Making Socialism Work Better?

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I
can still hear Mises saying: "The history of government intervention
is the correcting of the ill effects of earlier interventionism,
and the results from that interventionism yield consequences precisely
the opposite of what the interveners themselves intended!"
It has been almost fifty years since I first heard those words,
and I have long since come to appreciate the wisdom of Ludwig von
Mises. The truth of his teachings is a reminder that some things
don't change!

Social
Security and I were both born in the United States in 1935, I being
the junior by three months. Indeed, I began life at the beginning
of a new era….the age of the "nanny state." How our
ancestors survived in their old age prior to Social Security still
remains a mystery for most Americans today….assuming they ever
think about it at all. Some politicians even today have been known
to declare that their own parents would probably have starved but
for Social Security. Incredible!

As
is the case with many new forms of interventionism, Social Security
legislation had minimal economic impact on the economy of the 1930′s
and 1940′s. From its beginnings in 1937 until well after WWII (1949),
the maximum social security tax paid by a worker amounted to only
$30 a year, with another $30 matched by his employer. In Social
Security's first year of operation (1937) only 53,236 beneficiaries
received a grand total sum of $1,278,000. Today's maximum annual
Social Security tax per worker is $5,580, plus another $5,580 matched
by his employer, an increase of 186 times over the original "contribution"
when Social Security first started.

What
began as a modest form of interventionism in the midst of America's
"Great Depression" has become today a public financing
nightmare with unfunded liabilities in excess of $45 trillion (when
the Medicare nightmare is included too, as it must be). The reality
is that Social Security was fraudulent from its very beginning,
both in name as well as in substance. The very idea of achieving
"social security" through government interventionism is
a flagrant violation of Frederick Bastiat's famous definition of
the State. Over a century and a half ago he profoundly observed
that "the State is that great fiction where everybody believes
he can live off of everybody else through the political process."
Today's Social Security unfunded liability of $45 trillion with
three taxpayer victims paying for one recipient is damning proof
of Bastiat's prescient observation.

Throughout
Social Security's nearly seventy year history, edict after edict
has been piled on top of this fraudulent scam in a losing effort
to "correct the ill effects of earlier interventionism."
With each new intervention comes the old promise that this time
it would make Social Security more secure. In the early years of
Social Security when a modest tax was being extracted from many
taxpayer victims and the proceeds were being transferred to a few
elderly beneficiaries fortunate enough to live beyond their expected
life expectancy of 65 years, few projected the magnitude of future
claims that would come as the pool of retirees increased along with
their life expectancies.

If
there is any doubt that Social Security is merely a disguised political
transfer program one need only look at the case history of its first
monthly recipient. In January of 1940, Ida Fuller of Vermont became
the first beneficiary to receive a monthly check from Social Security.
Prior to that time all Social Security transfers to beneficiaries
were made in an annual lump sum payment. Ida Fuller received her
first monthly check for $22.54, but it was not to be her last. She
lived to the age of 100, collecting a total of $22,000 over the
next 35 years. The very most she could have ever paid in Social
Security taxes prior to 1940 was $120, the taxpayer victims thereafter
making up the difference!

During
my first year of college teaching in 1961 I made the seemingly absurd
prediction to my Economics classes that by the time they reached
retirement age the average worker would be paying more in Social
Security taxes than in income taxes. We all laughed and at the time
even I harbored some doubts it could ever get that bad. After all,
at that time the highest income tax rate was 91%, and Social Security's
maximum annual deduction for a worker had risen to only $144 from
$30 in1937. Besides, what safer kind of prediction can one make?
It was so long into the future we would all certainly forget it
was ever made. Unfortunately I've never forgotten my prediction,
even though my forecast was proven wrong. Total Social Security
taxes exceeded income taxes for most working Americans long before
my 1961 students reached retirement!

The
history of Social Security has seen a steady incremental increase
in the magnitude of taxation and benefits from its very beginning.
The insatiable political appetite for ever more funds to cover the
cost of this expanding Ponzi scheme finally led to everyone becoming
a taxpayer victim as the net was cast wider to force additional
workers/taxpayers into the system during the early years of the
Reagan administration. Today is no different from Social Security's
earliest days when the political cry has always been the same, "We
must act to save the system." Never is there a political
voice when facing this failing scheme to ask the question, "Why
not get rid of it?" Not even today's $45 trillion unfunded
liability can cause politicians to consider the possibility of its
retrenchment or absolute repeal. Rather, the political answer is
more new schemes on top of old ones in an effort to "correct
the ill effects of earlier interventionism!" The statist is
convinced the only way to make socialism work better
is by adding ever more layers of intervention on top of the existing
mess. It never occurs to these political interveners that by adding
more edicts to their existing edicts they will produce consequences
precisely the opposite of what they themselves intended.

Now,
after 70 years of futile political meddling Social Security faces
a multi-trillion dollar liability which any reasonable person knows
can never be paid off in real economic terms. So what is the political
solution to this reality?…dig a deeper "socialist hole"
by advocating the privatization of a part of Social Security. What
a mockery it is to sully the term privatization for a statist transfer
scheme such as Social Security! The very essence of Social Security
is to force some victims (workers) through imposed taxes to provide
government funds to politically chosen beneficiaries. Social Security
is, and always has been, a welfare transfer system built on forced
edicts and mandated participation. It is a government creation which
should never be compared in any way to the voluntary nature
of private, individual market transactions.

Today
politicians are telling us once again we must act to save the system
by “privatizing” part of it! But what is not being told is that
if such a "privatization scheme" should ever be enacted,
it will "yield consequences precisely the opposite of what
the interveners themselves intended." While politicians are
claiming today that privatization will save social security for
the next generation and many have accepted this claim without question,
the history of government intervention tells us just the opposite.
Blind to the dismal record of government intervention throughout
the entire history of Social Security, the political interveners
are never willing to admit failure. Their reflex solution is always
the same, just one more edict and all will be well. Perhaps it would
be more accurate in this case to observe: just one more edict and
we'll go to hell!

The
question must be asked why it is that government intervention brings
about consequences radically different, and often just the opposite,
from what the interveners intended. Friedrich Hayek pursued this
question in his book, The
Fatal Conceit
, wherein he pointed out the intellectual arrogance
of "central planning." The simple answer to the question
is "good intentions aren't enough," but the more precise
answer is that intervention is founded on erroneous economic theory
and a misunderstanding of human action. An important economic truth
is ignored which explains why social security "privatization"
will not bring about the end which the interveners intend but, instead,
can only worsen future economic conditions.

That
economic truth is the fact that people always prefer present goods
over future goods when all other things are equal. What today's
political interveners fail to grasp in proposing a scheme of "social
security privatization" is, if their scheme is adopted as they
describe it, all other things won't be equal tomorrow. The
creation of "Social Security Privatization Accounts,"
will decrease the incentive to save! An individual Social
Security savings account, politically mandated by law, will force
private wealth transfers into government approved funds. This erroneous
perception that the government has saved Social Security "for
the next generation by creating private retirement accounts"
will make individuals act in a less future-oriented manner and consequently
will reduce incentives for them to save more voluntarily.

What
cannot be known is the magnitude of the disincentive which such
government mandated Social Security Savings Accounts will create.
But what is known is that political intervention which makes an
individual more present-oriented will reduce his incentive to save
for the future. What can also be known with absolute certainty is
that control over any forced Social Security Savings Account by
bureaucratic managers will not create the same stewardship care
which those same savings accounts would have received if voluntarily
accumulated and retained under the care of the individual saver.
Even more certain will be the inevitable political pressures directing
"privatized Social Security Savings Accounts" toward investing
in politically preferred government securities!

A
digression at this point is needed: Too often it is believed the
impetus for new statist interventionism derives exclusively from
within the bureaucracy of government. Not so, and the drive for
individual Social Security accounts is a prime example. The magnitude
of forced funds which these new mandated accounts would be investing
each month is staggering. Stock and bond brokers, as well as mutual
fund managers, are drooling at the prospect of such an eventuality
and are a leading special interest group pleading for this new Social
Security edict. The new fees imposed by these niche practitioners
dealing with "other people's money" will surely enrich
them, but the cost will be fully borne by those forced to join the
Social Security Accounts against their will. Is it too cynical to
ask these lobbyists for "privatization," "Why compete
when you can use the coercive power of government to line your pockets!"

And
herein is another lie about private savings accounts saving Social
Security and improving the economic welfare of future generations.
Such accounts will ultimately become nothing more than another dumping
ground for government securities as the new accounts absorb ever
increasing magnitudes of future debt. To believe private Social
Security Accounts will reduce the $45 trillion unfunded liability
burden which already exists today denies the demographics and political
reality that everyone cannot live off of everyone else through the
political process. This "privatization" scheme is simply
a government edict forcing workers to channel their wealth as politically
mandated in the "hope" that future unfunded liabilities
can be reduced by a game of financial musical chairs. And cows would
fly if wishes could make it so!

The
demographic and financial reality of Social Security today is beyond
repair or redemption, both politically and economically. The only
question is how much longer that truth can be concealed and how
much longer the citizenry can continue to be deluded with new political
schemes and gimmicks imposed upon them. Ultimately the tower of
expanding Social Security interventionism must collapse, not only
because it brings about consequences radically different from what
the interveners themselves intended, but because, as Bastiat foretold,
everyone cannot live off of everyone else through the political
process. As Social Security tries to pursue this chimera it is destined
to fail, and whether politicians pile on more intervention or not,
the future of Social Security remains doomed.

Finally,
a personal aside: One of the great frustrations of spending a lifetime
under an expanding "nanny state" has been to witness how
readily our citizenry has succumbed to statist edicts. The notion
of mandating individuals into a Social Security Savings Account
scheme is virtually unquestioned today from the perspective of personal
freedom of choice. In fact it is being promoted as a return to an
"ownership society." What a mockery of the private property
order! While politicians argue among themselves over precisely how
a citizen's actions should be directed, there is hardly a word spoken
anymore as to whether they should do so. Perhaps such political
debates are to be expected within a "nanny state," but
how sad that the citizen victims of such a political order have
given their sanction and remained silent over their loss of personal
economic liberty to the state. It is not my pessimistic old age
speaking when I observe that our personal liberty, and resistance
to its loss, have faded throughout my lifetime. Fortunately the
worldwide expansion of the market process gives us cause for great
long-term optimism. Of course what this could mean is that by the
end of this century the most economically free and prosperous people
in the world could be living in China, and Americans may be doing
their laundry!

January
20, 2005

Robert
Anderson [send him mail]
is a former student of Ludwig von Mises now retired in Wyoming.

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