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Social Security Has to Go

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President Clinton has jumped on the Social Security reform bandwagon. As a believer in government-sponsored pensions, he thinks he can fix the system. He is wrong. Social Security cannot be fixed. There is only one thing to do: junk it.

The financial problems with the system have been recited many times. Early in the next century, Social Security will be in deficit. Revenues will fall short of benefits. To keep it going, the government would have to raise taxes substantially, cut benefits, or both.

Why is the system in this mess? The primary reason is its pay-as-you-go financing. That is also the fraud at the heart of the system. It has aptly been compared to a pyramid scheme, which would land any private citizen in prison on bunko charges.

Even though Social Security never explicitly calls itself a pension or retirement insurance system, people have certainly been led to think that it is. Each pay period, workers are forced make what are called “contributions,” and when they retire, they are to receive benefits. The system is riddled with dishonesty. First of all, when the government forces a citizen to make a contribution, it’s a tax and nothing else. Second, the money is not put away or invested in order to earn interest and yield benefits for retirement later on. From the beginning, the money was used to pay benefits to current retirees. What seems to be savings is actually consumption. Third, there is no legal contract guaranteeing benefits.

The system over the years has taken in more than it has paid out. But the government “borrows” the surplus to spend on other things. That money is consumed too. The Social Security “trust fund” has nothing in it but bonds that need not be repaid and that can only be paid by additional taxation. This whole business is phony from top to bottom. How can the government borrow from itself? It simply moves money from one pocket to another. The various funds are accounting fictions.

When the surplus is gone, the fraud will be exposed. The problem with pay-as-you-go is demographics. As long as there were 42 workers per retired person, as the system had at one time, it could appear fiscally sound. But when it’s down to two or three workers per retired person, which is where it is going, things don’t look so good. The burden on those workers would have to be huge, or the benefits would have to be scaled back to stave off a tax revolt.

A publication put out recently by the Social Security Administration states, “Social Security is not intended to meet all your financial needs. When you retire, you will need other income, such as savings and a pension if you wish to maintain your current lifestyle.” That’s interesting, because if the government wasn’t taking all that money for Social Security (and other things), we would have more to save. Which brings up another fraudulent aspect of the system: the employer “contribution.” Even though your employer appears to pay half of the roughly 12 percent of your pay that is taken, he really doesn’t. You pay it. For the employer, it is part of your compensation package, a cost of hiring you, and thus money that would have been left in your pay envelope. The government makes it look like an employer contribution to keep you from getting mad.

Hardly anyone in power wants to acknowledge that the system is on the edge of a cliff. I think I know why. If Social Security, the crown jewel of the American welfare state, is seen to be rotted with fraud to the very core, what other conclusions might we Americans draw about our government? How else are we being bamboozled?

We can make a long-needed start toward throwing the welfare state off our backs by repealing Social Security and letting people look after their own retirement plans. Leave them the money they make, and they will be able to do so.

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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.