Making Socialism Work Better?

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