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Social Security Demeans Workers

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We can thank President Bush for reminding us that Social Security is not a pension or insurance plan but a welfare program. He did that recently when he proposed changing the benefit structure to favor (even more) low-income retirees at the expense of the “better off.” Whether this new wrinkle to his not-yet-defined plan to “save” Social Security will win support, we don’t yet know. But it will certainly prompt new points of debate over the issue.

Social Security has always been a welfare program. The essence of welfare is that government transfers money from one person to another, not that the money goes to the poor. The constellation of programs that transfer money from the taxpayers to businesses is properly called corporate welfare.

Social Security steals money from workers and gives it to retirees. That makes it welfare. In percentage terms, benefits are tilted toward people who had lower wages during their working years. As the New York Times points out, low-income workers are promised benefits amounting to almost half their pay, while workers with average incomes are promised only a bit over a third. But in other respects the current system is adverse to low-income people because they start working earlier in life and die sooner.

Bush’s latest plan would maintain the wage percentage for low-income workers but cut it for average earners to 26 percent by 2075. Higher-income people would get as little as 12 percent.

The transfer nature of the system gives the lie to the once widely believed fiction, actively promoted by government officials, beginning with President Franklin Roosevelt, that Social Security is a private pension or insurance plan. In such a plan people invest some of their income in stocks and bonds issued by productive enterprises. That money brings a return because companies earn profits by making goods and services that consumers value. So when workers retire they draw on the new wealth made possible by their savings.

Social Security works nothing like that. No money is invested. More than 12 percent of workers’ pay is confiscated and given either to retirees to spend on consumption or to the government. This inflicts a double loss. Workers can’t invest that money for their own retirement — they are merely promised the fruits of future confiscation — and we all lose out on what that investment would have produced. True, retirees get money to live on, but they need it only because the government deprived them of the ability to save while they were working.

Notice the self-fulfilling prophecy. What would retired people do without Social Security? we’re asked by the program’s defenders. The answer is: if Americans didn’t have Social Security, they wouldn’t need it.

The problem with President Bush is not that he’s too committed to private accounts, but that he’s not committed enough. His promotional rhetoric about ownership is legitimate — if only his plan matched it. People should be free to arrange for their own retirement without government interference. For this to happen, workers ought to go cold turkey: the payroll tax should be ended. (Financing current retirement is a separate issue.) Workers then could save what they wish in the manner of their own choosing. The modest government-regulated accounts proposed by the president may be intended to prevent imprudent investment, but what they are sure to do is stifle entrepreneurship in the production of innovative retirement-planning services. Besides that, government supervision of retirement accounts will set the stage for influence over, if not heavy-handed regulation of, the capital markets. Considering today’s pervasive entitlement mentality, would the government stay on the sidelines when people worry that the value of their retirement accounts might decline?

People should understand — but I fear they don’t — that they have no legal rights over their retirement income. Twice the Supreme Court has said so. Government-granted benefits can be changed any time. President Bush just demonstrated that by proposing to change the terms for middle- and high-income people — there won’t be enough money to keep the current promises. Ownership means control. Working men and women are demeaned by Social Security and must be freed from it.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.