The Free Market 13, no. 1 (January 1995)
What program consumes the largest share of the federal budget? What program is predicted to go belly-up in short order by every knowledgeable observer? What program are the leaders of both parties committing to protect until it bankrupts the country and destroys what’s left of intergenerational amity?
The answer, of course, is Social Security, the long-running insurance fraud created by Franklin D. Roosevelt. Don’t expect the new Congress to touch it, however. The two parties are committed to defending it to the death—the death of us.
As political scams go, it’s hard to top Social Security. It has imposed a prosperity-crushing tax bite on everyone, promoted financial irresponsibility in the middle class, and torn apart the generations. It has lessened the respect any civilized society should have for its elders, even turning some of them into greedy lobbyists. And it has expanded government’s reach beyond what any free society should tolerate. The program doesn’t even provide security.
Only 9% of Americans age 18 to 34 think that Social Security will pay them anything when they retire, according to a poll by the group Third Millennium. And three fourths don’t even believe the program will exist by then. As a result, people have to rely on private savings programs. That is as it should be. But the younger generation pays more into the program than it does in personal income taxes, and that amounts to theft (and I say that as someone much closer in age to the recipients than the young).
The Social Security flat income tax is masked by calling it a “contribution” (no, Clinton didn’t invent this euphemism), and by making employers pay half, which still comes out of the employee’s paycheck. When the program began in 1937, Social Security’s revenues comprised 10% of total government take. Soon it will reach 40%, most of the growth having taken place since 1970.
The program raises four times as much money ($479 billion) for the central state as the corporate income tax ($118 billion), and only 15% less than the personal income tax ($562 billion). In 1950, the Social Security budget was 1/17 the size of the Defense Department’s. But since 1991, it has beat out the military as the largest program in the federal budget—a dubious honor.
The myth survives that current payments are stored in a “trust fund,” as Democrats have claimed for years. In fact, today’s workers pay today’s retirees, with any spare funds handed to the Treasury for immediate spending. The financial instruments received in return are simply claims on the hapless taxpayers of the future.
Nor is Social Security an annuity—as Richard Armey of Texas recently claimed—for there is no payment difference for people who are going to live longer. There is only an arbitrary benefits formula slightly connected to what was paid. In short, the program has more in common with insurance fraud than market insurance.
Social Security also manufactured a phony “right” to leisure from age 65 onward. In 1930, that age surpassed the average life expectancy, which was 58 years for a man and 61 years for a woman. Today, millions of potentially productive, high-income older people are living off struggling young people.
The program has also created perverse political divisions among the old, middle aged, and the young. The government has relieved the middle aged of the responsibility of taking care of their parents. That, in turn, has made them less respectful of the older generation in general. The fiscal squeeze has also made euthanasia—the murder of the elderly—respectable in some quarters.
Middle-aged people have even begun lobbying to keep their parent’s Social Security cash flowing, so future bequest money won’t be spent during retirement.
Based on Otto von Bismarck’s earlier scam, Social Security was irrational to begin with. It was based on the premise that government is a better manager of funds than private individuals and financial institutions. Naive is not quite the word for that notion.
As a part of America’s vast and sprawling Transfer State, Social Security redistributes money between the generations, and promotes the idea that we don’t need to plan ahead because the government will take care of us.
It made political sense for the slippery FDR, however. He could bribe some voters with other people’s money, buttress his Mussolinian view of the state, and pose as a savior of the weak and infirmed. How fitting that today’s younger generation curses his name for starting the Social Security chain letter.
Later pyramid schemers included the Reagan administration’s commission led by Alan Greenspan, which “saved” Social Security with frequent, automatic tax increases into the next century. No leader in either party will speak out against Social Security. Doing so is supposed to be political suicide. But so angry are the American people at all welfare, the time may have arrived when it isn’t.
Other Republicans, even those with a conservative reputation like Newt Gingrich, passionately defend the program. When Clinton’s budget director Alice Rivlin suggested slightly cutting the rate of increase in benefits during the campaign, the Republicans went nuts. They attacked the Democrats for wanting to cut spending.
These politicians had better wise up. The aging of the population guarantees that something will have to be done about the Social Security mess. Now even the Congressional Budget Office says the scheme will go belly up during the lifetime of younger workers. The natural inclination of politicians will be to “reform” the system without disturbing the powerful interest groups which benefit from it. This tendency should be resisted. Better to declare the program a mistake, and abolish it.
It can be done in four steps.
First, we need means testing of Social Security, to cut spending and so that everyone knows it’s welfare, not insurance. This political taboo must be broken. It would take only a few high-profile speeches by a leader with the courage to make a difference. Cutting out the well-to-do is a start.
Second, we need to raise the retirement age to 70, at least. This will help end the catastrophic New Deal myth that our professional lives should end during what is increasingly the prime of life.
Third, we need a British-style buy-out system, where people give up future claims on previously paid taxes in exchange for lower taxes now. Not everyone would go along. But enough people would to make a difference. Sure, we would have to admit that all the paid-in money was spent long ago, but that’s a benefit.
Fourth, we need to end taxes on savings and investment. After that, retirement money can come from burgeoning pensions and private savings plans in the free market. Even in the absence of tax cuts, 401K programs are booming. Abolishing all these taxes would cause an explosion in lifetime savings. Also crucial is eliminating all taxes on bequests and inheritances.
Politically unrealistic? It may seem so right now. But political climates can change very fast these days. And unlike the weather, we have control over it. Political leaders backed by intellectual leaders who understand the disaster of Social Security should begin the debate now. Any politician, whatever his partisan loyalties, who refuses to deal honestly with the issue should be punished.
The transition will not be easy. But even a rough transition beats bankruptcy.
