Social Security’s defenders routinely laud it in moral terms, as “our most successful program of social reform,”[1] a humane, compassionate response to the needs of the elderly. One work puts it this way:
None of us knows his or her fate. Today’s good fortune can turn into tomorrow’s disability. Most of us will gradually move from vigor to diminished capacity, and we will need help. All of us should ensure that such help will be there, just as we should extend help to those who need it today.
The prime method of doing so is called social insurance. And the doing of it is called civilization.[2]
Social Security in other words, is part of what it means to be civilized and moral.
In truth Social Security’s immorality is as monumental as its actuarial deficit, estimated under pessimistic assumptions at $23,188 billion as of January 1, 1994.[3]
To begin with, the system is, as Alf Landon described it in 1936, “a cruel hoax.”[4] Social Security raises revenue by taxing worker incomes, then uses it to pay benefits to retirees, disabled persons, and other beneficiaries. Any money left after paying benefits and administrative costs is lent to the Treasury in return for special interest-bearing government debt, which can be redeemed as needed for money to pay benefits. Social Security, then, is a welfare program redistributing money from taxpayers to beneficiaries.
“Insurance”
Yet millions of Americans believe that Social Security is a retirement insurance program. They believe that the money they are paying into it is being invested and will be paid back with interest when they retire. They believe that the benefit money belongs to them by right and that they have earned it. A letter to the Wall Street Journal expressed the view of many:
. . . Social Security is not an entitlement program, but a savings system.
When the government sends a Social Security check to an individual, it is not giving him anything; it is paying him back a portion of the money he has saved for his retirement through a special retirement plan. The money belongs to the individual, money owed to him, money systematically and forcibly taken from his paycheck as security against a time when he will be too old to work.[5]
Such misunderstanding (except the part about forcible extraction from one’s paycheck) is the result of assiduous and dishonest use of insurance terminology by Social Security and its intellectual advocates. Its payroll taxes are euphemistically called “contributions.”[6] The legislation authorizing them is titled the Federal Insurance Contributions Act (hence the acronym FICA).[7] Social Security’s components are called Old-Age and Survivors’ Insurance (OASI), Disability Insurance (DI), and Hospital Insurance (HI, or Medicare A). The Social Security Bulletin describes the program as “insurance,” and its payments as “insurance benefits.” A worker paying into the system is described as “covered” or “insured.”[8] The Social Security Administration’s free brochure Understanding Social Security, available at any Social Security office, assures readers that “we will honor your investment [sic] in Social Security.”[9] It all sounds reassuringly that one is doing something like buying a policy from Prudential or Mutual of Omaha.
Unfortunately for the hapless “covered workers” making their “contributions,” Understanding Social Security doesn’t tell them about Flemming v. Nestor, the 1960 Supreme Court decision by which the wife of a deported Communist lost her benefits, even though her husband had paid Social Security taxes. Didn’t she have a legal right to those benefits, since her husband had paid those taxes? Not according to the Social Security Administration, which argued that:
The OASI program is in no sense a federally-administered “insurance program” under which each worker pays premiums over the years and acquires at retirement an indefeasible right to receive for life a fixed monthly benefit, irrespective of the conditions which Congress has chosen to impose from time to time.[10]
The Court concurred: “To engraft upon the Social Security system a concept of `accrued property rights’ would deprive it of the flexibility and boldness in adjustment to everchanging conditions which it demands.”[11]
Congress has already acted repeatedly with “flexibility and boldness in adjustment”—or, baldly put, cut Social Security benefits. Flexible and bold adjustments in 1977 and after included eliminating benefits for orphans and children of disabled or retired workers, who are full-time students and 18-21 years old; postponing cost-of-living adjustments (COLAs) for six months in 1983 and allowing future COLA delays under certain conditions; raising the retirement age (which deprives retirees of the benefits they would have collected had the earlier retirement age remained in effect); taxation of benefits (in effect a benefit cut); eliminating the minimum benefit under most conditions; and tightening the conditions for receiving lump sum death benefits.[12] So much for the pledge to “honor your investment.”
Taxes versus Benefits
Social Security is disingenuous in another way about the relation between one’s taxes and one’s benefits. Understanding Social Security, i.e., the version of reality that the Social Security Administration produces for popular consumption, has it that the size of one’s benefit depends on factors such as date of birth “and most important your earnings,” and “In general, a Social Security benefit is based on your earnings averaged over your working lifetime.”[13]
In reality, A. Haeworth Robertson, Social Security’s Chief Actuary in 1975-1978 points out, “the relationship between taxes and benefits for an individual is so tenuous as to be virtually nonexistent.”[14] This is because Social Security is a social insurance program, stressing “social adequacy.” That is, “It pays benefits according to presumed need,” and “no attempt is made to relate the benefits that a particular group of persons receives to the taxes paid by that group of persons to become eligible for such benefits.” Two people in very different circumstances, say a married worker who dies leaving a wife and dependent children and a single worker who dies, may pay the same tax rates, yet the married worker’s benefits will be much greater. While there is some indirect tie of taxes to benefits, it is “more tenuous than most people have realized, and this misunderstanding is an important factor in any public dissatisfaction with the Social Security system.”[15]
Facing the Future
Similar deceit occurs regarding Social Security’s future. Understanding Social Security, published in January 1994, opens by addressing the question “Is Social Security in Your Future?” and assures readers four times in three pages that “it will be there when you need it!”[16]
Yet for the past few years the annual reports of Social Security’s Board of Trustees have warned that the system is not in close actuarial balance (i.e., projected future income doesn’t match projected future cost) and that steps should be taken to strengthen the system and restore actuarial balance.[17] And just three months after the 1994 Understanding Social Security appeared, the trustees reported that the Disability Insurance trust fund is projected to run out in 1995, even under its optimistic economic and demographic assumptions. The Old Age and Survivors Insurance trust fund is projected to go broke in 2036 under the intermediate assumptions, in 2023 under pessimistic assumptions. Projected exhaustion dates for the combined funds (OASDI) are 2029 and 2014 under, respectively, intermediate and pessimistic assumptions.[18] These dates indicate considerable weakening in Social Security’s position; the 1993 report projected OASDI exhaustion, for example, to occur in 2036 (intermediate assumptions) or 2017 (pessimistic).[19] Exhaustion of the Hospital Insurance trust fund, which pays Social Security’s hospital benefits, is projected in 2004 under intermediate assumptions and in 2000 under pessimistic ones.[20]
And only actuaries and specialists know that Social Security’s actuarial deficit, or excess of projected future costs over projected future revenues and trust fund assets, is soaring: under intermediate assumptions from $5,836 billion as of January 1, 1990, to $10,408 billion as of January 1, 1994; under pessimistic assumptions, from $14,282 billion to $23,188 billion.[21] Another indicator of Social Security’s rickety long-term financial condition is its growing accrued unfunded liability. As of January 1, 1990, the unfunded liability for Old-Age and Survivors and Disability Insurance alone was $6,511 billion; four years later, it stood at $8,059 billion.[22] This is the amount of benefits that Social Security is liable to pay, but for which no money has been provided to pay them.[23]
This is the program that “will be there when you need it”?
As for the trust funds’ assets, Understanding Social Security labels “false” the idea that the funds contain only “worthless IOUs” and asserts that Social Security’s investment in government debt will be honored.[24] Alas, as former Chief Actuary Robertson acknowledges, “the trust fund assets have no tangible value [i.e., are worthless IOUs!] and represent only a claim on future federal revenue.”[25] Social Security’s investment will be honored only if the government forcibly extracts more resources from the private sector to repay it.
A private insurance company that took people’s “contributions” for years; told them for years that they were “insured” with a “right” to benefits, without telling them it reserved the right to apply “flexibility and boldness in adjustment to everchanging conditions” if for some reason it couldn’t pay them; lied to its “investors” about the value of its trust fund assets; and repeatedly assured them that their money “will be there when you need it” even while its own experts were forecasting oncoming financial ruin and calculating actuarial deficits and unfunded liabilities running into the trillions, would, rightly, be deemed unfair, untruthful in advertising, and fraudulent. “A cruel hoax,” indeed. What then is the moral status of Social Security?
But even a private firm writing such a fraudulent prospectus has one moral advantage over Social Security: its victims participate of their own free will. Obviously, a financial system—especially an unsound financial system—which coerces people into it is morally inferior to a voluntary one.
Intergenerational Injustice
Social Security’s coercive nature makes it inherently an engine of intergenerational injustice as well. It operates on a pay-as-you-go basis, meeting current expenses out of current revenues. Today’s retirees are paid benefits with taxes levied on today’s workers. That is, each generation is forced to support the previous generation, and as the program, and our population, have aged, the burden on each young generation has grown. And since the workers cannot leave the system their only hope of compensation for the injustice inflicted on them for the sake of their parents and grandparents is to have a similar injustice inflicted on their children and grandchildren.
This injustice is not altered by the trust fund surpluses which have accumulated since the 1983 tax increases. The only way the Treasury can get money to repay the bonds when Social Security presents them for payment, barring (unlikely) spending reductions elsewhere in the budget, is by extracting more resources from the workers by higher taxes or borrowing.
Social Security’s intergenerational injustice could hardly be expected to endear the old to the young, and it hasn’t. The Social Security literature speculates on a war—between the elderly understandably anxious for their benefits and the young groaning under a heavy payroll tax burden. The latter, some fear, may rebel at the prospect of the huge tax increases which will be necessary to pay the retirement benefits of the huge Baby Boom generation.[26]
This intergenerational discord is due to nothing else but Social Security’s involuntary nature. No private retirement pension scheme ever has or ever could pit the generations against each other in a grim clash of interests, since private arrangements are entirely voluntary. Nobody ever heard the epithet “greedy geezer” when provision for retirement was one’s own responsibility. Indeed, the better-funded a private pension fund is and the more lavish its benefits, the better off the young are, since their possible financial burden for the support of their parents is that much lighter. With Social Security, by contrast, the more the government tries to give the elderly or the better it tries to fund the program, the worse off the young are since they, not the earnings of private pension fund investments, are the sole source of financing.
The redistribution which Social Security carries out is likewise wrong. As a general rule, a person’s earnings vary with his ability, enterprise, and industry, though unionization, nepotism, and other distortions might affect one’s income. Social Security taxes are, ultimately, paid according to ability; the greater one’s ability, the larger the amount of tax extracted. But, as we saw, benefits are paid according to “presumed need.” That is, the program operates on the Marxist principle of “From each according to his ability, to each according to his need.”
What of the argument that Social Security provides equity between generations? One is surely obligated to one’s parents, and equity demands that one care for those who cared for one in one’s childhood. But this hardly translates into perfect strangers having a moral claim on earnings forcibly extracted. And as Social Security’s costs have risen, today’s young generation faces a far heavier Social Security tax burden than previous ones, with ever-diminishing prospects of receiving benefits as lavish as those today’s elderly enjoy. In truth, moral arguments about intergenerational equity run the other way: Social Security is inequitable to the young.
Perverse Incentives
But beyond the obvious wrongs which its mendacity and coercion entail, Social Security is evil in more subtle but nonetheless important ways, due to the perverse incentives which it creates and their impact on our national character and conduct.
For one thing, Social Security discourages savings and self-reliance. Believing themselves covered by the “savings” forcibly taken from their income, individuals save less than they would otherwise.[27] As a corollary it encourages irresponsibility and improvidence for the future. Social Security’s huge size and longevity have made it a part of the landscape of people’s thinking. For decades people have taken it for granted that much of the responsibility for their well-being in old age belongs to “society” or “the government.” As President Grover Cleveland warned in 1887 when vetoing an appropriation for drought relief in Texas:
the lesson should be constantly enforced that though the people support the Government the Government should not support the people. . . . Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character.[28]
Still another sinister aspect of Social Security is its role in undermining the family. With Social Security assuming the responsibility for the elderly once borne by their children, both the ethos of reciprocal obligation between family generations and the incentive to marry and have children (to ensure care in old age) are weakened.
Finally, Social Security works insidiously against the value of life. Assuming that life is good and that a major purpose of human existence is reproduction—which, biologically speaking, it is, just as with all other living things—then it follows that other things being equal, that which encourages childbearing is good, and that which discourages it is not. As we saw, since much of the financial burden of caring for the elderly is now borne by Social Security and Medicare, the incentive to have children is thereby weakened. Moreover, as Allan Carlson of the Rockford Institute has observed, because struggling young couples are forced to participate in Social Security, they cannot improve their standard of living by reducing the support they give to the elderly. What they can do is delay or even forgo children. And in many cases they do; research across nations has found a causal connection between the size and generosity of a social security program and a country’s fertility decline.[29] That is, social security has been a factor in the slow biological suicide of advanced Western societies.
Social Security can pay its current beneficiaries, and will be able to pay for some years yet. However, early in the next century, Social Security will face bankruptcy as the retiring Baby Boomer generation drives its costs above its revenues and exhausts its “trust funds” of Treasury debt. Radical reform, ideally privatization, will become urgently necessary. But should anyone attempt it, a firestorm of opposition grounded in morality will ensue. It will be one of the fiercest controversies of the future. Social Security, it will be argued, is moral, humane, compassionate, enlightened, progressive; radical reform is unthinkable, inhumane, callous, immoral. If needed reform is to be achieved, such objections must be overcome. And for that, it will be vital that the public realize just how morally flawed Social Security really is.
1. Senator Gaylord Nelson, “Foreword,” in Robert M. Ball, Social Security Today and Tomorrow (New York: Columbia University Press, 1978), p. vii.
2. Merton C. Bernstein and Joan Brodshaug Bernstein, Social Security: The System That Works (New York: Basic Books, Inc., 1988), p. 288.
3. Sum of the Old-Age Survivors and Disability Insurance actuarial deficit of $6,964 billion and the Health Insurance actuarial deficit of $16,224 billion, both under pessimistic assumptions. Figures furnished to author by the Office of the Actuary, Social Security Administration, and Health Care Financing Administration, respectively. The actuarial deficit is the excess of Social Security’s projected expenditures over its projected income and trust fund assets, over the next 75 years.
4. Quoted in Wilbur J. Cohen and Milton Friedman, Social Security: Universal or Selective? (Washington, D.C.: American Enterprise Institute, 1972), p. 7.
5. “It’s Not an Entitlement: It’s Money Owed to Us,” in “Letters to the Editor,” The Wall Street Journal, March 28, 1994, A13.
6. Social Security Administration, Social Security Handbook 1993, p. 482, 1994 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds [hereafter, Annual Report OASDI] pp. 30-32, 36, 38, 42, 48, 50, 63-64, 204-205, et al.; Robert J. Myers, Social Security, second edition (Homewood, Ill.: Richard D. Irwin, Inc., 1981), pp. 1, 5, 8-9, 27-30, et al.; M. C. Bernstein and Joan Brodshaug Bernstein, Social Security: The System That Works, pp. 16-17, 29, et al.
7. Understanding Social Security, p. 9.
8. Social Security Handbook 1993, pp. 25, 28, 192, 488.
9. Understanding Social Security, p. 5.
10. Peter J. Ferrara, Social Security: The Inherent Contradiction (San Francisco: The Cato Institute, 1980), p. 70.
11. Ibid.
12. A. Haeworth Robertson, Social Security: What Every Taxpayer Should Know (Washington, D.C.: Retirement Policy Institute, 1992), pp. 134-135.
13. Understanding Social Security, pp. 10-11.
14. Robertson, p. 68.
15. Ibid., p. 195.
16. Understanding Social Security, pp. 4, 5, 6.
17. 1992 Annual Report, OASDI, pp. 31-33; 1993 Annual Report, OASDI, pp. 33-35; 1994 Annual Report, OASDI, pp. 26-28.
18. 1992 Annual Report, OASDI, p. 24.
19. 1993 Annual Report, OASDI, p. 29.
20. 1994 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, p. 3.
21. See footnote 3.
22. 1990 figure: Robertson, p. 116; 1994 figure, Office of the Actuary, Social Security Administration.
23. Robertson, p. 121.
24. Understanding Social Security, pp. 4-5.
25. Robertson, pp. 90-91.
26. See, e.g., Dorcas R. Hardy and C. Colburn Hardy, Social Insecurity: The Crisis in America’s Social Security System and How to Plan Now For Your Own Financial Survival (New York: Villard Books, 1991), pp. 27-41.
27. Robertson, pp. 231-232.
28. A Compilation of the Messages and Papers of the Presidents, vol. XII (New York: Bureau of National Literature, Inc., 1897), p. 5142.
29. Allan Carlson, Family Questions: Reflections on the American Social Crisis (New Brunswick, N.J.: Transaction, Inc., 1988), p. 222.
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