus return is a distinct possibility in the near future. One wonders
what Mr. Ponsi would have thought about Social Security "stealing" his
Social Security can be saved by Federal Budget Surpluses
In fiscal 1998, our government ran a $70 billion surplus, the first since 1969.
Some politicians propose saving Social Security with these and future surplus
funds. It's ironic, but the budget surplus was generated by "raiding"
the Social Security trust fund and other trust funds in the first
place! Here's what happened and happens generally.
In 1998 the Social Security trust fund had its own surplus of $99 billion
dollars. It wasn't invested to create real wealth and an income stream. That is
not permitted. These funds are, by law, borrowed or "invested" into a
special class of non-marketable U.S. Treasury securities ( government IOUs). The
SS surplus then ends up in the Treasury's general fund and is subsequently spent
on other government programs. Some Trust Fund! Since1970 these SS surpluses have
financed, in part, government deficit spending. However, in 1998, with a booming
economy, "borrowing" from the SS trust fund actually helped generate a
Federal budget surplus. But understand this. If the trust funds had not
been "raided," the general budget would have had a significant
deficit, just like the preceding 28 years.
And in all likelihood all the talk about what to do with these
"supposed" budget surpluses would not have emerged!
The key point to understand is that the Social Security trust fund is nothing
more than a pile of IOUs. These non-marketable IOUs are not assets but unfunded
liabilities, government investing in its own debt. They represent payroll taxes
that have been diverted to general spending. When Social Security outlays
eventually exceed payroll taxes, expected in about 2012, the government will
need to raise taxes, cut its spending, or borrow more money to pay off the debt
(IOUs) to the Social Security trust fund when the SS managers redeem the IOUs.
So, to answer the question, can Social Security be saved or "fixed" by
not "raiding," or by "raiding" less of its own excess
revenue (Present Clinton's proposal)? Of course not, it is still a Pyramid
scheme relying on more and more workers to retirees, just the opposite
demographic as to what is actually occurring - more retirees to workers in the
Social Security can be saved by Privatization Investing retirement money into
the creation of real wealth is an essential element to any economically sound
reform of Social Security. Thus privatization, the act of converting a
government- run program into a private activity, appears appropriate at first
glance. However, a private pyramid scheme is just as unsound
as a government one. Current proposals to have government trustees invest a
portion of the SS trust fund into the stock market, or to establish
"private accounts" where individuals make their own investment
decisions (within certain government guidelines of course), is
privatization-lite at best. Truly these proposals are not boni-fide
privatization reforms in any meaningful sense of the word. The latter idea would
be better classified as a mandatory savings program - a truly socialist
proposition with its own grievous flaws. Americans would not be free to
use "their" money as they see fit. For example, they
could not withdraw it or decide how much to "contribute." Taxation and
government oversight can never be a feature of real privatization.
The Social Security system, passed in 1935, is not a legitimate,
savings-investment, insurance program. Taxes are not invested into real,
income-earning assets. There is no trust fund but in name only. Americans have
no property right in their supposed "contributions." The Social
Security system today is a compulsory, redistributive, unconstitutional, pyramid
scheme that contains the seeds of its own destuction given the demographics of
the next 30 years. Reforming or "tweeking" a corrupt system
is not a meaningful option. There is only one true privatization reform of
Social Security. There is only one Constitutional solution. There is only one economically
and morally sound system. Our nation must begin the difficult but manageable
process of dismantling the Social Security system - yes, in total. The sooner
the debate begins on how best to do it, on how to transition to free-market
retirement options with their vast array of investment and retirement program
choices, the sooner all Americans will remove the
social insecurity in their futures.
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