Tell Us the Truth About Social Security
Senator Elizabeth Warren and the Democratic left are calling for an expansion of Social Security benefits. "Seniors have worked their entire lives and have paid into the system," Warren claims, "but right now, more people than ever are on the edge of financial disaster once they retire."
This non sequitur only compounds the fundamental deceitfulness of our old-age "social insurance" system.
The Social Security Act of 1935 was the first federal entitlement program. The term "entitlement" has a variety of definitions in political theory, but in everyday politics it means simply that Congress does not have to vote for annual spending increases for the program. If an individual meets certain criteria, he or she is "entitled" to receive the benefits. With Social Security, you are entitled to certain benefits if you reach a certain age and have (with your employer) "contributed" payroll taxes into the system.
The fundamental problem with Social Security is that it is a "defined benefit" pension system masquerading as a "defined contribution" program. Senator Warren says, correctly, that seniors have contributed to the system. But what have they contributed, and what relationship does their contribution have to their benefits? Politicians have understandably been more reluctant to raise taxes (euphemistically called "contributions") than to raise benefits. The inevitable result has been promises that far exceed resources.
The very first recipient of Social Security benefits demonstrated the problems to come. Ida Mae Fuller retired in 1940 after having paid about $22.50 into the fund. She collected over $22,000 over the next 35 years. While Fuller's is an extreme case, there is no doubt that, until now, the vast majority of Social Security recipients have received far more in benefits than they have paid into the system.
It is true that part of the problem is demographic -- that life expectancy was 62 in 1935 and has since risen to 78, and that Americans are having far fewer children today than they had during the Baby Boom. But another part is demagogic: Politicians use benefits to bid for votes. Even before the system began paying out, Congress extended pensions to spouses and surviving dependent children in 1939. In 1950, benefits were extended to millions of previously exempted workers -- who received benefits almost immediately while having contributed almost nothing. The first cost-of-living adjustment was also made that year. A disability program was added in 1956, which today has become a long-term unemployment or welfare program. In the early 1960s, Congress lowered the retirement age. Ten years later, cost-of-living adjustments were made automatic, and minimum benefits were raised. The first serious effort to have contributions catch up to this runaway benefit train came in the 1980s, and it was not nearly adequate.
Congress should pass a "Truth in Social Security Act," which would tell the public the story of the payoffs over the years. Every year, the Social Security Administration sends me a statement detailing how much I have paid into the system, and projecting how much I (or my wife and dependents) will collect if I continue to contribute at the current rate. But the administration does not include such details as the fact that there will be no funds left for anyone by 2033 -- unless the government goes above and beyond the "contributions" to the program and makes payouts from general revenues -- and that it is almost certain that future retirees will get less back than they paid in.
Over the last year, the "payroll-tax holiday" reduced employee taxes from 6 percent to 4 percent. (Notably, the act did not reduce employer "contributions," and thus could stimulate only consumer spending, rather than payrolls.) Nobody in the administration explained why this would not also reduce the ultimate Social Security benefits of the payroll-tax vacationers.
Some critics have called Social Security a Ponzi scheme. But that’s not fair -- not fair to Charles Ponzi, that is. He could keep his scheme going only as long as he could enlist new participants. We have no choice. Social Security is better called "a Ponzi scheme with a gun."
The guys with the guns ought to tell the truth. But Social Security was conceived in dishonesty. FDR understood that the payroll-tax system of funding Social Security was untenable. "I suppose you’re right on the economics," he told Luther Gulick. But payroll taxes "are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program."
True, no damn politician since has wanted to grasp the "third rail of American politics." But telling the truth can be the first step toward reform.
Paul Moreno holds the William and Berniece Grewcock chair in constitutional history at Hillsdale College.
