Ending Social Security: Part 1
by Michael S. Rozeff
by Michael S. Rozeff
The Social Security program, as with all government programs, has problems, causes problems, and is a problem. We hear a great deal of talk, often acrimonious, about reform. Talk of changing Social Security for the better places us in a dream world that ignores Social Security's many negatives. The appropriate and only genuine solution to the damage caused by Social Security is to eliminate it altogether — end it. Political conditions make such a course infeasible at present. They can change and be changed.
Ending Social Security is realistic in several ways. It is the only positive and desirable course of action once one sees Social Security for what it is and understands what its ill effects are. These go way beyond the ills of the program itself such as money shortfalls. The excellent article by Robert Higgs on the numerous negative economic and social consequences of income redistribution provides ample reason for ending Social Security. And in his conclusion, Higgs points out that in terms of morality "the transfer society quashes genuine virtue" and that "it is impossible to found a good society on the institutionalization of theft."
Once one realizes that Social Security should end, it then becomes possible to envision possible ways to end it. There are surely feasible methods to end it; what can be instituted can be de-instituted. What is unrealistic is to hope that the ill effects and problems will go away by tinkering with tax rates or retirement benefits or wishing them upon someone else. This article focuses on just a few of the many reasons why the program should be ended. It successively considers the program in moral, rights-based, economic, and financial terms.
A moral perspective
Full-fledged moral arguments against Social Security get into moral or religious philosophy, which are well beyond the scope of this article. These arguments will not persuade or be used by skeptics. I suggest that readers read Gary North's Inherit the Earth for a serious, logical, and consistent religious-moral perspective that strongly condemns Social Security on Biblical grounds. In brief, God owns the universe. Mankind chooses to be either under God (and free) or under other men (in bondage.) The State exemplifies the latter condition. "Nothing is clearer than the Bible's prohibition against theft," and "The commandment doesn't say, ‘You shall not steal, except by majority vote.'" Social Security is the state's largest invasion of the family, and "There can be little doubt that the Bible teaches that property is primarily owned by families." The state, through Social Security, inheritance taxes, and education, substitutes itself for both parents and children.
A strong philosophical-based moral case against Social Security can be based upon Kant's moral philosophy. The Social Security program treats workers and taxpayers as mere means to an end, which is the income augmentation of one class of specially designated human beings. Such a program cannot reflect a universal moral law because it depends on one group (Congress) deciding upon who shall pay and who shall receive, and each and all of us cannot universalize the imposition of our wills on others without conflicting with one another. And, I might add, if we attempt this we get chaos. Each of us by natural necessity seeks our own happiness, and that cannot be attained universally unless we operate autonomously according to our own wills, not the wills of others.
Perhaps another case can be made, a practical-moral case. We as individuals and family members can and should honor our parents and other elders. We can and should give to those in need. Social and moral behaviors like these are so central to our lives as human beings that we take them for granted. We are not only brought up learning them but we are apt at learning them. We constantly make moral decisions. We constantly judge whether others are acting fairly in social exchanges. We have consciences, and we have ideas and expectations of right behavior. We ascertain when others are shirking, demanding too much, misbehaving, selfish, and not deserving of help, just as we determine who is behaving properly and who is really in need. We find out who is trustworthy and who is not, who deserves our time, attention, and resources and who does not. We may not notice but we constantly are using ideas of fairness, trust, conscience, and right. Our choices and behaviors are finely tuned and responsive to whom we are dealing with. In all of this, we do not act indiscriminately. We do not encourage or respect cruelty, unfairness, or theft if our parents engage in them. We do not throw our money away on anyone who simply asks for it. And in all of this, we act quite naturally and necessarily as individuals. We use our heads, our own heads. Only we as individuals have the necessary knowledge of whom we are dealing with to act morally and responsibly. If we ask a subcommittee of Congress to extract 15 percent of everyone's pay and transfer it to people over a particular age, we abandon all of this which is so essentially human. We abandon all good sense, which includes the exercise of our moral senses of worth and judgment. It says far too much even to term Social Security a collective exercise of our responsibilities. It abdicates responsibility. It is irresponsible. This is what Social Security is — both irresponsible and inhumane. It is a program by which we abandon central human capacities and resort to brute force and arbitrary rules as substitutes.
When we abandon God and morality, when we treat others as means, when we give up our own consciences, when we call upon the state and its power to do what we should be doing, we unleash destructive forces that wreck society. The state uses immoral force, and immorality has negative consequences. Abandoning responsibility in favor of the state uncorks a bottle with an evil genie, the power and domination genie. Call it a devil or Satan if you will because that's what it is. We endorse that the state's power is right and just in highly personal relationships. We allow the state to make arbitrary and unjust rules that benefit one man and harm another. We begin to battle and war against each other. We war over the state's power and who shall get what. We create strife and rancor. Production and cooperation suffer. We create a monster in the state that soon begins to devour all personal matters. We create a taxing serpent. Doing the immoral thing of introducing the state into matters of personal welfare has very real and dire consequences. Americans stepped onto this ungodly path decades ago, and surely the sins and iniquities of the fathers are being visited upon the sons and daughters, even to the third and fourth generations. If this is not now apparent to most Americans, the time will come when it will be.
Social Security is a case of moral rot at the core of society, one instance of many. As long as there is a powerful state affixed on society, the rot will be there and it will tend to spread. The state is a cancer on society, to paraphrase John Dean. Getting rid of one of the state's largest programs cuts out part of the cancer and hastens the curative process. The patient, which is society or the body politic, is ultimately responsible for curing itself of its own malady. It has to recognize that it has a cancer first, however, and then it has to energize itself to remove it. This is asking a lot. Americans have to change their moral outlook and regain control over their state, over the U.S.A., and then they have to agree on what is to be done with it. These are large moral and political challenges. If this society fails to do this, then this society will continue to fail. We hope future societies will understand better what American society has brought upon itself.
Let it be clearly understood that this is not a plea for a new, better, or inherently more moral human being. It is not a plea for a change in human nature. It is asking for a different choice of institutions that are clearly within the realm of moral possibility, since they are closer to ones that Americans used to have and took for granted.
The U.S.A. conglomerate
To place the Social Security problem in an economic context, let us imagine, contrary to reality, that the U.S.A. is a business providing services for Americans. From this perspective, it is a very, very large business that handles a tremendous amount of money. We call this "business" Uncle Sam.
Wal-Mart Stores, one of the very largest businesses in the world, has annual sales near $321 billion. It pays out some $310 billion for all its costs, leaving about $11 billion profit for shareholders. Using 2006 estimates provided by Uncle Sam, the U.S. government's receipts are $2,285 billion and its outlays are $2,709 billion. This "business" is incurring an annual loss of $2,285—$2,709 = $423 billion. (There is rounding error.) Losses are now customary for Uncle Sam. Uncle Sam is about eight times the size of Wal-Mart and running a loss that is 38 times the size of Wal-Mart's profits.
Uncle Sam is like a conglomerate company whose top management oversees a variety of unrelated subsidiary companies. Economically speaking, breaking it up and decentralizing its functions (de-conglomerating) will work miracles of value creation by freeing up people to make their own decisions using the greater information and knowledge of values that they have as compared with a few members of Congress or the Executive who impose their values on others.
The Social Security company is one of the largest of Uncle Sam's subsidiaries. Social Security is now taxing 159 million Americans and paying out money to 48 million Americans. Most Americans who work are made to pay a good part of their earnings to other Americans. Social Security spent $530 billion last year and took in $608 billion. The money it didn't pay out was spent by the rest of the government. It is gone. Soon Social Security will be spending more than it takes in and the government will have to raise taxes, cut benefits, or borrow more. The Social Security company has no savings whatever and no assets.
Social Security is not really a business. We are not customers of Uncle Sam who decide to buy from Social Security or not. With Wal-Mart, we go or not go, we decide what to buy, how much to spend, and when to spend it. With Social Security, if there is any choice, it is a collective political choice embedded in the bowels of Congress.
A rights-based reason to end Social Security
All the money that has been paid into Social Security in the past is gone. It has been paid out to recipients in the past. There is no money in any trust fund anywhere. There is nothing being accumulated for future retirees, and there never was. There is no giant mutual fund holding assets that can be liquidated to pay retirees. There are no accounts in the names of retirees or future retirees. There is nothing there. Nothing.
Money currently being paid out is extracted day in and day out from the paychecks of current workers. Other than its organizational assets, the Social Security system is not much more than a zero. Money cycles in from workers and it cycles out to recipients. Only government force keeps the money flowing in and out. Nothing else. We know that government force is necessary and that the workers would not voluntarily pay in because Congress mandates the program and refuses to make it voluntary for fear it will collapse. In natural rights, not legal terms, the workers who are paying have no obligation to pay and the recipients have no warrant to receive what they are getting. "Legal" terms mean brute force and only brute force.
If Social Security and the money flows ended tomorrow, it would simply end the largest ongoing theft in American history and possibly all of history. The recipients would have no moral or rights-based leg to stand on. The current workers owe them nothing. Current recipients have no right to keep on stealing from current workers because the former have been robbed in the past. The money of current recipients paid in before they retired has gone to nameless others and been spent. If they have a case, it's against these anonymous recipients of the past. They are long gone or unidentifiable. The current recipients have been defrauded via the U.S.A. Try to sue the U.S.A. Try to sue the voters who supported the program. Try to affix responsibility. There is no just solution.
From this point of view, a libertarian/rights-based/moral perspective, ending the program is the right and good thing to do. It halts the theft from those now paying in. This is partial justice. Restitution to those already defrauded looks to be impossible. However, let us bear it in mind as we proceed. Perhaps there are some means of alleviating the inequities.
An economic reason to end Social Security
The top management of Social Security is the Congress. Is it plausible that 535 Congressmen, or a small subcommittee thereof, can efficiently allocate money to 48 million Americans? Everyone who pays in to Social Security has to pay a fixed percentage of earnings (up to a rising ceiling), and recipients receive payments based on their earnings history and other complex factors including how much they earn from other sources. In such matters as these, formulas can never be efficient.
The "efficiency" of this massive money recycling actually can't be defined. There is simply no criterion to do so. Ordinarily, each of us decides individually what we wish to do, and our acts define our efficient allocations of resources. Congress can't determine how much the recipients value the money they get or how much those who pay in to the system value the money they give up. Congress can't even conceive of what efficiency means in such a situation. Congress simply does it. It simply recycles money. It has criteria. It is not managing a completely arbitrary lottery. On the other hand, there is no way on earth that it can justify the individual money transfers made by Social Security.
Consider the matter from a personal point of view. Given your druthers, would you pay out what you now pay out to Social Security? Would you pay out exactly that amount, and to that government agency? And would you write checks in the precise amounts to the precise people who are now receiving it? The odds against this happening are infinite. Uncle Sam can't possibly be satisfying your preference or anyone else's. Furthermore, would you choose to pay in exactly what you are now paying in while hoping to get some unknown amount in the future that depends on the political choices of 535 Congressmen at that time, that is, if you live that long? Of course not. Multiply your situation by that of 159 million other paying Americans and Uncle Sam's allocation of capital must be massively inefficient. It is doubtful that anyone paying in can honestly say that the money transfers are what they prefer. They don't even know what these transfers are.
From an economic standpoint, the Social Security system of money transfers is senseless. And that is only considering the efficiency of the transfers themselves. The number of other economic and social ills caused by these transfers is also very large. They promise to become even larger in the years to come.
A financial reason to end Social Security
I am not going to speak of the looming deficits or even the fact that Social Security is a Ponzi scheme. These are well known. I have in mind that Social Security is about as bad an investment and portfolio management scheme as one can devise, both for individual and society.
In an earlier article, I pointed out that the Social Security program does not increase the security of income. Society's income stream has risk to it. It fluctuates. Social Security is advertised as making the income of retirees secure. If it does that, then it loads all the fluctuation of the society's total income stream onto the non-retirees. Their income is then more risky. Social Security doesn't make risk disappear. It only shifts it around.
Now I will argue that the state's Social Security program increases society's overall risk. It does this in several main ways, although there are others. It introduces a brand new risk, which is political risk, and forces the worker/payer to accept this risk. Furthermore, the payer is forced to focus on one alternative and led away from proper diversification. Then, the payer is forced to accept an income source with highly undesirable features. Last, Social Security discourages the usual methods by which society copes with income risk such as saving, diversifying, agreements among family members, and various other voluntary associations and societies that include insurance. Its taxation raises the cost of these alternatives.
Many possible scenarios can occur in the future. One should diversify across investment types because they pay off better or worse in different scenarios. One should never invest one's entire net worth or a large fraction of it in one single type of investment. This involves too much risk of loss. But an individual who relies on Social Security for most of his future income is focusing on a single asset and relying on a single scenario occurring in the future. This is about as close to investment folly as he can get. He is counting on Social Security income being there for him under all future scenarios. This may not and need not happen. There is political risk of program change. There is risk that the state will spend the taxed money for other purposes. There is risk that the claims on the state will exceed its capacity to pay off on its promises. The government with its huge deficits is shakier than an insurance company that holds solid investments and sells annuities, and it has other priorities. There are economic risks that the income sources will dry up or that the claims on them will grow so that the pie has to be divided into smaller pieces. The Social Security program has created these new risks. Ordinary retirement investments like annuities mitigate risks in a number of ways such as by matching future expected payments with investments that pay off at the times needed. Social Security relies solely on future taxing power of future unknown income.
Look at Social Security as simply another risky investment. It's an investment that is all promise without any tangible assets (except future taxing power) since the state pays out or spends all the money it takes in and invests in nothing. It may not pay off as promised and expected. Unlike other investments, you are stuck with it. You can't liquidate it. You can't borrow against it. You can't pass it on to heirs. You have no control over it. You have no control over how much you pay in. You have no assets other than a hope that someday you'll be able to steal from others. It's really not yours until you receive a check. All of these negatives are tantamount to risk factors.
Uncle Sam is a terrible and fraudulent investment advisor who has done the American public a huge disservice by forcing them into this poor investment, making them believe that money was invested in assets, and counseling and assuring them that Social Security would always be there for them. Uncle Sam can't keep this promise except by continual theft from new workers. From the individual's point of view, standard financial wisdom suggests investing in other alternatives and not relying solely on Social Security. Those who have not built up an alternative to Social Security in the past may luck out or not, but relying on Social Security is quite risky.
Meanwhile, the payers are made that much poorer and less capable of saving for their own future. There are many ways to give up current income in order to assure future income, including all sorts of arrangements with other people. But if a worker has 15 percent less income, he is discouraged from such arrangements and investments because he then has to give up even more income. The Social Security tax raises the marginal cost of other ways of ensuring future income. A worker is discouraged from saving and investing in the usual investments. If a parent would have provided more generously for a child in exchange for the greater assurance that the child would care for him in his old age, his cost of doing this rises. And with Social Security in place, adults have a lower incentive to have children altogether. Instead of social security, there is actually greater insecurity. The sooner that the Social Security program is eliminated, the sooner that people can set about handling the ordinary risks in the usual ways and going back to sounder and diversified investments.
Part 2 of this two-part series considers a few ideas about how to end Social Security.
August 10, 2006
Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.
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