Social Security: Mendacity and Mythmaking

The Economic Policy Institute, a prominent leftie think tank, employs two staunch Social Security partisans, economists Dean Baker and Mark Weisbrot, who co-authored a book titled Social Security: The Phony Crisis, arguing what its subtitle proclaims. Naturally, I stopped by the EPI's web site, www.epinet.org, and clicked Social Security, to see what the EPI's sages had to say.

My first stop was their item "Social Security: Facts at a Glance."

Propaganda at a glance is a better description.

The section "Facts About Social Security Benefits" opens with the statement that Social Security, or Old-Age, Survivors, and Disability Insurance (OASDI), was created in 1935 "as a publicly funded retirement insurance program, which means that only those who work and pay taxes are eligible for Social Security benefits."

Social Security's partisans have called it insurance ever since it was enacted. But what is insurance? As any insurance or risk management textbook will tell you, insurance is a means of coping with risk (uncertainty regarding a loss) by combining risk pooling and risk transfer.

In risk pooling, a large number of persons, each of whom faces an uncertain, large loss, shares the loss ("pools the risk") through premiums: charges based on calculations of the probability of the risk eventuating, which each member of the group pays, thus creating a fund for compensating those members who suffer the loss insured against. The risk is transferred to the insurer, because the insurer must meet contractual obligations out of the premiums and out of monies earned by investing them, and if the insurer miscalculates probabilities of the risk eventuating, and thus charges premiums insufficient to cover costs, or makes bad investments with the premium money, it risks financial loss — even bankruptcy.

Social Security is not, never has been, and cannot be insurance. Why? Because it lacks these defining characteristics of risk pooling and risk transfer. Politics and ideology determine benefits. For example, benefits were increased in 1967 because President Lyndon Johnson wanted to be nice to the elderly, and in 1972 because President Richard Nixon and congressional Democrats were competing over who would raise benefits more in an election year. Taxes are then raised to cover projected costs. Since politics and ideology determine benefit levels, and benefit levels determine OASDI taxes, Social Security taxes are determined by politics and ideology, not risk. Risk has nothing to do with Social Security taxes. Therefore, Social Security doesn't really pool risk. Therefore it isn't insurance.

As for risk transfer to the insurer, this doesn't happen either. Social Security assumes no risk. If it can't pay its benefit costs, it will simply borrow, or Congress will raise Social Security taxes. Risk is transferred, all right — but to the taxpayers, not to the alleged "insurer."

With neither defining characteristic of insurance present, the claim that Social Security is insurance is flat nonsense. The truth is clear to any honest mind: Social Security is redistribution, not insurance.

As if that were not enough, in briefs for two landmark Supreme Court cases on Social Security, the Justice Department, acting on Social Security's behalf, and presumably saying what its administrators wanted said, explicitly denied that Social Security is insurance. In Helvering v. Davis (1937), the case which established Social Security's constitutionality, the Justice Department asserted that the Social Security Act "does not constitute a plan for compulsory insurance withint the accepted meaning of the term u2018insurance'." In its Flemming v. Nestor (1960) brief, Justice wrote that "The OASI [Old-Age and Survivors Insurance] program is in no sense a federally-administered u2018insurance program' under which each worker pays premiums over the years and acquires at retirement an indefeasible right to receive for life a fixed monthly benefit, irrespective of the conditions which Congress has chosen to impose from time to time." The Social Security tax is "not comparable to a premium under a policy of insurance promising the payment of an annuity." Insurance lingo such as "insurance," "property" and "vested rights" "can be applied only at the risk of a serious distortion of language."

As for benefits being "earned," I covered this in my earlier "Disinformation versus Social Security Reform." Briefly, in Flemming v. Nestor, the Supreme Court ruled that a Social Security taxpayer's claim to benefits "cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments." That is, benefits are not "earned" by paying taxes.

The EPI's next assertion is a real whopper: "Social Security benefits are guaranteed to beneficiaries." This is another stock claim of OASDI's friends. It too is a flat falsehood.

To begin at the beginning, the original Social Security Act of 1935 contained a routine reservation of power clause, Section 1104, which reads:

"The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress."

This makes utter nonsense of any “guarantee.” Indeed, Congress has already repeatedly cut or eliminated benefits, proving that the "guarantee" is set in quicksand. Whereas the original Act's benefit language was written such that in all cases a worker (or his estate) would get back at least as much as he paid in taxes — a money-back guarantee, in other words — under the Social Security Amendments of 1939 Congress removed it, to offset the cost of adding survivors' benefits, obviously hurting single persons.

Furthermore, if a beneficiary died, whether before or after qualifying for monthly benefits, the original Act provided for paying his estate a lump-sum death benefit sufficient to make his total benefits at least equal to his total tax payments. The 1939 Amendments cut the lump-sum death benefit to six months' benefits; the 1950 Amendments trimmed it to three months' benefits; and the 1954 Amendments capped it at a measly $255 – where it's been ever since, almost half a century now, unadjusted for inflation.

In 1983, Congress rescued Social Security from impending ruin by a mix of tax increases and — guess what? – benefit cuts. The original Act fixed the normal retirement age (the age at which one qualifies for full benefits) at 65. The 1983 Amendments gradually raised the retirement age, to 65 years 2 months this year, 66 in 2009, and 67 in 2027. Making people wait longer to become eligible for full benefits is, of course, a benefit cut. Early retirement benefits were cut, too. In 1983, one could retire at age 62 and collect 80 percent of the full benefit; the 1983 law cut the early retirement benefit to 75 percent of the full benefit in 2005, and 70 percent in 2022.

The 1983 legislation also introduced benefit taxation. Until then, the consistent position of the federal government since 1935 had been that Social Security benefits were gratuities, and therefore not taxable. Congress changed its mind in u201883. Beneficiaries with "combined incomes" (adjusted gross income, plus taxable interest income, plus one-half of OASDI benefits) above $25,000 for single taxpayers and $32,000 for married couples would have 50 percent of their benefits subject to the income tax. For all practical purposes, this is a benefit cut. In 1993, Congress raised the portion of benefit subject to taxation to 85 percent for beneficiaries with "combined incomes" above $34,000 for singles and $44,000 for married couples.

"The promise [sic] of Social Security benefits," the EPI ringingly declares, "is . . . backed by the good faith [sic!] of the U.S. government . . . Thus, there is no uncertainty [oh, my aunt!] for beneficiaries — once they start receiving benefits, they will continue to receive them in the future." Sure they will — unless Congress changes the rules in the middle of the game. See the foregoing discussion of the "guarantee."

If you don't believe a policy research institute could publish such hogwash, go to their web site and see for yourself. All too clearly, the Economic Policy Institute's knowledge of the history of Social Security is skin-deep.

That Social Security is still described, even now, as "insurance" paying "earned" and "guaranteed" benefits with "no uncertainty for beneficiaries," is damning. The evidence to the contrary is overwhelming and undeniable. Social Security's partisans, such as the Economic Policy Institute wonks who wrote this rubbish, are either ill-informed or intellectually dishonest. Both explanations are possible, but neither does them credit.

February 12, 2003

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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