Skip to comments.Six Misconceptions About Social Security
Posted on 11/30/2002 5:23:18 PM PST by Republican_Strategist
Six Misconceptions About Social Security
Dr. Judd W. Patton
Social Security is headed for bankruptcy! No one disputes this fact, too many retirees to workers in the future. The dispute is over what to do - you know - reform proposals. Proposals range from raising the retirement age, to raising the payroll taxes, to cutting benefits, to eliminating the limit on earnings subject to the payroll tax, to having government trustees invest a portion of the Trust Fund in private assets, to letting individuals invest a portion of their payroll taxes into their own retirement accounts or into stocks, bonds, and mutual funds. The debate is on!
In the spirit of intellectual inquiry and academic interest in a genuine reform of Social Security, the following six misconceptions are offered to clarify the discussion.
Social Security Taxes are Contributions
Not! From its inception in 1935, Social Security - officially known as Old Age and Survivors Insurance (OASI) - has been compulsory. Try telling your employer you plan to end your "contribution" and see how voluntary it is! The Federal Insurance Contribution Act (FICA), is a misnomer of the first magnitude. Social Security payroll taxes are taxes.
More importantly, Americans do not have a legal right to these taxes. In 1960 in Flemming vs. Nestor, Mr. Nestor sued the Federal government claiming he had a right to collect Social Security benefits since he had paid his Social Security "contributions." The U.S. Supreme Court ruled that he, and all workers, have no such property right. "I paid in, I contributed, and therefore I deserve my benefits," is, therefore, a common mis-belief among Americans. Congress can change, as the current debate reveals, any and all criteria as to benefit amounts, tax rates, retirement age, etc. They can cut or eliminate benefits regardless of workers' so-called "contributions."
Social Security is Constitutional
This misconception is easy to identify and confirm. Blow the dust off your United States Constitution booklet, and go to Article I, Section 8. Our Founders enumerated 20 powers or areas for the Federal Government. All other areas "are reserved to the States respectively, or to the people" (Amendment 10). Can you find a power giving the Federal government the responsibility to care for the retirement welfare of American citizens? I will give you five minutes to find the answer! For the record, there is no such power and no such amendment has ever been passed giving such authority. Social Security is unconstitutional.
Workers pay Only One-Half of Social Security Payroll Taxes
Well, it is true that workers today pay 6.2% of their earnings (up to an earnings limit of $72,600) and the employer pays the 6.2% as well. Yes, that adds up to 12.4% in payroll taxes. (Self employed pay 15%.) But as economists often say, "There ain't no such thing as a free lunch." That 6.2% "mandated benefit" is not free; it forces employers to reduce workers' market- determined salaries or fringe benefits. Otherwise, the mandated cost would inflict losses on employers, causing unemployment. In other words, mandated benefits simply replace market- determined benefits and/or monetary compensation. Economically this means that workers, in fact, pay the full 12.4%. The bottom line is don't be fooled: It's your money the employer is sending to Washington, D.C.
Social Security is a Government Insurance Program
Superficially, Social Security appears to be just a government pension plan for the elderly. Rather, it is a pyramid or Ponsi scheme. It is not based on sound principles of insurance. Private insurance companies invest the premiums of their customers in stocks and bonds and other income-producing assets. Real wealth is created. Later, the earnings from that wealth is used to pay annuities or pensions. But Social Security is not a savings-and-investment program. Social Security taxes (premiums?) create no wealth. The payroll taxes are not invested, but are used to pay current retirees and survivors under the program. It's called a pay-as-you-go system. Some call it an intergenerational income-transfer program. It is indeed!
Now understand this, please. A pyramid or Ponsi scheme (illegal in all 50 states) works under the unsound and unethical principle that early investors are paid handsome returns with cash taken from later investors. As long as more and more investors (suckers) are attracted, the scheme works and appears to be successful. Eventually, however, the system collapses with the inevitable decrease in the number of new investors. In like manner, Social Security seemed to work well in the early years when there where few eligible retirees and lots of workers. A person retiring in 1940 could get an inflation-adjusted return of 135%!! But as the ratio of workers to retirees has declined over the decades, so has the average expected return, now 4% in 1999. A minus return is a distinct possibility in the near future. One wonders what Mr. Ponsi would have thought about Social Security "stealing" his idea.
Social Security can be saved by Federal Budget Surpluses
In fiscal 1998, our government ran a $70 billion surplus, the first since 1969. Some politicians propose saving Social Security with these and future surplus funds. It's ironic, but the budget surplus was generated by "raiding" the Social Security trust fund and other trust funds in the first place! Here's what happened and happens generally.
In 1998 the Social Security trust fund had its own surplus of $99 billion dollars. It wasn't invested to create real wealth and an income stream. That is not permitted. These funds are, by law, borrowed or "invested" into a special class of non-marketable U.S. Treasury securities ( government IOUs). The SS surplus then ends up in the Treasury's general fund and is subsequently spent on other government programs. Some Trust Fund! Since1970 these SS surpluses have financed, in part, government deficit spending. However, in 1998, with a booming economy, "borrowing" from the SS trust fund actually helped generate a Federal budget surplus. But understand this. If the trust funds had not been "raided," the general budget would have had a significant deficit, just like the preceding 28 years.
And in all likelihood all the talk about what to do with these "supposed" budget surpluses would not have emerged!
The key point to understand is that the Social Security trust fund is nothing more than a pile of IOUs. These non-marketable IOUs are not assets but unfunded liabilities, government investing in its own debt. They represent payroll taxes that have been diverted to general spending. When Social Security outlays eventually exceed payroll taxes, expected in about 2012, the government will need to raise taxes, cut its spending, or borrow more money to pay off the debt (IOUs) to the Social Security trust fund when the SS managers redeem the IOUs.
So, to answer the question, can Social Security be saved or "fixed" by not "raiding," or by "raiding" less of its own excess revenue (Present Clinton's proposal)? Of course not, it is still a Pyramid scheme relying on more and more workers to retirees, just the opposite demographic as to what is actually occurring - more retirees to workers in the next century.
Social Security can be saved by Privatization Investing retirement money into the creation of real wealth is an essential element to any economically sound reform of Social Security. Thus privatization, the act of converting a government- run program into a private activity, appears appropriate at first glance. However, a private pyramid scheme is just as unsound as a government one. Current proposals to have government trustees invest a portion of the SS trust fund into the stock market, or to establish "private accounts" where individuals make their own investment decisions (within certain government guidelines of course), is privatization-lite at best. Truly these proposals are not boni-fide privatization reforms in any meaningful sense of the word. The latter idea would be better classified as a mandatory savings program - a truly socialist proposition with its own grievous flaws. Americans would not be free to use "their" money as they see fit. For example, they could not withdraw it or decide how much to "contribute." Taxation and government oversight can never be a feature of real privatization.
The Social Security system, passed in 1935, is not a legitimate, savings-investment, insurance program. Taxes are not invested into real, income-earning assets. There is no trust fund but in name only. Americans have no property right in their supposed "contributions." The Social Security system today is a compulsory, redistributive, unconstitutional, pyramid scheme that contains the seeds of its own destuction given the demographics of the next 30 years. Reforming or "tweeking" a corrupt system is not a meaningful option. There is only one true privatization reform of Social Security. There is only one Constitutional solution. There is only one economically and morally sound system. Our nation must begin the difficult but manageable process of dismantling the Social Security system - yes, in total. The sooner the debate begins on how best to do it, on how to transition to free-market retirement options with their vast array of investment and retirement program choices, the sooner all Americans will remove the social insecurity in their futures.
Both major political parties perpetuate The Big Lie regarding Social Security. The Big Lie has existed since Social Security's inception. The debate over "privatization" is only the latest version of The Big Lie.
The Big Lie is that Social Security is some kind of retirement savings plan.
It is NOT.
Social Security is a socialist income redistribution scheme, nothing else.
Those who are working are taxed to provide a "safety net" for those who are less fortunate.
Originally, this meant retirees and surviving dependents.
Congress has, of course, complicated it far beyond this over the last 65 years.
But one fact remains: it is NOT a "savings plan", it is an income redistribution scheme.
A major facet of The Big Lie is that "we have to do something so that Social Security remains solvent in the future.
In today's age of modern computerization, the computation for operating an income redistribution scheme that remains perpetually solvent is quite simple:
The only change necessary to the current system is that monthly payments to eligible recipients would be a variable amount, not fixed.
THERE IS ABSOLUTELY NO NEED FOR A MULTI-TRILLION DOLLAR "TRUST" FUND!!!
Congress should NEVER have been permitted to confiscate so much money from the American People in the name of The Big Lie. This fund is nothing but a slush fund that Congress raids to pay for other government expenditures. If private sector employers did the same thing with their companies' pension funds, they'd be placed in prison. The "privatization" plan proposed by Bush is merely an attempt by Wall Street brokerage firms and financial institutions to get in on the scam: grab a portion of a constant revenue stream (guaranteed by taxation) from which they can skim their commissions.
Daschle's "concern" over the Social Security system is a lie.
Bush's plan to Enronize the system is worse.
The American People need to wake up and put these liars and thieves in prison.
For this, Charles Ponzi went to prison.
FDR was elected President 4 times.
The answer (sort of) lies in the opening sentence from the third myth: Well, it is true that workers today pay 6.2% of their earnings (up to an earnings limit of $72,600) and the employer pays the 6.2% as well.
The fact of the matter is, the employee NEVER sees that money in the first place so he or she has no sense of ownership of it. In other words, the "worker" doesn't PAY any of those taxes. It has been my long-held belief that the quickest way to overhaul our tax and socialist security system is to require employees to write a check every month for all the taxes that are currently "withheld" from their paychecks.
Yes, yes, I know a lot of people aren't responsible enough to do this, but to hell with them. If they fall behind on their payments, then the taxes could be garnished from their paychecks.
Isn't garnishing the taxes the same as withholding them? Ask someone who has had his or her paycheck "attached" and I will tell you.....errrr.....I mean THEY will tell you that there is a very big difference.
LOL, you missed the 1st misconception. It ain't voluntary. Beside that, if you do attempt to eliminate it and get close, some old guy'll run ya though with a sharpened golf shaft.
I am 44 and I am screwed.
I have no wish to pass this insane burden on to my beloved child.I missed the original cuttoff and the subsequent reinstatement of the GI bill.Bad timing on my part.Good lesson on the fact that life is not fair.
Stop taking FICA from anyone under 40 years old.In the interim chaos, do means testing for benefits, but for the sake of future generations, stop the insane lie of the Social Security system now!I am fully aware that this "sacrifice" is not "fair" to people my age and older.But the continuation of this now obscene scheme is not fair to anyone.End it!
Old people are greedy, don't care about the future, don't care about their children, grandchildren, etc, and they vote in large numbers. Large enough numbers, so that politicians are afraid to do anything.
...and another good question.
"And why does the Bush Administration want to make it even larger with the new Prescription proposal???"
"Repeal that [welfare] law, and you will soon see a change in their manners. St. Monday and St. Tuesday, will soon cease to be holidays. Six days shalt thou labor, though one of the old commandments long treated as out of date, will again be looked upon as a respectable precept; industry will increase, and with it plenty among the lower people; their circumstances will mend, and more will be done for their happiness by inuring them to provide for themselves, than could be done by dividing all your estates among them."
Benjamin Franklin, letter to Collinson, 1753
Well said. I just wish there were more voters with your understanding and ethics. As a worker under 30, I'd be more than willing to let the government keep the FICA taxes I've already paid with no expectation of any benefits if I could opt out of this Ponzi scheme.
That's the most frustrating part; it's possible to privatize SS without affecting the benefits of current recipients. (I don't really blame them, they were lied to their entire lives about the nature of SS). But that won't stop Democrats from blatantly lying to retired people and telling them that Republicans are out to steal their benefits, and too many of them buy it.
I just want is out of social security!! I want to be able to take care of myself, thank you. You people who are self-employed know how punishing the 15% tax is.
Many of them who experienced the great depression, IMO, wanted to be fooled and lied to. I don't think a lot of them wanted to face what were the real problems of that day. One of the problems being an out of control government, no longer responding to the Constitution.
Listed below is a brief letter I sent to author of the article. You may be interested in the same.
Hello Dr. Judd,
Permit me a brief moment of your time to comment on your article titled, "Six Micsconceptions about Social Security."
1--Social Security participation is "voluntary." See EEOC v. Information Systems Consulting CA3-92-0169-T IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS DALLAS DIVISION
2--The Social Security Act is constitutional because it is a law passed by our federal congress in conjunction with a treaty called the International Labor Agreement.
Laws made to implement a treaty are the law of the land. See U.S. Constitution, Article VI, Sec 2, "all treaties made, or which shall be made, under the authority of the United States shall be the supreme law of the land; and the judges in every state shall be bound thereby, any thing in the constitution or laws of any state to the contrary notwithstanding."
But for the most comprehensive compendium on the subject of voluntary participation in the Social Security system, please visit the following website:
Thank you for your time.
Until a future congress decides that the "evil rich" received far too great a benefit from the Roth IRA and decide that all Roth proceeds over and above the original contributions must be included as taxable income!
Face facts, Roth IRA's would be much easier (politically) to eliminate than would Social Security!
You are correct. One does not have to be retirement age to collect Social Security payments. Social Security also covers workers who become disabled prior to retirement age. However, in order to collect Social Security Disability Income (SSDI), one must have a qualifying employment record. Those who don't have qualifying employment records might be eligible for Supplemental Security Income (SSI), but only if they meet the strict poverty standards that program requires.
Please don't misunderstand me......I am by no means a cheerleader for the Social Security system. I'm just telling you how it works.
Just curious, but do you think the GI Bill has anything to do with SS? Or are you just demonstrating something which is "unfair"?
If my husband dies, I can collect benefits for myself and our two children to the tune of $3000 per month.
If my husband dies, he is well insured. I would not have a house or car payment. I would have sufficient funds to go back to school and gain a skill allowing me to support my family.
My husband has paid in less than $20k. I would be paid well over the amount that he has contributed.
This money may well have been intended to keep widows and children from being poor, but quite frankly, I would be very well off financially (until the youngest turns 16)if my husband died.
SS has to change greatly.I am not altruistic when I say I am willing to suffer the pangs of the required cuttoff.I would consider it sunk cost, as long as it stops somewhere,preferably before my childs generation has to fund my generation.