MayerBlog: The Web Log of
|
|
|
Socialist Insecurity
Without a doubt, the greatest challenge – and, if successful, the greatest achievement – of President George W. Bush’s second term is his proposal to reform Social Security. Under his plan, younger working Americans would have the option to divert up to 4% of their wages – or nearly one-third of their 12% Social Security payroll tax – into private accounts. Persons with private accounts would forego traditional Social Security benefits by an amount commensurate with their account’s size. They would have five investment options – large- and small- cap funds, international funds, corporate bonds, and Treasury bonds – and their accounts would be annuitized upon their retirement. This proposal, according to President Bush, would “strengthen and save” the retirement system, by helping transform the United States more truly into an “ownership society.” Persons knowledgeable about Social Security – those who know the current system for what it is, and who see through the propaganda of the system’s defenders – know that President Bush’s proposal, despite its flaws, is a step in the right direction. The only rational reform for Social Security is to move toward some system of private retirement accounts. (For more on genuine Social Security reform, see the Cato Institute’s Project on Social Security Choice, on the Institute’s website.) Not surprisingly, Democrats and the welfare-state lobby (headed by AARP) have mounted a reactionary attack on President Bush’s proposal. Declaring that the President’s proposal for private individual accounts would “weaken” Social Security and “put benefits for future generations at risk,” AARP has run full-page ads in major newspapers denouncing private accounts. One of the ads features a picture of a couple from the Baby Boom generation, with the caption, “If we feel like gambling, we’ll play the slots.” “Let’s not turn Social Security into Social Insecurity,” the AARP ad declares. Other defenders of the existing Social Security system tout it as the “most successful” government program ever. All this demagoguery, however, is belied by the facts – by historical truth and economic reality. The Social Security program came into being in the late 1930s as part of Franklin D. Roosevelt’s so-called “New Deal” – the huge con game that Roosevelt and his advisers put over on the American people. For the past three-quarters of a century, leftists have perpetuated the myth that New Deal policies and programs helped alleviate the economic woes of the Great Depression. Today, fortunately, the myth has been shattered: historians and other social scientists are beginning to acknowledge what conservative and libertarian critics of FDR have been arguing all these years – that the New Deal, rather than alleviating the Depression, actually prolonged and exacerbated it. (See, for example, Jim Powell’s FDR’s Folly (2003).) Social Security epitomizes the New Deal con game, at its worst. To disguise its true nature, the Roosevelt administration sold it to the American people by calling it an “insurance” program, masking the fact that it’s really a wealth-redistribution scheme. True insurance programs involve people voluntarily contracting for benefits based on the premiums they paid. As Jim Powell notes,
With true insurance, premiums varied according to the policyholder’s age and how much retirement income they wanted. Insurance companies invested the premiums long term in productive assets, principally stocks, bonds, and real estate, so that individuals could cover the costs of their own retirement. In contrast, every “social insurance” scheme [like Social Security] had some people subsidizing others. Often such schemes started out or became pay-as-you go, meaning that current taxpayers covered the costs of people currently receiving pensions. Individuals, as taxpayers, didn’t contribute anything for their own retirement. The cost of their retirement became a burden for future generations. The assumption was that there would be enough taxpayers in the future to take care of all the retirees and that future generations would be willing to bear burdens. Nobody seems to have considered that such burdens might become heavier over time if the number of retired people grew faster than the number of taxpayers.
Indeed, as Powell also notes, FDR repeatedly misrepresented Social Security as an insurance program. The Roosevelt administration proposed paying for Social Security benefits with a payroll tax, even though such a tax is regressive, taking a higher portion of the earnings of lower-income people than higher-income people. “FDR apparently wanted a payroll tax because it made Social Security seem more like a self-financing insurance plan and politically more difficult to later repeal.” As FDR himself said, candidly, “`With those taxes in place, no damn politician can ever scrap my social security program.’” (FDR’s Folly, pp. 174, 179-80.)
Instead of “Social Security,” the program should be called “Socialist, Insecure, Shitty,” because it is each of those:
Socialist
“Social insurance” programs like Social Security originated in one of Europe’s most autocratic regimes, Germany in the 1870s. As Powell notes, “German socialists demanded that their government gain more power in the name of social justice, and German chancellor Otto von Bismarck saw that expanded government power would suit his very different purposes. In 1881, Bismarck said, `Whoever has a pension for his old age is far more content and far easier to handle than one who has no such prospect.’ Bismarck’s biographer A. J. P. Taylor added that `Social Security has certainly made the masses less independent everywhere.’” Germany’s government-run retirement system began in 1889; by the early 20th century, socialist governments in other European countries followed suit. In the United States, many European immigrants agitated for the same kind of government-run pension systems they had known in their “old country”; Russian immigrant Isaac Rubinow was the most prolific and influential author promoting “social insurance” as a scheme for redistributing income in the name of “social justice.” (FDR’s Folly, pp. 173-75.) Not only were the movers behind Social Security themselves socialist, but the program established by Congress in 1935 epitomizes socialism. As noted above, rather than being a true insurance program, where individual Americans own their own pension funds, Social Security is a government-run monopoly that is funded on a pay-as-you-go basis, taking the money paid in taxes by working Americans and redistributing it to retirees. No one “owns” their Social Security “account”; the “lock-box” that some demagogues imagine doesn’t exist, and the so-called “trust fund” also is a misrepresentation. In reality, the so-called “trust fund” is completely controlled by the government, which uses the fund to redistribute wealth, to make an increasingly large number of Americans dependent on the government for their basic needs in their retirement years. The system uses force (the coercive power of government) to take money earned by some Americans (younger workers paying FICA taxes) and redistribute it to other Americans (retirees and other “beneficiaries”). It is the epitome of a government program that takes property from A (one group of citizens) and redistributes it to B (another group of citizens). Architects of the system deliberately used the terminology of private pension plans – terms like contributions, benefits, trust fund, etc. – to mask the true nature of Social Security, to create the myth that it is an insurance program rather than being what it really is, a socialist wealth-redistribution scheme. For example, by describing payroll taxes as “contributions” workers make to their own retirement accounts, the architects of Social Security created a false sense of entitlement. They also disguised the true costs of those “contributions” by creating the fiction that employers “matched” their employees’ “contributions.” In fact, as libertarian commentator Neal Boortz has observed, this fiction is doubly wrong: First, it isn’t a “contribution”; it’s a tax. Contributions are voluntary; Social Security taxes are not. Second, your employer isn’t matching anything. Every single penny paid to Social Security on your account is coming straight out of your pocket.
The so-called “matching contribution,” in economic reality, is another part of the costs employers must pay for each employee; like all other such costs, it comes out of the employer’s budget – which is to say it ultimately comes out of each employee’s pay. (To put it another way, without Social Security taxes, each employee would have a larger paycheck – larger by the full amount of those taxes, which include both the employee and employer “shares.”) As Boortz notes, “This nonsense of splitting up your Social Security tax into your `share’ and your employer’s `share’ is a blatant scam set up by Liberals to keep you from realizing the true cost of this absurd income redistribution program.” (Boortz, The Terrible Truth About Liberals (2001), p. 80.) The proposal currently being floated by Congressional Democrats – and a disappointing group of unprincipled Republicans, like Senator Lindsey Graham of South Carolina – is to increase Social Security taxes by raising the ceiling (currently above $90,000) on income subject to the payroll tax. All that proposal would do would be to exacerbate the injustice of the current system, by making it even more socialistic – by redistributing even more of the wealth earned by higher-income taxpayers. In 1998, when President Bill Clinton declared that Social Security was in a state of fiscal crisis – something that Democrats who deny there’s a crisis today would like us to forget – he offered in his State of the Union address a truly frightening proposal: to have the government, rather than individuals, take Social Security funds and invest them in the stock market, to pay future benefits. That radical plan, if carried out, would have made the U.S. government a part-owner of U.S. business enterprises -- which also is, by definition, socialism. The Clinton administration proposal would have left not only the Social Security system socialistic but also would have put the entire United States economy far down the road toward total socialism, as Milton Friedman warned in a Wall Street Journal op-ed at the time. “Have we not learned from the experience of the past century that private property is the key bulwark of personal freedom? Has that experience not shown how dangerous it is to transfer a larger and larger fraction of the productive assets of the country into the hands of a government bureaucracy?” (“Social Security Socialism,” January 26, 1998.)
Insecure
As noted above, the AARP ads denounce private accounts as “risky,” tantamount to gambling. Any responsible American who has made a retirement plan, however, knows that private investment accounts are only as risky as the individual managing them chooses them to be. Short-term investment in the stock market may be risky, but in planning for retirement, no one invests for the short term; long-term investments, in contrast, are relatively risk-free, one of the best choices a responsible investor can make. From 1926 to the present (a time period that includes the Great Depression of the 1930s), annual rates of return from the stock market have ranged within a rough band of negative 40% to positive 50%, with an average just over 10%. For all 25- and 35-year investment periods from 1926 to 2004, investors have always earned positive rates of return. (Burton G. Malkiel, “`Social Insecurity’? Hardly,” Wall Street Journal, January 17.) Moreover, as investors get older, they can switch to even more secure annuities accounts, as the Bush proposal and other plans for private accounts provide. The real risk, or insecurity, is not with the reform proposals but with Social Security as presently constituted: the government-run scheme in which no American owns his or her own retirement fund, but rather the entire scheme is at the mercy of politicians. As Alex Epstein has written in a recent op-ed: Under Social Security, every aspect of the government’s “promise” to provide financial security is at the mercy of political whim. The government can change how much of an individual’s money it takes – it has increased the payroll tax 17 times since 1935. The government can spend his money on anything he wants – observe the long-time practice of spending any annual Social Security surplus on other entitlement programs. The government can change when (and therefore if) it chooses to pay him benefits and how much they consist of – witness the current proposals to raise the age cutoff or lower future benefits. Under Social Security, whether an individual gets twice as much from others as was taken from him, or half as much, or nothing at all, is entirely at the discretion of politicians. He cannot count on Social Security for anything – except a massive drain on his income.
(Alex Epstein, “End Social Security,” The Ayn Rand Institute, January 18, 2005.) What could be more insecure than this Ponzi scheme that can be changed, by law, whenever Congress wishes! (In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled – correctly – that workers have no right to receive Social Security benefits.) Income that derives from government largesse – in other words, income that derives from politicians using the coercive force of the law to transfer wealth from taxpayers to the “beneficiaries” of government programs – is based on nothing but the politicians’ promises.
Shitty
If a private company offered a retirement plan similar to Social Security, its managers would be indictable for a criminal offense – for running a Ponzi scheme that defrauded investors. (In a Ponzi scheme -- also know as a pyramid financing scheme, which is illegal in all 50 states – early investors are paid off with cash taken in from later investors. The system creates no real growth, but accounting data can create the illusion of wealth as long as the base of investors keeps growing. When the demands of increasing numbers of expectant recipients confront the limited resources of decreasing numbers of new participants, however, the system collapses.) The legal and accounting fiction called the “Social Security Trust Fund” merely gives the system government bonds in exchange for payroll tax money. But as Thomas Sowell points out in a recent op-ed, government bonds “are not an investment that adds to the country’s wealth. They are a claim on future taxpayers.” (“Social Insecurity?” January 20.) Bonds also offer a pathetically poor rate of return, compared to the other options individuals would have for investment if they controlled their own accounts. If a younger worker today would invest a small portion of his Social Security payroll taxes (say $1000) into a private retirement account, the results would be staggering. $1000 annually invested in the stock market, with its historical 10%-a-year average return compounded, would grow to more than $440,000 in 40 years. In 50 years it would balloon to more than $1.15 million. Those figures do not come from either a libertarian or conservative pundit; rather, they are cited by left-liberal Al Neuharth, founder of USA Today, in a January 7 editorial in his paper denouncing the AARP’s ad campaign as “an abuse of power by AARP leaders” who are engaged in scaremongering. As Milton Friedman noted in his 1998 “Social Security Socialism” op-ed, a truly privatized system of individual retirement accounts would not only benefit participants in the system but the whole nation’s economy: “If the corresponding sums had been accumulated by private individuals and not used to finance government spending, they would have been a real addition to the nation’s capital and not just a bookkeeping entry. Those sums would have been invested in ways citizens or their advisers chose. The end result would have been more productive investment, a larger stream of income and a freer, more responsible, more productive society.” Instead, we have a socialist, insecure, and shitty program that is not only a drag on the nation’s economy but also is tantamount to grand larceny on an epic scale: a system that uses force to deprive productive Americans of a significant portion of their income, and of the full future earning capacity of that income, in order to fund a retirement system with a pathetically dismal rate of return. As one reader recently wrote to USA Today, Social Security “isn’t a sacred cow. It’s not even a good milk cow”: Imagine how you’d feel if, at age 16, the government told you it would be taking approximately [12]% of your earnings every year to buy a milk cow, and in about 46 years you could join the milk program. Then you discover that, for the same investment, you could have bought a cow for the same price from private industry – a cow that would have given four or five times as much milk. And you have been able to leave that cow to your family when you died, instead of the government confiscating it. Is Social Security one of the most successful government programs ever? Not from my perspective.
(Dennis W. Miller, Letter to the Editor, January 20.) Anyone who denies that Social Security faces fiscal crisis is in denial of reality, for the program is inevitably in conflict with demographic reality. When the program was first enacted by Congress in 1935, the average life expectancy for 65-year-olds was only about 13 years. The architects of Social Security assumed the program would remain solvent because they set the retirement age – the age at which benefits would begin to be paid – at 65, just a few years over the average life expectancy. Over the past seventy years, although the retirement age has remained largely constant (Congress increased it to 67 in 1983), the average life expectancy has steadily increased. In 1950, there were sixteen people working and paying Social Security taxes for every person receiving benefits. By 1997, the ratio had declined to 3.3 people for every beneficiary; by the year 2020, the ratio will be less than two to one. It’s plainly obvious that the system is a fiscal disaster; the only dispute is over exactly when the system will go bankrupt.
Also Immoral and Unconstitutional
The real crisis in Social Security today, however, is not fiscal but moral. Like other forms of government-run welfare programs, Social Security undermines not only individual freedom but also morality because it destroys individuals’ responsibility for their own lives. Social Security is premised on the assumption that some people are too irresponsible – too imprudent, stupid, lazy, foolish, or incompetent – to plan for their own financial security in their old age. Otherwise, why does the scheme rely on forced “savings”? Edward C. Prescott, an economics professor at Arizona State University and co-winner of the 2004 Nobel Prize in Economics, noted in a November 11, 2004 Wall Street Journal op-ed that Americans are perfectly capable of planning for their own retirement income. “U.S. citizens already utilize IRAs, 401Ks, PCOs, Keoghs, SEPs and other investment options just fine, thank you. . . . Consumers already know how to invest their money – why does the government feel the need to patronize them when it comes to Social Security?” As a program that takes wealth earned by taxpayers and redistributes it to beneficiaries on the basis of their presumed “need,” Social Security also epitomizes the moral code of the 20th-century welfare state – a moral code based on the Marxist slogan, “From each according to his abilities, to each according to his needs.” In practice, implementation of that policy inevitably has lead to misery and destitution. (Witness the history of communist societies, whether based on Christian, Marxist-Leninist, or Maoist dogmas, from the 17th century to the present day. Or consider the parable of the “Twentieth Century Motor Company” in Ayn Rand’s novel Atlas Shrugged.) The moral code of the welfare state is at odds with human nature – with individuals’ inherent desires to be free and to better their own lives – as well as with our society’s private morality, based on individual responsibility. As David Kelley notes in his insightful book A Life of One’s Own, one of the tragic consequences of the welfare state is its basic assumption that the needs of recipients take precedence over the rights of producers – which means that “those with the ability to produce are obliged to serve, while those with needs are entitled to make demands” – resulting in “a public morality at odds with our private standards.” (Kelley, A Life of One’s Own: Individual Rights and the Welfare State (1998), p. 2.) Although the U.S. Supreme Court upheld the federal law creating Social Security, in its 5-4 decision in Stewart Machine Company v. Davis (1937), that decision was wrong, based upon an incorrect interpretation of the Constitution that ignored its essential context as a document creating a federal government of limited powers, enumerated in the Constitution. The majority of the Court held, essentially, that Congress had an unlimited power to levy taxes and to spend tax revenues on whatever purpose it wished, notwithstanding the explicit enumeration of federal powers in the text of the Constitution. A retirement system – whether a true insurance program or the kind of Ponzi scheme that Social Security really is – is not among the enumerated powers of the federal government. Social Security is doubly unconstitutional, when we consider that it not only exceeds the legitimate powers of the U.S. government as enumerated in the Constitution, but also deprives individuals of their rights (both their rights to property and to economic liberty), in violation of the Fifth Amendment due process clause of the Constitution. The Social Security scheme, as noted above, is the epitome of a government program that takes property from A (one class of citizens) and gives it to B (another class of citizens). In early American constitutional law, it was universally understood that such a law violates the essential rights that all individuals have in a free society. Supreme Court Justice Samuel Chase, in the landmark early Court case, Calder v. Bull (1798), observed that a law contrary to the principles of natural justice – “an ACT of the Legislature (for I cannot call it a law) contrary to the great first principles of the social compact” – cannot be valid; it “cannot be considered a rightful exercise of legislative authority.” Among the examples of such blatantly unconstitutional laws that he gave were: “a law that punished a citizen for an innocent action, or in other words, for an act, which, when done, was in violation of no existing law” [an “ex post facto” law]; “a law that destroys, or impairs, the lawful private contracts of citizens”; “a law that makes a man a judge in his own cause”; and – of course – “a law that takes property from A. and gives it to B.” Chase added, “It is against all reason and justice, for a people to entrust a Legislature with SUCH powers; and therefore, it cannot be presumed that they have done it.” It is a measure of how far the 20th-century welfare state has corrupted American constitutional principles – how far it has undermined our commitment to individual freedom and responsibility, the responsibility each of us has over our own individual lives – that Social Security today is seen by many people as a “sacred cow,” rather than as the horribly unjust, immoral, and unconstitutional program it really is. As Alex Epstein concluded in his recent op-ed, “Social Security in any form is morally irredeemable. We should be debating, not how to save Social Security, but how to end it – how to phase it out so as to best protect both the rights of those who have paid into it, and those who are forced to pay for it today. This will be a painful task. But it will make possible a world in which Americans enjoy far greater freedom to secure their own futures.”
| Link to this Entry | Posted Tuesday, February 15, 2005 | Copyright David N. Mayer |
|