Social Security

My Thoughts On: July 12th, 2007

Social Security has recently become an issue of great controversy. Since it's creation in 1935 as a part of Franklin Delano Roosevelt's government-expanding New Deal movement, there are as many who question it's nature as there are those who ardently support it. Just what is fiction and fact, and what is the best policy for Social Security? The 'NAM comes back to take an in-depth look at this troubling issue.

The New American Myth comes in many forms, and usually both Republicans and Democrats are at fault for spreading incorrect ideas about the nature of civil government, it's duties, responsibilities and functions. In the case of Social Security, this becomes obvious. The Social Security Act of 1935 established for American citizens a mandatory old-age retirement pension, which has greatly changed the way our tax code works and the way people retire. It's widely viewed as a good idea, because few can argue against this support of the elderly without being demagogued as compassionless.

The nation's seniors now rely heavily on a huge, expensive government-driven system of retirement aid and fixed incomes. Republicans have taken up the cause of privatization, and they want to invest Social Security tax income into personal retirement accounts which they feel will let each individual know their entitlements, and with limited investment options, make those benefits grow. Democrats reject this idea as dangerous and possibly expensive, and endorse the current pay-as-you-go system, where beneficiaries today receive the tax money going straight into the system, ungraduated and unsaved. We here at the 'NAM, as usual, have more than a few points to make regarding each system.

Debunking the Myth - Social Security:

"If left unattended, Social Security won't go into the negative until 2042. There is no crisis."

Democrats stand by projections for Social Security (by the Social Security Trustees) that estimate Social Security will operate like it does today until 2042, before running a deficit. However, in 2018, the surpluses being saved today will begin to need to be exchanged for the Treasury bonds which are expected to support them, and the payroll tax that funds Social Security will be running in the red. The trust fund support is not like a real trust fund of any tangible sort, and many of the benefits projected to carry Social Security from 2018 to 2042 are literally being taken for granted.

"Let's privatize Social Security by moving the tax revenue into private accounts, that'll do it."

Unlike every private retirement program in the world, Social Security doesn't earn money. Republicans want to privatize the system, which is a worthwhile idea, but how do they plan to go about doing so? Well, Republicans want the system to largely remain intact, but to merely change the way the government runs it from pay-as-you-go to personalized savings. This type of "privatization" should not be confused with real privatization, where each taxpayer would be able to leverage significant ownership over his/her individual savings, or even opt-out. Government still makes these choices for you, and will play favorites with the mutual funds and investment plans that dictate your retirement pension. If history is any record, the government will not only play favorites, but pass up better savings options to grant political favors.

"Having personal Social Security accounts wouldn't earn enough, so the benefits are still being cut."

The central problem with the pay-as-you-go system is that any change or crisis creates immediate need. No advocate of Social Security reform suggests that people who have paid the payroll tax throughout their whole lives should be denied Social Security benefits. Reforming Social Security does need to refocus and reschedule the greater part of the U.S. budget, however, so long as Social Security is running a surplus, and other programs are also open to reform, there is no reason to believe progressive reform would need to create benefit cuts, as there is more money in the system than immediate beneficiaries need (and that will be the case until 2018, and could easily be the case far longer if the government took a long hard look at it's wasteful spending practices). This is the inherent complication when you have a system that does not save a cent in practice pretending to be a stable retirement pension fund, and it can be overcome. Whether Republicans are aggressive enough to cut government spending to appropriately overcome this is a matter of greater discussion.

"FDR had a great idea in establishing Social Security, we simply must preserve it for our nation's seniors by making it stronger."

The principle behind Social Security was to ensure the safe retirement for all elderly people in the United States. It was a part of the worker's movement during the Great Depression, where workers were more concerned about their long-term well being than the proper duties and scope of government. Social Security is not a "sweet deal", in some households seniors rely on it for over 90% of their income, and that 90% earned considerably less than what the individuals could have saved over the course of their own lives had they been able to have some leverage of investment of their own payroll tax. 1 in 10 seniors on Social Security are in poverty status, the remainder are often on stringent fixed incomes, and they have since lost the ability to invest or save for the important expenses of old age.

It's too easy for detractors to imagine a world without Social Security, of seniors slaving in minimum wage jobs and being homeless on the streets, however that's not very realistic. Families could easily support seniors without the payroll tax... don't believe me? Look at your grandparents or family-related seniors, and take this into consideration: for each person in your family interested in the well-being of that senior, take their average gross income (before taxes) on a monthly basis and multiply it by 0.124 (the payroll tax percentage). Add the sums of each of these people together and you have the amount your family could contribute to support your senior. There will be few instances where a family could not support it's seniors if it chose to do so, and in conditions far better than most communal rest homes, likewise you will also see that the money would be far more useful than a check on the government dole, as it could be portioned however the family needs it. There is no plan to reform the system to allow for greater leverage of personal financial support for seniors, and it is a shame to say that most people would favor those without grandparents and seniors to care for to "chip in" to the program anyways, instead of being allowed to save for their own retirements.

Of course, Social Security becomes a worse deal if you consider that by the time you are of retirement age, the benefits will - in all of these circumstances - be cut and taxes increased. This possibility was something FDR was not considering and did not care much about at the time, and frankly, did not plan for.

"Private earnings aren't guaranteed, so they aren't safe."

Saving and earning money you have control of is not guaranteed by government mandate, and this concerns many people. The flamboyantly socialist intent of this sentiment is obvious if we are talking about common, everyday living, but when you throw in the emotional appeal of the elderly you get many who are willing to overlook it. Social Security doesn't save any money to graduated expenses for the growing population, and it inherently cannot guarantee it's system will be stable for long-periods of time without raising taxes or cutting benefits. If you disbelieve this, continue paying 12.4% of your paycheck to the government to let politicians (like the ones you see in office today) make this "compassionate" decision for you.

If you trust your own capacity to handle yourself financially (instead of letting a government-mandated financial manager oversee your pocketbook), private earnings are as much of a "guarantee" as you can make it. It is true that people will wastefully spend or make unfortunate investments, but with 12.4% of the nation's wage-earned income returned to the economy, there is little reason to think that people won't have plans or ideas set aside to solve such problems. For instance, we'd see a boom of retirement pension programs that earn money (unlike Social Security) and senior-related charity for medical and other expenses. Such programs have a track record of effectiveness even without the additional income to supplement them today, but those successes are ignored in favor of a mandatory, fixed income, unstable government system. With Social Security, the issues of retirement are slowly slipping out of the American consciousness, as is the case in all places where government takes over the responsibilities of private citizens. This encourages those people to not think of retirement (after all, the government is supposed to do that for us), and be spendthrifty with their income. Getting to 65 (or whatever the retirement age is when you grow old, it is slowly being paced back, a visible cut in years worth of benefits Democrats openly ignore) is the problem for these people, not thinking or caring about investment or savings plans to pay for medical expenses and retirement years.

Private earnings encourage better savings, and individuals inherently can plan for those years better than any government official. The problem here isn't that private earnings are worse than heavy government tax & pension plans, it's that people don't trust others to save for their retirements when they come up. This "social progress" is actually backwards, given that our country is not built on the principle of believing less in the ability of society to solve many of it's own problems, nor in believing government officials can or should solve these problems for you.

"Individual accounts are fine, but we shouldn't let people opt-out of Social Security."

While the American Left advocates the protection of Social Security, the American Right has taken it upon itself to push for partial individual retirement accounts. While this may seem like a logical step, recognizing that the current Social Security system is flawed and that private investment produce better returns and may keep the program solvent at least longer than the current scenario. However, it has to be recognized that the current Social Security scheme is nothing but a fraud and keeping money with the government, even in private accounts, is no type of solution. Because even if partial private accounts are enacted under President Bush, the entire system remains at the whim of popular politics. Partial private accounts may last no longer than 2008, as the next president could undo the system and take everyone's "private account" and throw it back into the community pool.

By keeping the money in the government, it gives the government the power to continue to adjust how much wealth they take from their citizens. Since 1935, the payroll tax has been increased 17 times. Indeed, anytime Social Security shows a surplus, the money is spent on other entitlement programs and partial privatization shows no reason that this trend would end. By keeping money in the government instead of removing it from their control, the government is given control of deciding if, when, and how much they actually feel like paying out to the citizenry. Even under a system of individual accounts, the individual is in no way, socially secure.

Likewise, at the very least, concerned citizens should be allowed to opt-out at the risk of losing their outstanding Social Security obligations, as many discerning young people who have not invested much into the system could do a great number of things with that extra income, including make a better retirement plan than the government can make for them. This frightens social progressives, who know that if enough young people do this, Social Security could become phased out... at the whim of the greater social demand.

"Social Security surpluses are invested in bonds, a real investment opportunity, why change it?"

The surplus of Social Security is invested in the Federal Treasury through special Treasury bonds on Social Security. These special Treasury bonds are non-marketable, and proponents of Social Security would remind you that over $80 billion a year is "earned" from these bonds. But where does this $1.5 trillion dollars in "savings" really go?

Treasury bonds are purchased against the general expenses of the United States government, which means the revenue generated by the Treasury bonds that the Social Security surplus purchases is paid for by the income tax and other general sources of revenue. Once 2018 hits, the payroll tax which finances Social Security will begin to run a deficit, this deficit will be paid for by the "savings" and "earnings" of the special Treasury bonds the surpluses have purchased.

Now, when Social Security pays the money to the Federal Treasury, the Treasury doesn't store and save or invest that money. It takes it and immediately spends it on general government expenses - roads, federal programs, the military, postal system, etc. That money doesn't exist in savings, so when 2018 comes up, Social Security will only meet it's projected earnings if the Treasury can cash out the appropriate bonds and the revenue earned. How will the Treasury do this if there is no money? It will have to increase the income tax (or cut overall government spending - something we shouldn't really expect from officials today), essentially what we've done here is allowed government to play a shuffle game with us. On the one hand, government is telling you the "surplus" is being "saved" to "earn" money for long-term Social Security well-being. But what's really happening is government is spending the Social Security surplus which it only plans to pay back via an increase in the income tax come 2018. The payroll tax still stays the same, so advocates can say Social Security will "operate the same", however the liability for Social Security will no longer rest entirely on the payroll tax so this is an inadequate statement. What the government has done, at the behest of leading Democrats, is made sure that the rich will have to pay for the elderly's retirement in the future while hiding the extra costs from people critical of Social Security. If Republicans are "cooking the books" by wanting to devise shady investment schemes, then Democrats are boiling, frying, searing and throwing those same "books" in the fireplace by passing off the liability of Social Security from one wing of government to another.

There is no guarantee that this plan will work, as most would not support it if they understood the fraud being perpetrated, and few understand the causes behind it. So when 2018 comes, if the income tax is not raised to even higher degrees (it is already crippling the economy as it stands, most workers must work nearly half the year to pay it), Social Security will need to have benefit cuts or increase it's own payroll tax. As far as I can see, this is also not expecting that benefits will be increased to match the rate of inflation. Our only salvation from this are Republicans who would "invest" this money for us in their preferred savings plans, and portion it out to us over time on the dole... which is only slightly less shady than what is going on today with the juggling act of the Democrat system we have now.

"If people can just spend the money, no one would save it."

Having shown that Social Security is a program doomed to failure, defenders of the system fall back on one final argument, the morality of the Social Security, claiming that some people would foolishly fail to save. However, more than any other entitlement program social security protects the irresponsible at the expense of those who are capable of planning for themselves. Social Security treats people as feeble-minded fops, simply incapable of planning for the necessities of old age.

The irony of this situation is that those rescuing the people from themselves are enlisting them in a program that no one would willingly enter. Planning for one's retirement is an entirely individual experience, instead of having their money crammed into a giant pool and paying out dividends as the government sees fit through social security, ending Social Security would allow every individual to cater their retirement to their needs. Returning that 12.4% people pay in payroll taxes would give people the freedom they need to properly plan for their retirement and would be the step needed to end the chronic monetary problems that face the elderly of the future.

"Money invested privately or in government-held individual accounts have high operating expenses, while current Social Security has very low overhead. This means that the system today is far more efficient."

The current redistribution model run by the government today and the Social Security Administration has low overhead because there is little done with the money. It is taxed, collected, and paid out directly. The planned "surplus" is immediately spent on general expenses, and not a dime of it is actually being saved for anything. Private plans, while having high overhead, pay for and sustain not only a constant revenue for their beneficiaries, but they sustain and maintain jobs for millions of Americans. It would be millions more if the 12.4% payroll tax was allowed to be given back to the economy. Legislators who are skeptical can devise plans to do this in stages or phases, but no such plans are being seriously considered, because these same legislators would rather deny there is a problem than actively address it, shifting responsibility entirely on those who would address the problem, but don't have enough ideas and plans to make those solutions very worthwhile.

"But shouldn't we support our seniors?"

Supporting our seniors and obligating all parts of our society to a potentially fraudulent, deceptive and unstable retirement program are two entirely different things. We as a society should support our seniors, and that we trust our society so little that we require government officials to do this for us is a sign of social regression, not social progression. The economy will not develop, and seniors will not be any more financially safe in the future, if our only plans to fix Social Security are to increase our already exhorbinant taxes through the roof and juggle our liabilities amongst ourselves. This will only cause more thrift and spending, on the part of individuals and the government, which results in little to no actual saving being done by anybody. This is a larger fundamental problem with the way society thinks about solving it's financial problems than any other, and solving it by reducing government's oversight of Social Security would lend our society to face this problem the right way, the way less likely to result in long-term financial chaos of which we are all subjected to, by the compulsory nature of our government's involvement.

Those who would not promote the support of seniors enough to believe that there are more options than total government control are the ones devoid of the compassion necessary to tackle the issue, not vice versa. While Republicans are right in addressing this as a problem, the sad fact is that they too are doing little more than Democrats, as the Social Security and retirement pensions of Americans today are still at the dictatorial whim of Congress (a function Congress was not designed to properly have in the first place). This of course, merely details the greater problem with Social Security - the misconception that it's a good idea.

When you let your politicians retire you, your golden years won't be very far from the rest - just another part of the New American Myth we live in everyday.