Government Spending

The Truth and Lies About Social Security

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Mother Jones' Kevin Drum responded to my post that Social Security is worse than a Ponzi scheme by some gentle tsk, tsking. Drum maintains that if Social Security is a Ponzi scheme, so is every other government program. The implication being that unless we are willing to dismantle all government programs, something only libertarian loonies would ever consider doing, we should stop questioning Social Security and get on with fixing it.

That's a clever argument. A bit too clever.

I noted that Social Security resembles a Ponzi scheme because while it presents itself as an investment program, in fact nothing is invested, and all  participants are paid from the contributions of new participants. Drum doesn't disagree with this: he just thinks there is nothing wrong with it. 

He agrees that:

Seniors today are all convinced that the money they paid into the program during their working years was somehow saved up for them and now they're getting it back.

This was always a "convenient fiction" he notes, but people believed this because "it was, basically, the way the program was initially sold." He goes on:

But that's always been a lie. Social Security is actually a much simpler program than that. I'm going to put the rest of this paragraph in bold so you can't possibly miss it. Here's how Social Security works: every month we take in taxes from working people and every month we turn around and distribute those taxes to retirees. That's it. That's how it works, and everyone who actually knows anything about the program knows that's how it works. Taxes come in, benefits go out. And the key to solvency is simple: making sure that those taxes and benefits are in balance.

This is, of course, the way every government program works. Taxes come in, payments to soldiers go out. Taxes come in, payments to NASA rocket scientists go out. Easy!

First off, I am shocked—shocked—that a liberal would be so blasé about lying politicians. Wasn't the big difference between liberals and conservatives that liberals did not believe ends justified the means? They took the high road to advance their agenda—sorry, cause. "Noble lies" was something that evil right-wingers, who made up shit about weapons of mass destruction to lead the country into optional wars like Iraq, told.

Oh well.

But understanding why it was necessary to tell lies to sell the program helps explain why it is not like other government programs. It has special accountability problems all its own.

Drum is of course right that participants in Social Security are not investors in any meaningful sense of the term because government has no way of "investing" what it collects in taxes from them. It has to spend the money. Hence, there was no option but for Social Security to be a pay-as-you-go scheme, not an investment program, just like every other government program. So, in essence, Drum is suggesting, we are blaming government for running Social Security the only way it possibly could.

But here's the thing: Given that Social Security can't be anything but a pay-as-you-go program there were two ways of financing it: through special payroll taxes as is currently the case or through general revenues. Why did politicians choose the first rather than the second method? The reason is that the second would have required raising general income tax rates by a whole lot, something that would have been politically exceedingly difficult if not impossible to do. Taxpayers would have been unwilling to hand Uncle Sam this kind of money without any guarantee that they would get it back in their old age. Dedicating their taxes to a special program created among taxpayers an increased sense of security although it eventually made Social Security less—not more—accountable than other government programs.

For starters, because people feel that what they will ultimately get back what they pay into the Social Security system, they don't have the same resistance to Social Security taxes that they do to income or sales or other general taxes. This makes it much easier for government to keep raising Social Security taxes. Indeed, as I noted previously, these taxes have been raised 40 times since the program's inception so that the 12.4 percent payroll tax that we pay today represents a 400 percent increase over the original after adjusting for inflation.

What's more, these taxes weren't raised to necessarily fund retiree benefits. They were raised to bankroll general fund programs. Right now, according to Jagdaeesh Gokhlae of the Cato Institute, Social Security Trust Fund has  $2.5 trillion in accumulated surpluses. But these "surpluses" are really debts (talk about a "convenient fiction")—they are IOUs of the country to retirees that future generations will have to redeem by paying higher taxes or taking on a bigger debt or cutting spending on other programs. If the government was taking in more than was needed to pay retiree benefits why did it simply not cut payroll taxes to a level needed to just cover the benefits? The question answers itself.

But Drum's response to the huge liability that future taxpayers face—over $100 billion annually beginning 2020 when Congress has to start redeeming the IOUs to pay off retirees, according to Gokhlae—is one big yawn. He notes:

Forget about the business about the surplus. It's not worth worrying about anymore. [W]ithin a few years it [Social Security] won't be generating a surplus at all…

That's like saying that we should forget about the $1 trillion that we frittered on invading Iraq and Afghanistan. Let's just concentrate on how much more we need to spend to fix these debacles, not questioning whether we should have undertaken them in the first place. This betrays a pretty stunning refusal to learn from previous mistakes, not to mention a total abandonment of the cause of good government that even liberals who don't have a principled hostility to Big Government have usually championed.

But there is an even deeper problem with Drum's claim. It is true that given the declining worker-to-retiree ratio, Social Security's problem going forward is remaining solvent. But that's based on certain assumptions about tax levels and benefits. There is absolutely no guarantee given the government's long track record of raiding the program that, push come to shove, it won't raise taxes or pare back benefits or both to create yet another "surplus" to fund the political priority of the day. Should the country, for example, reach the point of defaulting on its debt or ObamaCare's universal coverage liabilities start breaking the federal bank, all bets would be off.

This is not an idle worry. Consider what happened in France just last November. Its parliament passed a law to use the country's reserve pension funds to pay off debts of the country's welfare system. The retirement savings intended for the years 2020-2040 will be used earlier in the years 2011-2024 for other purposes. Likewise, Ireland used the country's €24 billion National Pensions Reserve Fund "to support the exchequer's funding program. "

As a blogger for the Christian Science Monitor concluded after examining the shenanigans of a slew of fiscally beleaguered European governments:

It looks like although the governments are able to enforce general participation in pension schemes, they do not seem to be the best guardians of the money accumulated there.

Amen.

If Drum is serious that we are "morally obligated" to provide pensions to seniors, we should let them keep more of their Social Security money in private accounts. But that's a subject for another day.