Due to its prodigious status in the federal “budget” and the necessity of deficit spending and fiat currency inflation to keep all the money-inhaling federal programs funded, Social Security is recognized by even the most obtuse of players in Washington as desperately needing reform to stave off economic calamity.  It is the opinion of this writer that Social Security is wholly devoid of any justification from a dialectic standpoint and should be eliminated as quickly as possible.

To be sure, this will create a period of pain and, more than likely, economic recession, but this is necessary as the economy begins to heal and correct the period of pervasive economic damage that is currently happening.  Busts are not in and of themselves economic problems, they are simply the effects of artificial booms marked by malinvestment and fraud.  Indeed, the longer we ignore the impossible promises and placebic fixes, the worse the damage and the eventual recession will be.

The Social Security Act was passed in 1935 as a response to the high rate of poverty among the elderly as a result of the Great Depression.  Since then, several amendments have been passed that have extended benefits for such things as unemployment and healthcare.  For the purposes of this article, we will focus on the largest expenditure of the program:  Federal Old-Age (Retirement) Insurance.  Here are six reasons why Social Security is impractical, immoral, and should be reformed and ultimately ended.

1.  Social Security isn’t exactly a Ponzi scheme… it’s worse.

A Ponzi scheme is a fraudulent investment scheme that relies on the investments made by new investors to pay returns for older investors, rather than those returns coming from profit earned by the interest or fees on the investments.  To keep a Ponzi scheme going, a greater number of new investors (payers) are needed than older investors (beneficiaries).  They are destined to collapse because at some point the earnings become less than the payments.

Texas governor Rick Perry received a lot of flack from Social Security apologists when, in a GOP presidential debate last September, he referred to Social Security as a Ponzi scheme.  On the face of it, Perry was clearly correct:  current recipients of Retirement Insurance Benefits (RIB) receive their checks from the payments made by current productive workers, not from the wealth invested and interest accrued in a trust fund.  The projections of Social Security remaining funded until 2033 (or whatever the year is currently projected to be) depend not on 21 years of stockpiled wealth, but on expected tax revenues.

But haven’t millions of retirees received benefit checks?  Even a Ponzi scheme can make a person wealthy, provided they get in early enough.  If you believe, as I do, that Ponzi schemes are generally terrible investments, recall that I said that Social Security is actually worse.  Shikha Dalmia points out three reasons why:

First, a Ponzi scheme takes money from current investors to pay previous investors, minus a fee.  Social Security does the same thing, but instead of a fee, money is taken out to spend on programs for politically favored groups and to support a massive bureaucracy.

Second, involvement in a Ponzi scheme is voluntary.  Social Security relies on the forced coercion by the government to enforce the levying of taxes on the people, who may not choose to opt out when they recognize the raw deal they are getting, without suffering violence.

Third, a Ponzi scheme collapses when it is unable to fool a sufficient number of new investors.  When Social Security runs low on funds, it can simply raise taxes on workers or ask the Federal Reserve Bank to print more money (which is simply another way of raising taxes, via inflation).

2.  It is fiscally insolvent.

In 2010, Social Security began paying out more money than it was taking in.  Nearly every year we see that the exhaustion of the so-called trust fund will occur sooner than was predicted the year prior.

The primary structural flaw of the program rests on the initial assumptions of the worker-to-retiree ratio.  In 1945 the number was 41.9:1; funding the program was not a problem.  But only five years later, in 1950, as more Americans began to make claims, the ratio had dropped to 16.5:1.  It has decreased ever since (with only a small uptick after the 1983 Social Security reform) and by 2010 the ratio is a paltry 2.9:1.  The number is expected to drop to 2:1 by 2030.

3.  It is a terrible way to save money towards retirement.

As of August 6 of this year, people entering retirement will now have paid more money in Social Security taxes throughout their careers than they will receive in benefits.

Let’s go over that one more time.  Everyone who has not yet retired will be receiving less money than they put into the fund.  I am personally skeptical that anyone under 40 will be receiving anything from SS, all the more reason why we should cut our losses and end it sooner, rather than later.

It would literally be better to take the money spent on payroll taxes and bury it in the ground.  Even then you wouldn’t break even as inflation destroys the value of money; inflation that has been accelerated in recent years due to the need for the Fed to print ever-increasing amounts of money to keep federal programs, such as Social Security, funded.  That is what you call a cruel irony.

If it still hasn’t sunk in, consider this analysis from economist Paul Cwik.  A person born in 1988 and making $30,000 per year can currently expect to receive $1539 per month from SS when retiring at 70 in 2058.  If he is expected to live to the age of 87, then the annuity present value of $1539/month for 17 years would necessitate saving of $1132.50/year, starting at age 22, in a 5% security to amass $212,938.88.  That would only be 3.775% of his annual income.

Social Security and Medicare taxes are currently 15.3% of his income (and sure to increase dramatically before he retires!).  If he put that into the security instead, he would be saving $4590/year.  Assuming the same 5% return for 48 years, instead of the $212,938.88 from SS, he would receive $863,036.55!  Over 4x the return!

To those who would suggest that the recent economic downturn provides evidence that private investment is far too risky, I would counter that one must consider the extent to which government policy contributed to the recession.  It is beyond the scope of the present article to go into detail, but suffice it to say that the Fed holding down interest rates and the moral hazard introduced by the bailouts of the banks and Wall Street firms had much more effect on the crash than any perceived inherent flaws in capitalist investment, per se.

4.  It is “generational warfare”.

This term was expressed in a recent article for Reason by Nick Gillespie and economist Veronique de Rugy.  Here they emphasize many of the moral arguments against Social Security. 

For one, it will destroy the social safety net.  The program is not capable of sustaining benefits for all citizens and is destined for failure.  This compromises a scenario for which the use of those funds might be morally justifiable:  protection of the poor or impoverished.

The greatest moral failure is that the program forces younger people, who have relatively lower wages, to subsidize the retirement and health insurance benefits of older people, even though they will never receive those same benefits.

Perhaps the most common moral argument for Social Security is that without it, senior-citizens would be thrown into poverty.  This is simply not supported by the data.  While it is true that in 1935 poverty among the elderly approached 50%, in the years since then medical technology, the standard of living, and changes in the economy have all but eliminated that level of risk.  One study shows that individuals 65 and older have much lower poverty rates than most other groups, only 11% in 2010.  For households headed by persons under 35, the poverty rate is 22%.  Eighty-three percent of elderly households own a home.  In 1984, households headed by persons 65+ owned 10x as much wealth as those headed by persons under 35.  By 2009, due in part to the recession, the number was 47x!  By the time they retire, individuals have had a lifetime to amass savings and investments, including owning a home, and have decreased living expenses.

Payroll taxes pose an unfair burden on younger workers who make less money and contribute a higher percentage of their income to support retirees who, in general, are far more affluent.  Younger people will not only receive negative returns but in the meantime will likely be subjected to even greater taxes in the near future to cover current beneficiaries.

5.  It is based on false premises.

Social Security is sometimes marketed as insurance and sometimes as a retirement fund.  It is neither; Social Security is welfare, but not even welfare distributed based on need as it is expected that everyone will get it.  In reality, not everyone will get it; we’ve already reached the point where new retirees will spend more in tax payments then they will receive in benefits, and some people will get nothing.  Surely if we end Social Security, as I am proposing, many people will get nothing.

When faced with the proposition of ending social security, most people are terrified and appalled at losing all the money they’ve paid into the program.  The sad truth is that you already have.

In the 1960 Supreme Court decision of Flemming v. Nestor, it was ruled that participants in Social Security have no legal claim over any contributions made or assets they may have accrued over their lifetimes.  You simply are not entitled to that money.  It was forcibly stolen from you and given to politically powerful groups.  Try to remember this if and when a politician must break the news that the program cannot be strung along and people who thought they were promised their money back will get nothing.  It is not that person’s fault, but rather the fault of every silver-tongue who came before and made empty promises.  You were lied to, long ago.

6.  It introduces egregious moral hazard.

Moral hazard is when parties insulated from risk behave differently than they would if they were fully exposed to the risk.

Social Security will end some day; either because it will simply go bankrupt, because the unreasonable tax hikes will finally wake younger people up from their stupor and allow them to see the terrible deal they are getting, or because the unconscionable level of deficit spending the federal government is addicted to will collapse the entire economy.  In any case, there are too many people expecting that a paternalistic government will take care of them in their old age.  Just as in the parable of the ant and the grasshopper, they will not save for themselves and will be ill-prepared when the time comes.  We may yet see extreme levels of poverty amongst the elderly, but the irony is that it may be caused by Social Security itself.

Moving On

An immediate end to benefit payouts would be cruel and cause much economic instability.  It is preferable to bring Social Security to a relatively gradual end.  Several realistic proposals can be found (see here or here).  They usually involve one of the following alternatives: 

  • Switch to a means-tested safety net in which benefits are given based on need, not arbitrary factors like age.
  • Offer the choice for younger people to opt-out.
  • Maintain benefits for those people born before a certain year and eliminate them for anyone younger, fund benefits through general revenues.
  • Transition to a private, free market retirement investment system.

Regardless of how it ends, let’s end it.  Retirement savings should be a responsibility put back in the hands of individuals and their families.  As John Attarian notes:

“The more responsibility for our welfare we shunt onto the government, the more power over us we give it, and the more freedom we necessarily forfeit thereby.”