The Social Security train heads for a collision, the system’s bankruptcy. Everyone hangs on for dear life hoping the crash won’t come or that they will survive it. What should be done? Stop the train and let everyone off. The arguments in Part 1 all suggest one thing: The system should be abolished. Not only is it ill, but it imposes all sorts of ills on society and reflects an ill society. Congress created Social Security. Congress should abolish it. Social Security taxes should be abolished. No more Social Security checks should be paid to anyone. (See also Anthony Gregory, Jacob G. Hornberger, and Lew Rockwell.) We should all be Social Security abolitionists.
Congress shows no intention of eliminating the Social Security program. However, that should be the goal. And that implies thinking about what to some seems unthinkable, namely, how to handle the end of the money flows into and out of Washington. The general answer is obvious. The money need not go on a round trip to Washington. We the people can shift it around among ourselves without being told how to do it or being made to do it. Families should take care of themselves. Individuals should make their own arrangements for their elderly futures. People should help others who need help, which calls for the exercise of individual conscience and judgment.
Talk of ending Social Security is bound to elicit much emotion. The emotional part is secondary. For many people, this issue is largely about money, and if everyone thought they would not lose anything, the emotion would die down in a flash.
Two types of termination are discussed below. One is an end to the program in which it stops taxing payers and also stops paying benefits. As impolitic and extreme as this may seem, thinking about it is useful because it shows us that even this course is feasible and we see what is involved in a less radical phasing out. The second option considered more briefly is ending the program for payers who desire to drop out and maintaining the program for those who wish to remain in (although it could still be transformed in beneficial ways by privatizing accounts.) This is a slower termination. No new payers would be accepted and all children could burn their Social Security cards if they wished.
The general consequences of any termination
Many retirees and near retirees will experience some hardship, some severe, if the entire system is ended quickly (say within 18 months) and nothing else changes. This is an important consequence that society has to face. But society has the resources to address the consequences and other things will change. Most importantly, working Americans will find that their incomes are larger by the Social Security taxes they no longer have to pay. Many will get pay raises of 15 percent or so (if the amounts were free from income tax). Society will find itself immediately in possession of a lot more money, in fact, all the Social Security tax money that is being sent to Washington.
What will then happen is that the decisions about who is to receive how much old age or disability support will have been decentralized down to the level of the individual. Abolishing the Social Security system doesn’t abolish giving, charity, or planning for the future. It de-conglomerates the decision-making power from Congress to individual Americans where it belongs. Since they know more about who needs aid and who deserves aid, on a case-by-case basis, they can make more efficient, free, and moral decisions about who shall benefit from their charitable gifts. They can plan their futures more effectively.
There will be pessimists and statists who will argue that people are incapable of arranging their own lives. Shame on them! Those are the devilish, elitist, and entirely false views that created the system and its ills in the first place. Society took care of itself for a few million years when it was much poorer than today. It took care of itself before Otto von Bismarck and Franklin Delano Roosevelt came along. Without Social Security lowering capital accumulation and lowering society’s income, society will be even better able to take of itself in the future. All sorts of businesses, charities, and associations will jump at the chance to make new arrangements for the retirement security of Americans.
If Americans wish to, they can fund any number of organizations that provide all sorts of services to those in need. They are doing this now. They did it before Social Security pre-empted them and discouraged them. There may occur some shifting of charitable giving away from some traditional recipients to new ones.
Two other possible directions
Even greater giving can be stimulated by de-conglomerating the rest of the Federal government. If the war in Iraq is ended, for example, the military downsized, and taxes cut accordingly, Americans will find themselves getting the equivalent of another large pay raise. These are the kinds of Projects for a New Century that Americans should be thinking about. If Americans can build a huge military, set up bases all over the world, and fight superfluous foreign wars, they are surely capable of ending these misconceived ventures and doing a lot more worthwhile things. But they need to settle upon what those things are and not insist that the state do them. My countrymen remind me of the Tin Man, the Cowardly Lion, and the Scarecrow seeking solace in the Wizard of Oz when they already have more than what it takes to handle their own affairs. What a downright shame that so many of our society’s leaders and intellectuals have for many long decades supported Oz, accepted the state, glorified it and its leaders, sought it out, built it up, groveled before it, did its every bidding, extracted all they could from it, used it to manipulate their fellow Americans, sat mute before its blunders, been entranced by it, failed to criticize it, and applauded its every move.
Like Social Security, the tax code creates fundamental impediments to what used to be normal human relationships that involve property and property transfers. The income tax reduces the individual’s income. It therefore prevents a person from spending, investing, or giving his income as he sees fit. It therefore prevents all sorts of human relationships and exchanges. While it is not necessary to change the code in order to eliminate Social Security, it would help society adjust if it were changed while also cutting down the size of government. Income taxes should be reduced. They are best ended altogether. Gift and inheritance taxes should be ended. Their termination would allow anyone in society to provide funds for anyone else without negative tax consequences. Right now a person can’t give too much to another without tax consequences. A person cannot receive without tax consequences. Capital gains taxes also impede wealth transfers and should be eliminated. One can give to a charity tax-free and take a tax deduction, but if one gives too much to a relative or someone else, one incurs a tax and gets no deduction. One can take a deduction if one is the sole means of support, but one can’t if one provides partial support. All of these anti-people and anti-family provisions need to be changed in order to get society back on a proper footing. The tax code disrupts normal human relationships. It is an abomination every line of which shows what we as a society have come to. We are a long, long way from where we should be.
Privatize the agency itself
The Social Security organization itself can be converted either into a charity owned by the American people or a private insurance company. The Social Security Administration has assets in the form of an organization of employees, computer systems, mailing lists, addresses, buildings, etc. Membership credentials (or stock if a company is formed) can be issued to every American representing their status as originary donors in the new Social Security Fund of America. The Fund like any charity will have trustees, directors, and a staff. It can set about the business of soliciting donations from Americans and distributing them. It will compete with other charities for American dollars. It will have to make clear its program, its criteria, its costs of operation, etc. in order to survive. Those Americans who believe strongly in Social Security may contribute if they think the new organization fulfills the aims they’d like to see it carry out. If Social Security is converted into an insurance company, it starts with high name recognition. It should be able to offer annuity policies and make a go of it.
The fast transition
Without recommending it, what would happen if the whole program were ended within 1—2 years, including payments to retirees? Undoubtedly the transition costs on individuals would be high. They would have to make many new arrangements and re-order their lives considerably. They would survive. Worse catastrophes have been survived. But with planning, the transition costs could be lowered considerably.
Remember that ending Social Security produces many gainers, namely, most of those paying in to the system who have little expectation of ever seeing a positive or competitive return on the money they are now transferring to others. And it turns a huge amount of income back to its originators. Over a longer time period, Americans would place their society on firmer moral, economic, and financial grounds.
If Social Security were ended properly, namely, harmoniously, in the open, and as a positive step for Americans, then those who are in need, those who rely heavily on Social Security, would have a greater assurance of finding other means of support. Some of these may return to the workplace. A larger income in the hands of Americans may generate more employment. Some will rely more heavily on family and friends. Americans will rally around a good cause. Americans would fill the breach in the incomes of these retirees. The transition period would be planned for in advance so as to make it smoother. No one need starve or be thrown into the streets to beg. If everyone knew that the system would end in 18 months, for example, those in need could apply to local charities who could then immediately begin soliciting pledges and making collections. The Social Security Fund could do the same. It could identify its goals of whom it sought to aid and solicit funds from Americans. It could, and other charities likewise could, ask working Americans voluntarily to check off a portion of their pay for withholding to go to retirees in need. Americans are inventive. They will invent many other ways to help one another, especially the less fortunate. Over the decades, Americans have thrown away trillions of dollars on lost causes advocated by their leaders and their state. Given the opportunity to use their wealth themselves to make their own society work without the state being involved, will they not be equally if not more generous? And will they not do this more effectively, more efficiently, more compassionately, and more morally than by being compelled? Even under the most extreme scenario, one in which Social Security in all respects would end quite rapidly, the retirees most in need would find help.
There will be those who are not in the kind of need that elicits the help of their fellow man but who count on their current checks nonetheless for significant comforts, or who have planned to receive money and haven’t saved enough to retire comfortably on. In the game of musical chairs, when the music stops some people do not have seats. In any Ponzi scheme, some end up at the end of the line.
These people (and those less well off) are destined to face difficulties anyway as the system deteriorates. It is a matter of time before Congress raises taxes and cuts benefits. Many now wish to postpone the inevitable, hopefully until after they die. If we stop the system sooner than they expected, we and they will have to adjust. What shall be done with or for this group of people so that their situations are made bearable?
There are those who haven’t retired and those who have. Many of those who haven’t retired are still working. They are within 10—15 years of retirement, let us suppose. They probably will have to work longer, but their retirement age is going to be raised anyway and longevity is increasing. Abolishing the system gives them 15 percent more income right away. They can save it. A worker now of age 55 who works until age 70 and earns $40,000 a year is being promised about $1,695 (inflation-adjusted) a month by Social Security. It is common, however, to read that future benefits will have to be cut by 25 percent, which implies $1,275 a month. Suppose instead that he saves his Social Security tax or 15 percent of $40,000, which is $6,000. If he invests $6,000 a year for 15 years at 6 percent, it cumulates to almost $140,000. Again at 6 percent, that produces income of $1,015 a month until age 90 or $1,201 until age 85. Such examples show that private saving can go a substantial way to make up for the end of Social Security. In order that this group can obtain more income, an important possibility is to eliminate other government programs and cut their taxes. Many of this group will have children and other family. Perhaps their children will reach an understanding with their parents about support. Perhaps family relationships will help. Several other suggestions are given below.
There are those who have already retired who are not poor but who enjoy the income that Social Security provides. Some might elect to go back to work. Some would have to cut back unless some other solutions were found for them beyond those mentioned above. One solution for them as well as for the poorer retirees mentioned earlier is for the rest of us to favor them by distributing to them some of the government’s other assets. If, for example, public lands were sold off, this group might receive preferential treatment. Perhaps other parts of the government could be privatized and distributed mainly to this group. Another solution is to eliminate their income taxes. Perhaps the younger of us who will be finding themselves with a large pay raise might voluntarily contribute to these groups. Before any government measures are imposed, voluntary checkoffs could provide alternatives.
Quick termination is possible but challenging. Thinking about it has generated some possibilities that might usefully be combined with slower termination. The important thing is that once a goal is set, such as ending Social Security, generating ideas about how to reach it become easier. For example, it might be possible to pay people to leave Social Security in the same way that companies pay employees to retire early.
Another type of solution entirely is to abolish only the compulsory aspect of paying in to the program. Anyone who wished to stop paying Social Security taxes would be free to do so. (Combined with this proposal would be realistic information on what Americans can expect to get back from the program as it runs into its future problems, presumably lower benefits received at a more advanced age. Then everyone could accurately calculate or get help calculating whether or not the program is a paying proposition for them.) The program would stop enrolling any new members. But the program would continue paying out to all the current enrollees as is now done. As they died off, the program would wind down. This solution involves much higher taxation and/or borrowing in the transition to the program’s demise. It is therefore a compromise solution, but it is a solution nonetheless in the sense that it eliminates the Social Security program.
For those who choose not to opt out but instead to remain in the system, Social Security could allow them the option of converting their accounts into a straight investment program (a 401k type program) owned by the individual. The program might limit access to the funds until retirement. The individual’s tax contributions would be invested in the standard investment assets (such as stocks and bonds) according to his choice of mix. Most importantly, the contributions would no longer pass into the hands of the state.
Further to stimulate such conversions, the program might guarantee a floor amount of retirement income that is somewhat lower than today’s. This gives the participant a chance to earn higher returns in the 401k-type account while having the security of knowing that income would not fall below a predetermined amount. This type of option is offered by many private investment accounts.
One does not have to be an actuary (which I am not) to see that ending Social Security is doable. Perhaps a combination of these methods with a faster termination is feasible and will work better. I have no hard and fast answers. My purpose has been to stimulate thought that may move us along toward the goal of ending Social Security. Even if the prospects of change are bleak, we benefit by thinking about the new direction and considering how we might get there.
Many Americans vehemently disagree with these recommended directions and possibilities or don’t want to bring the problems out into the open and discuss them frankly. Most want only to talk about how to save the system. Many only want to see the monthly checks keep coming. But only to discuss saving the Social Security system will fail to generate solutions because it won’t address the root issues. It will simply carry on the power struggles. It will leave the moral rot and the economic problems in place where they will become worse. By discussing the program’s termination, we see far more clearly what the important issues are and how we might go about handling them. And I’ll pass on one idea that was given to me yesterday by e-mail: Refund everyone in the system what they paid in, and end it. This has the virtues of simplicity and a degree of equity (ignoring interest.)
Waiting and doing nothing is an option, a bad option that results in other sorts of transformations of our society that can be much worse. If nothing is done, the demise of the program may be stretched out but is inevitable. As the number of younger workers declines relative to the number of retirees, the retirees will face cutbacks in their benefits and the workers will face extensions of the retirement age. Political struggles will ensue in Congress between these two groups. If taxes are increased, the workers will grouse and the economy will suffer. We will be poorer. The government will find that it cannot support all of its other programs if it attempts to maintain Social Security payments, inducing even more political struggle. Many groups will be dissatisfied, igniting political instability. Strife will increase. As the U.S. retrenches and its world power position declines, there will be pressures for the state to retain its former glory. There will be pressures for strongman rule to solve the intractable problems and establish priorities. When Medicare’s problems are brought into this picture, it becomes even more clear that turmoil lies ahead that is in no one’s interest except rulers who wish to gain power over a divided citizenry. In the end, American society will lose even more freedom and the economy will deteriorate as in other socialist countries.
The other main possibility (if Social Security is not ended) is that through ingenuity, invention, and political reform, the American people are able to raise their productivity. If their productivity rises and they simultaneously restrain programs like Social Security, they can to an extent grow out of or postpone their problems. They can reduce Social Security relative to other sources of income. For this to happen requires two new directions. One is to reduce the state’s programs, taxes, and regulations so as to encourage capital accumulation and income growth. It is very late in the game for this to happen. This is not the existing philosophy as shown by the new prescription drug program. And U.S. regulations are responsible for driving numerous U.S. industries overseas. The other is openly and frankly to acknowledge that programs like Social Security are moral and economic failures and should not be allowed further to grow but be scaled back and eventually eliminated altogether. It is also very late in the game to witness a widespread return to truth and reality. Nonetheless, these possibilities, although currently remote, can’t be ruled out. Even small changes at the margin that move in these directions would be beneficial and might turn society in a new direction.
Downsizing and de-conglomerating the U.S.A. is best begun now. That means abolishing the Social Security program now. The country could usher in a new era of growth and prosperity in the tradition of the old pre-socialist America minus its statism. With a change in direction, it could again become a beacon for peace and not empire, for real freedom and not force, for real justice and not law by fiat, for real security and not Social Security, and for a society that is really under God.
Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.