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Repealing, Not Reforming, Social Security, Part 1

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Social Security may be the most important domestic issue in Washington today. Everyone in the nation’s capital is for a balanced budget, or so it seems. Even if these most election-minded of politicos were serious, however, there would remain a rather serious fly in the ointment.

Politicians preaching a balanced budget want us to believe that the budget can be balanced without touching Social Security. Alas, the latter is the single biggest federal expenditure. Adding to it interest, which can’t be touched without repudiating the national debt, military outlays, which the Republican majority is dedicated to increasing, and Medicare/Medicaid, which can be trimmed only with great political difficulty, leaves roughly four-fifths of the budget off-limits.

If politicians plan on balancing the budget without cutting those programs, they must be planning to either impose huge tax hikes or close the rest of government — including, perhaps, the White House, Washington Monument, and Yellowstone. Neither of those strategies is likely, however.

Thus, Social Security must be targeted as part of any serious budget-cutting program. However, it is still viewed by most politicians as the third rail of politics: touch it and you die. For all of the public pronouncements on the necessity of cutting the deficit and widespread private recognition of the need to address Social Security, no election-minded politico is interested in taking the lead.

Republicans who want to maintain control of Congress and Democrats who want to supplant them fear the wrath of the elderly. The president may be a lame duck and therefore have nothing to lose politically, but he remains one of the most sensitive weathervanes in American politics. And those who desire to follow him want to win votes, not lose them.

As the most popular and politically invincible program, Social Security is the core of the welfare state. For this reason it is critical for believers in liberty to challenge Social Security: if we are able to break it, we will have broken the welfare state.

Of course, the Social Security Administration would have the American people believe that all is well with the system. The Social Security commissioner and other program defenders regularly extol the diverse benefits provided to people, the number of elderly lifted out of poverty, the security of a government system, the way in which the program brings the middle class and poor together, the political advantages of a system that delivers benefits to the middle class, and so on. Contends Carroll Estes, president of the Gerontological Society of America: “Social Security is the most successful antipoverty program we have. When you have a program that works, why try to fix it?”

Why indeed?

More people under the age of 35 believe in UFOs than expect Social Security to pay them retirement benefits. They have good cause for fear. When Congress created the program six decades ago, a few retirees were supported by many workers who paid low taxes. The result was a financially secure system that delivered a high financial return — several times the total employer and employee “contributions.” Legislators, in turn, reaped enormous political benefits.

Unfortunately, all “good” things must come to an end. Retirees started to live longer. When Social Security began, many people died before collecting a single check. In 1940, for instance, only 54% of men and 61% of women lived to the age of 65. Indeed, over the last six decades, life expectancy has risen by 12 years, from 63 to 75. Over the same period, the birth rate has fallen. Fertility levels dropped from 3.56 in 1900 to less than 2 today.

Putting the two trends together has had dramatic results. There were 16 workers for every Social Security beneficiary in 1950. That ratio is now 3.3 to 1. By the year 2025, it will be barely 2 to 1.

As the demographics have changed, so has the economics. Congress has increased taxes by 900% since 1950 (compared with a 200% hike in benefits). The maximum tax has gone from $60 (yes, $60) in 1937 to $6,438.24 in 1995. Two-thirds of workers now pay more in payroll levies than income taxes.

As taxes have risen, returns to retirees have plunged. In 1995, the first Americans retired who will lose money. The class is small — men with high incomes who never married. But future retirees are increasingly looking at mere parity and, over time, growing losses.

The Washington-based Tax Foundation figures that through the early part of the next century, the average low-wage couple is likely to receive an annual rate of return ranging between -.20% and -.65%. The return for middle-income couples will run from -.89% to -1.45%. High-wage earners will lose the most: -1.81% to -2.60% annually. These are, however, best-case estimates, because they assume no higher taxes and no benefit cuts. If Congress imposes either one, the rate of return will fall.

And, absent serious reform, one or the other steps will soon become absolutely necessary. By around the year 2010, Social Security’s outflow will exceed income.

Of course, system apologists argue that the trust fund surplus will carry forward until about 2030, leaving plenty of time to act. But there is no trust fund, at least as we normally understand it. Social Security is a Ponzi scheme, a pay-as-you-go program under which current revenues are used to pay current beneficiaries. Today there is a “surplus,” but it is lent to the federal government to help cover the deficit. The trust fund actually consists of a pile of federal IOUs. True, the Treasury Department promises to repay the loans, but to do so will require either tax hikes or spending cuts — the same as if there were no “trust fund.” In short, the crisis comes in the year 2010, if not sooner.

And even that forecast is probably too optimistic, since it is based on the Social Security Administration’s middle-range assumptions, rather than its pessimistic forecasts, which have usually been more accurate. If the economy turns out worse than expected, the crisis point would advance towards the turn of the century.

And, it should be noted, Social Security spokespeople have made a habit of being wrong. In 1983, the commission chaired by Alan Greenspan, now the Federal Reserve chairman, claimed that its reform program would safeguard the system for the next 75 years — until the year 2058. Five years later, Social Security’s trustees said that the trust fund would accumulate a maximum balance of $11.8 trillion in 2030, which would carry the system forward until 2048 — a loss of 10 years of funding.

In 1994, just six years later, the trustees predicted a maximum balance of $3 trillion in 2020, which would run until 2029 — a loss of 19 years! In just six years, three-fourths of the supposed trust fund vanished, and the crisis moved forward two decades.

This sort of experience suggests that one should be skeptical of any estimates from any government source.

To save the system through tax hikes alone would require a 25% increase in Social Security levies or a 20% jump in income-tax rates. Similarly, to solve the problem through benefit cuts would require slashing promised payments by up to 14% of those promised in 2020 and up to 30% in 2070. Neither approach seems likely in today’s political climate.

In short, Social Security is heading over the fiscal cliff. The population is aging and people are living longer. The young will have to pay ever higher taxes and receive lower benefits. The red ink will run steadily deeper.

But the problem is not just practical. It is also moral. Of course, this is not something that is much discussed in Washington, D.C. There, federal money is presumed to be owned by no one, but instead to be a great common pool to be handed out by government. But the money obviously isn’t free — it doesn’t come from some grateful Middle Eastern sheik, for instance. Instead, it involves redistribution in two different forms.

First, Social Security takes money from workers and gives it to retirees. The latter have no moral claim to their receipts; rather, the program simply robs some for the benefit of others. Second, Social Security redistributes responsibility for caring for the elderly from individuals and families to the state.

Both of these forms of redistribution generate the sort of results that one would naturally expect. To take from workers means that there is less reward for labor, so there is less incentive to work — and to prepare for one’s own retirement.

Equally important, Social Security leaves workers less ready for retirement. A person born in 1970 who earns a low wage throughout his life can expect monthly Social Security benefits (in 1995 dollars) of $769. Had the employee’s and employer’s taxes been invested privately, the retirement funds would run $1,085 monthly for the average bond fund, and $2,419 for the average stock portfolio. For a high-wage worker born the same year, the respective numbers are $1,908, $5,243, and $11,729!

Thus, Social Security essentially constitutes two rounds of theft. First, government takes money from people as they are working. Second, Washington deprives them of income when they are retired.

Moreover, shifting responsibility for the care of the elderly has moral overtones. There’s no doubt that caring for different generations within a family can be difficult and even unpleasant. But intergenerational ties are among the most important sinews of community. Social Security weakens those links and makes it hard for a family to offer better care for its more vulnerable members. Denying younger workers the ability to achieve a higher return throughout their working lives leaves them with less money to share with their parents and older relatives.

Thus, Social Security faces a dual crisis. On the practical side, it is going under. On the moral side, it is robbing Americans and weakening family and community ties.

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    Doug Bandow is vice president of policy at Citizen Outreach, the Cobden Fellow in International Economics at the Institute for Policy Innovation, a senior fellow at the Cato Institute, and serves as adjunct scholar for The Future of Freedom Foundation. He is a former special assistant to President Reagan; he is also a graduate of Stanford Law School and a member of the California and D.C. bars. BOOKS BY DOUG BANDOW: Leviathan Unchained: Washington’s Bipartisan Big Government Consensus (forthcoming) Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996) Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994) The Politics of Envy : Statism As Theology (1994) The U.S.-South Korean Alliance : Time for a Change (1992) The Politics of Plunder : Misgovernment in Washington (1990) Beyond Good Intentions : A Biblical View of Politics (1988)