Social Security's Core Contradiction

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by John Attarian

Thirty-five years ago, in a long article in the Oregon Law Review, “Vested Rights in Social Security Benefits,” a member of the Oregon Bar named Elmer Wollenberg examined the issue of vested rights under Social Security. Wollenberg walked his readers through the entire process from employment in an occupation covered by Social Security until after one had begun receiving benefits, to see if a right to benefits could vest at any point. He concluded that it probably couldn't.

Why? Wollenberg noted at the beginning that while Social Security benefits had to be predictable in order to furnish a foundation for retirement planning, Social Security was a large, growing, and costly program, in a context of several programs. Therefore, the government had to avoid getting stuck with “an overextension of fixed commitments that will endanger the nation's finances” if retrenchment ever became necessary. “Thus, a general Federal social-insurance system must work out an accommodation of these somewhat conflicting interests: the interest of the individual citizen in certainty of retirement income for himself and his family unit and the interest of the Federal government in a future free of too-heavy fixed fiscal obligations.”

Because of Section 1104 of the Social Security Act, whereby Congress reserves the right to modify the program, Wollenberg observed, one's “rights” to benefits were “flexible,” and Social Security legislation gives “little legal certainty to the individual.” Congress, he pointed out, had already cut and even abolished benefits sometimes.

Significantly, Wollenberg was not criticizing Social Security in saying all this. Indeed, he argued that Social Security was probably the best the government could do under the circumstances, meeting both the government's need to be free to change the program to deal with the future, and the individual's need for “adequate (as distinguished from assured) income [italics in original].” There was no contractual right under Social Security — and that, he thought, was as it should be. “A system of contractual social insurance involves the arrogant assumption that ours is the wisest generation of Americans for some time to come,” locking future generations into huge binding commitments. Wollenberg concluded by warning the old and economically dependent that if they are counting on Social Security, “they must anticipate that their own needs for financial security will often be subordinated to other paramount requirements of Federal policy.”

Wollenberg had fingered the contradiction, and potential for danger, at Social Security's core. On the one hand, for political and ideological reasons, Social Security and its defenders had to give Americans an impression that it would provide guaranteed security in an insecure world, that it was an anchor that would not slip. Hence the massive campaign to sell Social Security as “insurance” paying “guaranteed” benefits “as a matter of earned right.” On the other hand, to keep Social Security from breaking the Treasury, the government had to be able to modify it at will as needed — as former Chief Actuary A. Haeworth Robertson puts it, to break its tax and benefit promises. On the one hand, a manufactured impression of certainty which created, as it was meant to, a perception of certainty on the part of taxpayers and beneficiaries. On the other, a need for flexibility — and a capacity for it, Section 1104, which Social Security and its partisans never told us about.

Certainty and flexibility cannot coexist. A tentatively certain or flexibly guaranteed benefit is a contradiction in terms. This tension has the makings of a gruesome dilemma: if Social Security ever got into a financial crisis, would it live up to its appearance of benefit security and break its tax promises, burdening and alienating taxpayers, perhaps precipitating a political crisis on the tax side — or break its benefit promises, revealing its “guarantee” and “earned right” as shams, and precipitating a political crisis on the benefit side? Something would have to give.

Social Security's architects and promoters made it their business to present it as “retirement insurance” under which one pays “insurance premiums” or “contributions” to “buy” protection from old-age destitution, with one's “contribution” “held in trust” in a “trust fund” which will pay “guaranteed” benefits which, having been “paid for” by the “contributions,” will be paid “as a matter of earned right,” as America keeps its “compact between the generations.” Although all of this is demonstrably false, and Section 1104 explodes the “guarantee” and “earned right” (as Flemming v. Nestor proved), this sixty-five-year propaganda campaign succeeded all too well. Most Americans, especially the increasingly numerous and politically powerful elderly, accept this tissue of myths as reality.

This “false consciousness” — a term I cheerfully snitch from the Marxists but redefine simply as an understanding significantly at variance with reality but which is taken as true and governs conduct — decisively influenced the actions taken when Social Security experienced financial crisis in the 1970s and 1980s. Steeped in the Social Security myths, beneficiaries and their partisans insisted that the “guarantee” be honored, the “earned right” be upheld, the “social contract” and “compact between generations” be kept — in other words, translating pompous and frequently self-serving humbug into plain English, that benefits to current beneficiaries not be cut.

Accordingly, the rescue legislation of 1977 relied on massively raising Social Security taxes; the entire burden of adjustment was put on younger generations. The 1983 rescue relied on another huge tax increase — and on benefit cuts which were carefully constructed to minimize the sacrifices by politically powerful current beneficiaries — who, together with their partisans in and out of Congress, had crushed the Reagan Administration's 1981 attempt to cut early retirement and other benefits — and to inflict the lion's share of the benefit-side sacrifice on the same young people who were already being gouged on the tax side.

So when Social Security hit tough sledding, the contradiction between the political need for certain, guaranteed benefits and the fiscal need to keep Social Security flexible so as to meet changing economic conditions was resolved by preserving as much benefit certainty as possible for the politically powerful current beneficiaries and pushing the cost of adjustment to changing conditions onto politically weak future ones.

Trouble is, this strategy of preserving certainty for the old by inflicting flexibility on the young can be pushed only so far. The 1977 tax hike was one of the most unpopular pieces of legislation in American history and contributed decisively to souring taxpayers on Social Security. The 1977 and 1983 rescues greatly worsened the return young Americans will get from Social Security and greatly inflamed the issue of intergenerational inequity, which in turn created much of the impetus for privatization.

Another confrontation with that core contradiction is on the way. Social Security's long-term financial outlook has deteriorated steadily for well over a decade. Social Security's trustees have warned for years that the program is not in long-term actuarial balance and have asked Congress to rectify matters. But fear of political fallout has precluded corrective action. Current beneficiaries are insisting again that the “guarantee” be honored — and younger Americans are not about to shoulder another big tax increase. Well aware of this, politicians just keep procrastinating. Meanwhile, Social Security's defenders, from the AARP and the Economic Policy Institute to Democratic politicians, liberal economists, and ill-informed columnists, keep churning out propaganda feeding the false consciousness, making facing reality that much harder.

Social Security, then, is trapped between the imperatives of politics, springing partly from a deliberately-contrived false consciousness, which force policymakers to act as if Social Security's myths are facts, yet make another rescue based on a massive tax hike extremely dangerous politically, and the imperatives of economics, which require flexibility in Social Security to meet changing circumstances such as an aging population.

Social Security's defenders are trying to wriggle out of the trap by pretending that it doesn't exist — by insisting that Social Security is not facing a crisis and that there's nothing wrong with it that minor adjustments — raising payroll taxes a tad, tinkering with the formula for adjusting benefits for inflation, maybe inching up the retirement age a little more — won't fix. Their strategy for resolving the contradiction is to practice marginal flexibility, trammeling certainty just a little. We can honor most of your guarantee, folks; we'll just plane the corners off. Not enough to make you mad enough to get even on Election Day.

Of course, if it turns out that Social Security really does have a crisis coming, a tax-benefit shave artfully staying below the country's threshold of pain won't work, and going this route will be disastrous.

Privatizers, by contrast, think we can, like an ancient Cretan dancing before a bull, grasp the horns of the contradiction and vault over them without getting gored. The idea is to honor the guarantee for current beneficiaries and make adjustments which not only don't hurt the young but make them better off — by putting some of their tax money into the stock market, where long-term returns are so much higher than what Social Security offers, and harnessing the magic of compound interest. Both certainty and flexibility without tears. Win-win.

Oh, yeah? The stock market hasn't been doing so well for the past three years. More fundamentally, the market's long-term performance is grounded in, and disciplined by, what the real economy is capable of. The circumstances which made the high historical rates of return on equities possible — abundant cheap energy and raw materials, simultaneous epochal breakthroughs in transportation, production, and communication, a well-educated and enterprising people, low taxes and minimal government, sound money (gold and silver), etc. — are not necessarily going to prevail in the future. If they don't (and I doubt that they will), our economy may very well stagnate, and so will the stock market, and privatization's promise will turn out to be a mirage.

The most popular approaches to Social Security so far, then, are strategies for evading Social Security's core contradiction. We need to face it honestly and stop playing games.

John Attarian (send him mail) is a writer in Ann Arbor, Michigan, with a Ph.D. in economics. His book Social Security: False Consciousness and Crisis, which treats the myths and realities of Social Security in detail, has just been published by Transaction Publishers.

     

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