Speaking at a conference for a finance trade association in Chicago, former President George W. Bush said that the biggest failure of his administration was not privatizing Social Security.
In 2001 the President’s Commission to Strengthen Social Security was formed. This bipartisan, 16-member commission issued a report that included three reform proposals, all of which allowed workers to voluntarily transfer a portion of their Social Security taxes to a personal retirement account. At retirement, the workers’ benefits would be offset by their personal account contributions. Bush called for reforming Social Security throughout his presidency. But although he had a Republican majority in Congress for more than four years of his presidency, no changes were made to the Social Security system.
The idea behind the privatization of Social Security is that workers should be able to have more control over their retirement savings by investing some of the money they would normally pay in Social Security taxes in a private retirement account.
The privatization idea was never very popular except among some conservatives and Beltway libertarians. And that’s a good thing. Otherwise, we would have a new government bureaucracy to oversee the privatization and still be saddled with the massive Social Security bureaucracy. Privatization would entail billions in transition costs, accelerate the rate of insolvency of the current system, and yet provide no guaranteed return.
What has been realized about Social Security by people of all political persuasions is that as the birthrate continues its decline and fewer workers pay into the Social Security system, the “trust fund” will eventually be depleted as life expectancy increases and more retirees draw benefits. According to the 2010 annual reports of the Trustees of the Social Security and Medicare trust funds, “Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983.” Thus, now more than ever, will we hear — from Democrats and Republicans — about the need to fix, reform, strengthen, or save Social Security.
There have been a myriad of proposals offered to save Social Security. The method that has been used the most often since Social Security taxes were first levied in 1937 is an increase in the tax rate. The original rate was 2 percent (half paid by employees and half paid by employers). By 1960, the rate had tripled and continued to rise steadily. Ronald Reagan is often praised as a great tax cutter, but it should be pointed out that the Social Security tax rate increased from 10.16 percent when he took office to 12.12 percent when he left. The rate has held steady at 12.4 percent since 1990.
Other proposals to save Social Security include raising the retirement age (currently 67 for those born in 1960 or later), means-testing of benefits, cutting benefits, raising taxes on benefits, delaying or eliminating the age of eligibility for reduced benefits, changing the assumptions used to calculate cost-of-living increases to benefits, reducing or eliminating cost-of-living increases, mandating the participation of certain workers who are not covered by Social Security, dedicating estate taxes to Social Security, raising or removing the wage base (currently $106,800), changing the assumptions used to set the initial benefit level (currently based on the 35 highest wage years), and investing the trust fund in something other than government bonds (as required by current law).
Another approach, of course, is simply to do nothing and make up the revenue shortfall from the federal government’s general fund. About 75 percent of the expenditures of Medicare Parts B and D are already paid out of the general fund.
The dishonesty of Social Security
Infinitely more important than the question of how to save Social Security is whether Social Security should be saved in the first place.
Although Social Security is presented as retirement insurance for which one pays premiums or contributions, it is not an insurance program, a savings account, a safety net, or an investment account. Social Security is an entitlement program, an income-transfer scheme, a wealth-redistribution plan. Money is simply taken from those who work and given to those who do not. The recipients may be retired, disabled, or receiving survivors’ benefits. They may not be able to work. They may have lost the family’s provider. Social Security may be their only source of income. But none of that changes the nature of the system.
Social Security has been termed the third rail of politics. Any reform proposal that would in any way reduce benefits is political suicide. Social Security is the crown jewel of the welfare state. It is the largest entitlement program in the federal budget. Together with its cousin, Medicare, Social Security is responsible for more than a trillion dollars a year in income redistribution.
There is no real Social Security trust fund; there is no lock box; and there certainly isn’t a retirement account with anyone’s name on it. Payroll taxes collected are immediately spent to provide current Social Security payments. All taxes collected over benefits paid are “invested” in U.S. government securities on which interest is credited. The “trust fund” is just one gigantic IOU from the U.S. Treasury.
Social Security is also a gigantic Ponzi scheme that benefits those who get on board early. According to economist Walter Williams, a man reaching age 65 in the year 2000 could expect to receive $71,000 more in government transfer payments (of which the largest amount is Social Security) than he paid in taxes. But a 20-year-old man who entered the workforce in the year 2000 can expect to pay $312,000 more in taxes than he will ever receive in benefits.
There is no contractual right to receive Social Security benefits. Congress may amend and revise the Social Security benefit schedule at will. Social Security taxes exist simply for the purpose of raising revenue. On these points, see the cases Helvering v. Davis (1937) and Fleming v. Nestor (1960).
Social Security is so ingrained in American society that Republicans — even those who are viewed as staunch conservatives — defend Social Security as ardently as Democrats. Just look at the “Pledge to America” released by House Republicans a few weeks before the election last November:
We will make the decisions that are necessary to protect our entitlement programs for today’s seniors and future generations. That means requiring a full accounting of Social Security, Medicare, and Medicaid, setting benchmarks for these programs and reviewing them regularly, and preventing the expansion of unfunded liabilities.
Conservatives’ protection of, accounting of, setting benchmarks for, and reviewing Social Security is a far cry from libertarian calls to repeal, eliminate, and abolish the program.
The libertarian view of Social Security is a no-brainer. The program is morally, philosophically, economically, and constitutionally indefensible. The whole system is built on misrepresentation, theft, and coercion. It shifts responsibility from the individual to society, from the family to the state, from the private to the public. The taking of someone’s income for the purpose of giving it to someone else, whether the government takes it or a thief takes it, is immoral, no matter what the supposed good intentions of the taker may be.
Even if Social Security were an insurance program, even if it were optional, even if it were funded voluntarily, and even if it were solvent — the federal government has no authority and no business setting up and maintaining retirement, disability, survivor, or pension plans for non-government workers.
Social Security can be abolished. And it can be abolished today, once it is recognized for what it is: a relic from Roosevelt’s New Deal that has fostered dependency and redistributed trillions of dollars.
This article originally appeared in the July 2011 edition of Freedom Daily.