by Micah Frankel
In his 1999 State of the Union or more appropriately
State of the Government address, Bill Clinton in typical Orwellian wordspeak
stated: "Even today, without Social Security, half our nation's elderly
would be forced into poverty." What he didn't state was that the government
is a main cause of this poverty. Due to government coercion, these elderly
people are in a worse position for at least five reasons.
First, they were forced to contribute to a redistributionist pyramid scheme
(social security) with a sham trust fund which contained no assets only
IOUs.(1) As a result of having to make these compulsory contributions, these
elderly had less money to save and invest in real assets such as the stock
market. Thus they lost out on the much higher returns that they could have
earned if they were allowed to put their compulsory social security contributions
in the stock market.
Second, they were lulled into a false sense of security by thinking that
their compulsory contributions to the social security system would provide
their needs after retirement. As a result of this destructive passivity,
they saved less than they would otherwise would have if no such system existed.
Because of this lack of savings they are suffering and the economy is suffering
with lower productivity and growth rates.
In private insurance funds, money paid is by the beneficiaries (premiums)
to the insurance company. The insurance company then invests this money
in real assets (thus expanding the economy), and the earnings on these real
assets are used to pay the beneficiaries when they retire. Under the social
security system, no real wealth is created because money is not invested
in real assets. Rather the money received from workers is simply distributed
to retirees. According to Harvard economist Martin Feldstein, and others
economic growth, which has averaged less than 3 percent of gross domestic
product (GDP) a year, may be as much as 5 percentage points less than it
would be under a privatized system in which workers invested the money they
now pay into Social Security.(2)
Third, they would be thought of by employers and society at large as more
productive if social security didn't exist. In 1930, 54% of men over 65
were still working. Today despite increases in life span, about only about
20% work, and most classify themselves as "self-employed." Thanks
to the social security program, retirement at the age of 65 is now enshrined
in law and custom. Once a person reaches the age of 65 regardless of their
skills and positive cultural influence, they are regarded as disposable
and are put out to the barren social security pasture.
Fourth, the elderly are the subject of intergenerational envy. Generation-Xers
despise having money stolen from their pay checks to pay people over 65
social security benefits. Surveys have indicated that these Generation-Xers
doubt they will ever receive a dime from social security. Thus they correctly
surmise that the government is robbing young Peter (at the bottom of the
pyramid) to pay old Paul (at the top). In the past, social security "funding
crises" have been patched up by increasing payroll taxes. This has
lead to reduced employment opportunities and a lower standard of living.
Generation-Xers are rightfully fretful that the tax- hike solution will
be imposed on their paychecks in the future. This probable scenario only
fuels the fires of intergenerational conflict.
Fifth, they could have had more support from their families who probably
felt this support was not as necessary due to the nanny state and social
security. That is, social security is giving children the false perception
that they can unload the responsibility of taking care of their parents
on the nanny state. Social security is just one more example of a government
program that undermines the moral character and responsibility of people.
Why does social security need to be saved and more importantly, is it worth
saving? To help answer these questions, let's review of the history of social
security
The basis or model for the US social security system
was conjured up by two unrelated "visionaries". The Iron Chancellor
of Prussia/Germany, Otto Eduard Leopold Bismarck and con artist Charles
Ponzi.
The Iron Chancellor
Otto Von Bismarck, who unified Germany, had little trust in democratic processes
for achieving ambitions of state. Rather, he trusted "blood and iron,"
and hence became known as the Iron Chancellor. Upon being appointed chancellor
of Prussia in 1862 (later Germany in 1871), he openly ignored the constitution
and illegally raised funds (a role model for our current President) for
military programs. "Not by speeches and majority resolutions are the
great questions of the time decided...but by blood and iron." - Otto
Von Bismarck
In the late 1880s the Iron Chancellor was having more trouble than usual
with the German socialists. In an futile effort to undercut their appeal
to the working class or proletariats, he set up a social security system.
In this system compulsory contributions from employers, workers and the
state provided funds for a comprehensive system of social insurance which
included accident, sickness and old-age insurance.
Bismarck's motivation for implementing "social security" was purely
political. Through intelligence gathering, he found that one of the most
popular socialist proposals was a state run social security system. Similar
to the socialists his concept of social security was an autocratic, authoritarian
one - based on what Nobel laureate Friedrich Hayek called the "fatal
conceit". That is, both Bismarck and the socialists believed that the
average person is ignorant, irrational, irresponsible, immoral and inept
and hence can not be trusted to look after their own affairs or those of
their parents. Only a paternalistic socialist state system could know enough
to provide for these immoral incompetents upon their retirement.
Although Bismarck was aware of the political benefits which would accrue
to him as a result of instituting a social security system, he was also
concerned about its potential costs. Taxes in Germany were already high
in order to bankroll military expenditures. Consequently, Bismarck commissioned
an actuarial study in an effort to make the social security system as economical
as possible. The study indicated that the range of average live expectancy
in Germany (with a high level of confidence) was from 60 to 65. A low cost
system would therefore be one in which pension benefits kicked in right
about the time people kicked out. Hence the age of eligibility for the social
security system in Germany was set at 65 (the conservative end of the life
expectancy range). Some say that Bismarck knew that the German social security
scheme would collapse under its own weight as demographics eventually caught
up with it and that this was his way at getting back at the socialists.
In early 1920, Charles Ponzi promised speculators
a 50 percent return after 45 days in a "pay-as-you go" pyramid
scheme. Although no money was ever invested, the initial "investors"
(at the apex of the pyramid) actually did earn the promised return as money
from subsequent "investors" (beneath them) was transferred up.
However, as more and more people joined the pyramid, an exponentially higher
number of subsequent investors was needed to pay off the earlier investors.
Within a year the pyramid collapsed under its own weight and investors lost
millions of dollars. Charles Ponzi served 14 years in prison and was released
into society 1934. Contrary to popular believe, Mr. Ponzi was not the first
commissioner of the Social Security Administration.(3)
In 1932, Franklin Delano Roosevelt (FDR) was elected
president in a landslide (472 electoral votes to just 59 for the incumbent
Herbert Hoover) by promising to end the depression. It is now recognized
that his policies known as the "New Deal - a combination of nonsense
and fascism" prolonged and deepened the depression.(4)
FDR mistakenly believed that if prices could be raised America could be
raised out of its economic doldrums. Consequently, as incredible as this
may seem, the objective of FDR's policies was to create shortages by cutting
back on production in an effort to raise prices. To this end, all gold was
nationalized and private ownership of gold outlawed. The price of gold was
then artificially raised from $20.67 to $35.00 per ounce. This measure raised
prices minimally but at a high cost as it further restricted international
trade as foreign countries soon retaliated against the US.
The goal of FDR's 1933 Agricultural Adjustment Act (AAA) was to raise agricultural
prices to a much higher "parity" level by reducing the supply
of agricultural products. "Curiously enough, while Secretary of Agriculture
Henry Wallace was paying out hundreds of millions to kill millions of hogs,
burn oats, plow under cotton, the Department of Agricultural issued a bulletin
telling the nation the great problem of our time was our failure to produce
enough food to provide the people with a mere subsistence diet...It was
a crime against our civilization to pay farmers $700,000,000 to destroy
crops and limit production."(5) Thus while the destitute were starving,
processors were taxed and the tax proceeds used to destroy massive quantities
of high quality crops and healthy livestock. To make sure the slaughter
was actually carried out, armed Federal agents were employed. Farmers were
rewarded if they left their fields barren. The AAA turned out to be a catastrophe
and was eventually ruled unconstitutional by the "nine old men"
of the Supreme Court in 1936.
The objective of the National Industrial Recovery Act of 1933 was to raise
the prices of industrial products and increase the costs of labor through
industrial cartels, and codes of fair competition- i.e., price fixing and
restraint of trade. Administered through the National Recovery Administration,
557 basic and 189 supplementary codes were approved and enforced. The NRA
turned out to be a disaster and was eventually ruled unconstitutional by
the "nine old men" of the Supreme Court in 1935.
In 1935, with an election year approaching, FDR pushed the incalculably
ruinous National Labor Relations (Wagner) Act of 1935 through Congress and
created the boondoggle Works Progress Administration (WPA). Although the
Supreme Court's rulings on the AAA and NRA gave the economy a boost, the
Depression was still in full force,(6) and now the voting public was burdened
with higher taxes which FDR thought were needed to pay for his detrimental
New Deal programs.(7) Between 1933 and 1936, government expenditures ballooned
by over 83 percent while federal debt rose by 73 percent. In an effort to
gain public support FDR used his trump card which was to insure his place
in history and win him the next three elections.
Similar to the Iron Chancellor, FDR was aware of the political benefits
which would accrue to him as a result of instituting a social security system,
however he too was concerned about its short-term costs. Taxes in US were
already high in order to bankroll the programs of the New Deal. In addition,
FDR was convinced that too many workers were chasing too few jobs. This
drove wages down and FDR felt that if he could create a labor shortage by
taking productive but elderly people out of the labor market this would
help lift the depression.
In 1934 FDR appointed a Committee on Economic Security to examine the issues
of setting up a social security system in the US. Among other things, the
Committee indicated that the average live expectancy in the US was about
61. A low cost system would therefore be one in which the benefits were
very unlikely to be paid out to the average beneficiary. Hence similar to
the German model, the age of eligibility for the social security system
in US was set at 65. Although FDR's administration knew that the demographics
of the US population would change- i.e., people would live longer, and that
this pyramid scheme was an unsustainable recipe for disaster - this was
a problem for future politicians to grapple with. For the immediate future,
the plan appeared to be a low cost and powerful political campaign tool
to be wielded in the 1936 elections.
On August 14, 1935, FDR signed The Social Security Act which made Charles
Ponzi's pyramid scheme the law of the land. In addition to several provisions
for general welfare, the new Act created a "social insurance program"
designed to transfer money to retired workers age 65 or older. Under this
act, the compulsory payroll taxes submitted by workers and employers were
transferred to retired workers age 65 or older. That is, under this tax-and-welfare
scheme, through taxes, wages of one generation were transferred to another
generation. However, in order to sustain this pyramid scheme a large number
of workers was needed for each retiree.
Much to the chagrin of today's workers who are at the bottom of the pyramid,
in a 1937 case, Stewart Machine Co. v. Davis, the US Supreme Court, in a
fiercely debated 5 to 4 decision, upheld the constitutionality of the Social
Security Act.
In a 1960 case, Nestor v. Fleming, the Supreme Court ruled that individuals
have no constitutional right to Social Security benefits based on the taxes
they have paid. That is, Congress and the President can change or reduce
Social Security benefits any time they choose.(8)
Ida Fuller, who retired in 1940 was the first person to receive a social
security check. She and 222,000 beneficiaries were at the apex of the pyramid.
She paid $44 into the system and by the time she died, she had received
approximately $21,000 in benefits from people at the bottom of the pyramid.
Like the other beneficiaries at the top of the pyramid, I think its safe
to say that she probably thought that FDR was the greatest thing since old
Saint Nicholas.
Today there are about 44 million people (one of every six Americans) at
the top of the social security pyramid i.e., receiving benefits. They are
being supported by about 147 million workers at the bottom.
Back in October 1996, Third Millennium, a New York
based research group, surveyed people born after 1964 known as "Generation
Xers." Gen-Xers are of course at the bottom of the social security
pyramid. According to the survey, more Gen-Xers believe in UFOs than believe
they'll ever receive benefits from social security. Nor do a majority believe
that the medicare system will outlast the soap opera "General Hospital."(9)
Even the social security systemís board of trustees have their doubts
about the current social security system. In coming up with their projections,
the social security system's board of trustees make three sets of assumptions,
optimistic, intermediate, and pessimistic. According to the intermediate
set of assumptions, the system will begin running a deficit in 2013 (annual
benefits paid to retirees will exceed payroll tax revenue) and will be exhausted
by 2032. After 2032, the social security "trust" fund will be
fully spent. This means that the social security system will have to rely
entirely on revenues collected from the payroll tax.
Thus far the government has opted to delay the demise of social security
by increasing payroll taxes. Up until 1950 the maximum amount anyone was
forced to pay into social security was $30 a year. Today the amount is $10,006.20
for Old-Age and Survivors Insurance (OASDI) and it is unlimited for Hospital
Insurance (HI). In order to pay the promised benefits in 2032, the payroll
tax must be increased to 30 to 40 percent of workers wages.(10) That is,
15 to 20 percent of workers wages will be deducted in payroll taxes, with
the employer matching this 15 to 20 percent.
All pyramid schemes must come to an end sooner or later. In the case of
the social security pyramid scheme, demographics have actually helped it
survive as long as it has. For instance In 1935, the ratio of young workers
(age 20 to 64) to retirees was over 40 to 1, and life expectancy was only
61 years. In 1950, the ratio dropped to 16.5 to 1, still this ratio was
high enough to keep the pyramid from collapsing. But as eligibility and
life expectancies increased and birth rates fell, a larger number of retirees
had to be paid their benefits from taxes collected from a smaller pool of
workers. Today the rate stands at 3.3 to 1. By 2025 it will be less than
2.(11) Thus demographics are no longer helping to sustain this government
sponsored Ponzi scheme.
The only way the demise of the current system can be prolonged is if:
1. benefits are significantly reduced (i.e., the age of eligibility is raised
and the transfer payments are reduced) and or
2. payroll taxes are significantly increased and
3. free market policies such as less government interference (regulation,
taxes etc.,) are instituted to increase productivity, the savings rate and
hence the growth rate of the economy. Note that all three of these measures
will not help to save the current system but rather only help to put off
its inevitable demise.
In his 1999 State of the Union address, President
Clinton revealed to the nation his proposal for prolonging the demise of
the Social Security pyramid.(12) As one may suspect, the president's current
interest in "saving social security" is purely political. For
instance, during the 1996 presidential campaign he initiated no new proposals,
but instead he triumphed by attacking the Republicanís proposals.
It was only in 1998 when it became apparent that there were going to be
so-called federal budget "surpluses" that he spoke out about saving
social security. Republicans proposed returning these "government overcharges"
back to the people who paid them in the form of tax cuts. In an effort to
one-up the Republicans which he had done so effectively since November 1994,
the president surprised many pundits and Republicans by stating that he
wants to use about 60% of the government overcharges to save Social Security.
Once again, the Clinton handed the Republicans their hat as he defined the
debate as giving a tax cut to the rich (his spin on the evil Republican
plan) versus saving Social Security (his altruistic and noble plan).
Some of the specifics of the presidentís plan were laid out in his
1999 State of the Union address.(13) With his proposal, the president showed
why reforms of government programs can be as dangerous as the programs themselves.
Under the veil of possible impeachment, he recommended that the federal
government socialize American industry to "save social security. "That
is, the Clintons want politicians and bureaucrats to invest $1.2 trillion
of Social Security "trust funds" in the stock market over the
next 15 years.(14) The bottom line is that because there is nothing in the
"trust fund" but IOU's, this is tantamount to taxing citizens
and using the proceeds to nationalize a large portion of American commerce.(15)
And just who would determine which businesses would be nationalized? The
administration claims that it would build a framework that would isolate
the selection of equities from political pressures. A "quasi-independent
non-political central committee" along the lines of Calpers would decide
which equities the trust fund would invest in. After all, people cannot
be trusted to do the right thing with their money, and hence a central committee
of "fatal conceit" politicians, bureaucrats and social engineers
will make all the investment decisions.(16)
Which businesses would be nationalized? In an effort to protect the trust
fund from any investment in supposedly evil or unpleasant companies, the
central committee would reject prima facia any companies associated with
tobacco, alcohol, gun, defense, gaming interests, from investment consideration.
In addition, companies without unions, firms with a insufficient percentage
of women and minorities in executive positions, companies without a strong
commitment to gender pay equity and other morally objectionable i.e., politically
incorrect companies would be taboo.
Before going too far in squandering and frittering away resources in an
effort to prolong the demise of the social security pyramid scheme we must
ask the obvious question:
The answer as you can probably guess is an emphatic
No, the current system must be scrapped. Trying to save a pyramid scheme
is like trying to save a socialist country. Both are based on deception
and although, their existence may be prolonged in the short-run, eventually
they will both collapse under their own weight.
Social Security is just legalized stealing. "Each generation after
having had their money stolen from them to fund the previous generation,
has taken the position that it is okay for them to steal from the younger
generation". But eventually the generation at the bottom of the pyramid
must say enough is enough. "Stealing is stealing, regardless of the
label placed on it".(17)
We must repeal Social Security and start over with private, non-government
retirement system which allows individually owned and privately managed
investment accounts similar to Individual Retirement Accounts (IRAs). Ultimately,
individuals and their families must be held responsible for their own retirement
needs. Working, saving and planning for retirement should be a private matter
and not a government concern.
Footnotes
1. In the words of Dan Crippen, director of the
Congressional Budget Office (CBO) "the federal government's trust funds
are not trust funds in the traditional sense; that is, they do not set aside
current income for future use... The Treasury securities held by federal
trust funds are nothing more than the government's IOUs to itself."
2 . "Issue Brief: Social Security Reform and US Economic Growth,"
Capital Formation, Vol. 21, No. 1, January-February 1996. American Council
for Capital Formation.
3. For an excellent article on the beginnings of Social Security see "Unhappy
Returns" by Harry Dolan in the Freeman Vol. 49, No. 2 (February 1999)
published by The Foundation For Economic Education.
4. For example the works of John T. Flynn, Hans F. Sennholz, Murray Rothbard
and Robert Higgs.
5. John T. Flynn. The Roosevelt Myth. Fox and Wilkes, 1948. Pages 44-45.
Also see David Gordon "Power Mad." The Mises Review Volume 5 Number
1, for an excellent review of The Roosevelt Myth.
6. The number of unemployed Americans skyrocketed from 1.6 million in 1929
to 12.8 million in 1933.
7. FDR introduced a 5 percent withholding tax on corporate dividends and
increased the top marginal tax rate so many times that by the last year
of World War II it stood at 94 percent.
8. Michael Tanner. Cato Handbook for the 106th Congress. Page 54.
9. Money Daily, October 17, 1996
10. Michael Tanner. Cato Handbook for the 106th Congress. Page 49.
11. 1995 Annual Report of the Board of Trustees of the Federal Old-age and
Survivors Insurance and Disability Insurance Trust funds (Washington: Government
Printing Office, 1995), page 122.
12. In his 1996, the same year the US Senate rejected (by a 100-0 vote)
his left-wing distributionist budget with its deficit in excess or $200
billion, Bill Clinton delivered his typical Orwellian wordspeak State of
the Union address in which he introduced a slew of new programs and spending
increases. With a straight face and fingers crossed securely behind his
back President Clinton stated , "The era of big government is over.
We know big government does not have all the answers. There is not a program
for every problem." This statement is especially true of the social
security system, which has an official unfunded liability, adjusted for
inflation of about $18 trillion. Three years later we now find out that
the era of government nationalization of industry is to begin.
13. Based on the rhetoric of his 1999, State of the Union Address, we are
now entering the era of big brother. Actually the seeds of this era were
laid with the election of FDR in 1932 but if President Clinton and his statist
interventionists have their way the holy grail of government control of
the means of production will be well within their grasp.
14. Review & Outlook The Wall Street Journal February 1, 1999
15. In a related proposal, Bill Clinton recommended putting the fox in charge
of the hen house.
16. How can we be sure that this investment committee will be isolated from
political pressure? Just trust the President. One can imagine the verbal
smog of the President's Clintonspeak explanation of the collapse of his
"nonpolitical" trust fund: "My fellow Americans, we have
been through a lot together. I feel your pain regarding the unfortunate
collapse of our trust fund, however when I stated the trust fund was to
be `isolated from political pressure,' I was legally accurate, I just was
not volunteering any additional information. I can assure you that no intentional
inappropriate intimate contact with either the investment committee or political
pressure occurred within my the confines of my specific definitions of the
words "no," "intentional," "inappropriate,"
"intimate," "contact," "investment," "committee,"
"isolation," "political," "pressure." Most
ordinary Americans would embrace the distinctions I make in my definitions.
Further, "any person, reasonable person, would recognize that...performed
on the deponent by either the investment committee or political pressure
falls outside my specific definition of..." Just trust the President?
17. Jacob G. Hornberger, Founder and President of the Future of Freedom
Foundation.