Distractions in the Social Security Debate

by on December 13th, 2004


An old English saying perfectly applies to election promises made by the Presidential candidates: “Vows made in a storm are forgotten in calms.” The loser need not give second thought to his promises and the winner usually is prevented from living up to the promises he made in the election storm. In his brief victory speech President Bush echoed what every president promised before him, “to strengthen Social Security for the next generation.” Surely, he may set out to coach the system, as all his predecessors have done, but it is unlikely that he will be able to change its course by more than a few degrees.

The basic course of Social Security has remained largely unchanged since it was created by President Roosevelt some 70 years ago. It was born from politics and fashioned along lines of the sweeping social reforms first introduced in Germany by Chancellor Bismarck during the 1880s; it provided for sickness, accident and old age support.

The Roosevelt system, too, was cast as a giant welfare system unrelated to an insurance or savings program. Individuals may acquire legal rights to benefits but no contractual right to the funds contributed to the system. And just like the Bismarckian program, additional benefits have been added to the program, including disability and survivors’ benefits.

Social Security taxes have risen steadily over the years. At its introduction the maximum Social Security tax consisting of employee and employer levies amounted to $60 a year; today it is more than $13,400. The present tax rate is 15.3 percent which covers both Social Security and Medicare. The Social Security part of the tax is 12.4 percent of gross wages, presently up to $87,900 a year. The Medicare tax is 2.9 percent of all earnings.

Workers bear the total amount, one-half thereof directly, the other half by way of services rendered to their employers. More than 156 million workers presently (2004) are subject to Social Security laws and regulations and more than 47 million receive retirement, survivors, and disability benefits. About one in three Social Security beneficiaries is not a retiree; some seven million people get monthly survivors benefits and another seven million workers and family members receive disability benefits.

Social Security is much more than a retirement system. It is a political welfare system, born of politics and torn by bitter conflict ever since. Its managers see no conflict but always bemoan “long-range financial problems” which they explain in terms of demographics. “We are living longer than ever before,” they lament. “When the Social Security program was created in 1935, a 65-year-old American had an average life expectancy of 12½ more years; today, it is 17½ years and rising.”

No mention is ever made of the massive expansion of the system that is allocating many benefits regardless of contributions made. And no mention is made of many millions of victims, especially young Americans who are forced to contribute much more than they will ever receive, and those Americans who do not live long enough to draw out what they paid in.

Longevity is the official malefactor of the system. It is made worse by 79 million “baby boomers,” who will begin retiring in 2008. In time, there will be nearly twice as many older Americans as there are today who will enjoy the benefits. By 2031, according to official statistics, the number of workers supporting one beneficiary will have fallen to barely two. In short, all eyes are on American demographics and none on legislation and regulation that created the rights to Social Security benefits.

Ever eager to garner votes, legislators determine and enact every penny of benefits. But every blessing they bestow also is an exaction from some denizen. Every enrichment they devise is matched by a loss and every largess by a reduction. After all, government can bestow only what it seizes from taxpayers or borrows from lenders. In fact, the costs of the benefits including the transmittal costs and interest charges always exceed the benefits themselves; the army of Social Security regulators and administrators needs to be paid.

At the present, the system still takes in more money than it pays out in benefits; the surplus goes in a “trust fund” of U.S. Treasury obligations and constitutes the Social Security reserve. According to official statistics, the legislated benefits will begin to exceed the taxes collected in 2018 and completely exhaust the trust fund in 2042. At that time, Social Security will have to reduce its promised benefits unless changes are made.

Political skeptics are doubtful that the apparatus of politics can be moved to solve a political problem some 38 years before it actually becomes acute. Surely, for years and decades to come, politicians of all colors will discuss and vociferously debate the needs of Social Security, but it is unlikely that they will soon agree.

Numerous reform proposals point in all directions. One would reduce the payroll-tax rate for workers under age 55 by two percent and direct the savings into mandatory savings accounts. Another would allow workers to deposit up to two percent of their wages into optional personal retirement accounts. Some critics believe that the promised benefits should be reduced or at least their growth be slowed. They would further increase the retirement age for full benefits. The law already was changed to gradually increase the age until it reaches age 67, affecting people born in 1938 and later.

Other critics would boost Social Security taxes to cover all future benefits. They would increase the present combined payroll rate of 15.3 percent to approximately 25 percent to pay for all benefits owed. The rate has been raised 20 times since the beginning of the system and probably will be raised again and again before 2042. But payroll taxes are already very high. Some 80 percent of workers pay more in Social Security taxes than they do in income taxes. And every raise in the employer contribution increases labor costs, which reduces the demand for labor and increases unemployment. The rate of unemployment of unskilled youth, especially minority youth, is already deplorably high.

Some critics would allow younger workers to have their own Social Security savings accounts which they could invest in stocks and bonds. Some would limit the accounts to a small percentage of Social Security taxes paid, others yet would have Social Security itself invest its reserves in stocks and bonds, which soon would make it an important stock holder in American commerce and industry.

A Cato plan would create “a safety net ensuring that no worker’s retirement income would fall below 120 percent of the poverty level.” It would allow workers to place their half of the payroll tax into individually owned, privately invested accounts. Individuals who would choose to adopt the Cato plan would receive “recognition bonds” amounting to the benefits already earned and redeemable at retirement.

Officials would at first define and delimit the investment accounts but eventually allow a wider array of investment options. At retirement these workers could choose either to acquire an annuity or a withdrawal option assuring annual incomes equal to 120 percent of the poverty level. The safety net and the transition costs would place a heavy burden on the shoulders of taxpayers or force Congress to borrow the funds.

It is revealing and sad that not one of the proposals touches upon the basic flaw of the system: its coercive nature. None gives thought to an exit from the conscription and none ponders about ways of liquidation. They all cast nearly every American into the system and make him or her a Social Security lifer without parole.

The National Committee to Preserve Social Security and Medicare is the most vocal, forceful, and influential lobbying organization in Washington. Its 17 million supporters readily respond to Committee calls to send letters and petitions to members of Congress defending present benefits and demanding further improvements.

In the past they managed to prevent any reduction in cost-of-living adjustments of benefits (COLAs). They fought the reduction of Medicare spending by any amount. They battled every effort to balance the Federal budget that would cut across-the-board spending including Social Security. They repulsed every proposal to privatize Medicare and staved off attempts at privatizing any aspect of Social Security. The National Committee does not hesitate to appeal to the most powerful political spur and incentive, to envy, railing against wealthy Americans and their tax breaks. It can be expected to rise up in arms against any of President Bush’s proposals no matter how ordinary and judicious they may be. It undoubtedly will demonstrate its power and influence in the political battles to come.

Social Security probably is one of the most popular and celebrated political institutions ever designed. But it also is a divisive construction that is creating unending bitter discord. Most reform proposals are new concoctions of the old welfare medicine. They are searching for another truce between beneficiaries and victims. Unfortunately, there can be no lasting peace as long as the system engages in class and generation warfare. If it would allow a breath of individual freedom to enter the stale atmosphere of coercion, it would point not only toward financial solvency but also to social peace.

In the coming years the Social Security program will undergo many alterations and reorganizations. No political system that seizes income and wealth from some subjects and bestows them on others is ever in a stable equilibrium. And no political system can forever create a growing burden of obligations and then shift them to future generations. Sooner or later the victim generation will resent the shifting and endeavor to lighten the load. It will repudiate it via inflation or other default devices.

In battling error and injustice, it is tempting to seek compromises which adjust the differences and meet the opposition halfway. Fearing popular censure and rejection, it is appealing to echo public opinion and come to terms with the opposition. But such a position may actually aggravate the error, which forces this writer to reject a happy medium. He is aware, of course, that his reasoning is rejected summarily in the din of public opinion and official pronouncements. But he is confident that it will be remembered in years and decades to come when the American people finally tire of class and generation warfare. The following proposal hopefully may shed some light and point to a peaceful order.

1. Telling the Truth. To restore a commonplace of truth and reality, every recipient of Social Security benefits should be informed of the nature and source of his benefits. Every benefit check should carry a stub that reveals the dollar amount contributed to the system including the accrued interest and the cumulative amount of benefits received.

2. When total benefits received equal the contributions made the recipient may apply for Social Security assistance and submit to a means test. At that time many Americans being ashamed of applying for public assistance undoubtedly would hasten to leave the system. It is the worst kind of shame to publicly admit to being poor. Wealthy Americans for whom Social Security benefits merely amount to pocket money would shun the assistance immediately. According to some estimates, some 20 percent of all present recipients would not miss it. Moreover, one-half of all present retirees are enjoying employer-sponsored pensions; most probably would leave the system as soon as the benefits received would equal the contributions made and they would have to apply for Social Security assistance.

3. The departure of affluent Americans as well as many pensioned recipients would allow young Americans to leave the system. They are the primary victims of the present scheme that is loading trillion-dollar burdens on them. They are condemned to finance the system for some fifty years, hoping to survive and collect a meager return. In our age of inflation they must brace for ever rising tax exactions and ever depreciating benefit claims.

4. When millions of older Americans have gladly left the system and millions of young Americans have rushed to leave it or choose never to join, the mode of Social Security operation will change fundamentally. Many Americans will be as free again as they want to be. The remaining system thus reduced by way of truth and freedom can now be privatized. It should be offered to a great number of private insurance companies which write policies for the protection of families. The benefits they pay are augmented by compound interest and payable in a lump sum at the end of a term of years. They also offer annuity policies which pay the insured a monthly or yearly income after a certain time. And in contrast to Social Security, all such contracts may provide for hereditary transmittal of claims and savings.

5. Some portions of Social Security may not be privatizeable; they need to be returned to charity organizations from which they came. Helpless and handicapped individuals may depend on charity which is one of the primary virtues of all great religions, of Christianity, Judaism, and Islam. Throughout American history private organizations cared for the sick and poor. By 1900 some 150 societies, such as the Salvation Army, the Red Cross, various Christian charities, the Jewish Charities, and later the Community Chests, ministered to them in the larger cities. According to some estimates, recipients of charity at times totaled one-third of New York City’s population. Early in the 20th century public funds began to supplement and often take the place of private charity.

Rising tax exactions invariably dampened the spirits of charity. The passage of the Social Security Act in 1935 revolutionized charitable activity by giving central focus to the welfare responsibility of the Federal government. The Department of Health, Education, and Welfare, which was created during President Eisenhower’s presidency in 1953, is confirming and buttressing the Federal position.

In the coming months President Bush’s plan “to strengthen Social Security for the next generation” is likely to encounter much political opposition. It matters little who will prevail in the battles on the floor of the Congress; politicians will decide who will get what, when, and why. It is unlikely that they will soon pass a Social Security reform act that reduces their immense power and points to the light of freedom.


Hans F. Sennholz, Professor Emeritus Grove City College and Adjunct Scholar of the Mises Institute, is the winner of the 2004 Gary G. Schlarbaum Prize. See also A tribute to Professor Sennholz by Joseph Salerno, Book: The Underground Economy (1984), Quarterly Journal of Austrian Economics, Vol. 5, No. 4, dedicated to Hans Sennholz, Daily Article archive of articles by Sennholz, Austrian Economics Newsletter interview with Hans Sennholz, and Lew Rockwell’s essay on Sennholz. Comment on the blog.

Michael Hussey