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Six Misconceptions About Social Security
Bellevue University's Economic Department ^ | Dr. Judd W. Patton

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.

TOPICS: Constitution/Conservatism; Culture/Society; Free Republic; Government
KEYWORDS: congress; socialsecurity
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Contact Dr. Judd W. Patton

Why do we continue to accept this socialist program?
1 posted on 11/30/2002 5:23:18 PM PST by Republican_Strategist
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Comment #2 Removed by Moderator

To: Republican_Strategist
I guess we can only hope for another Ross Perot'esque'" type to run for President and harp, harp, harp about this b.s. scheme called social security. We can always hope.
3 posted on 11/30/2002 5:33:04 PM PST by demkicker
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To: Republican_Strategist
"In 1916 an Italian immigrant named Charles Ponzi created an investment fund that paid large dividends without making any investments. Money from new investors was transferred to old investors while the new investors received money from newer investors yet. The system had flexibility and boldness and worked as long as an ever-expanding pool of suckers could be found. Charles Ponzi made a profit on this, and so does the U.S. Government." - P. J. O'Rourke, on the subject of Social Security.
4 posted on 11/30/2002 5:33:36 PM PST by TheGrimReaper
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To: TheGrimReaper
A worker's rate of return is based on the amount of money paid into the system, the worker's monthly benefit and life expectancy. Since Social Security is skewed to help those with lower incomes, people with higher wages tend to get a lower return than those with lower wages. However, some of this progressive tilt is offset because lower-wage workers generally have shorter life expectancies (and receive fewer benefits) and longer working lives (and pay taxes longer). A person who starts his working life immediately after high school and works from age 18 to age 67 will pay into the system for 49 years; however, Social Security only credits individuals for their 35 highest earning years. Extra taxes paid by those who begin working early do not earn additional benefits.

In general, workers born before World War II paid significantly less in taxes than they will receive in benefits - and can expect a higher rate of return than subsequent generations. By contrast, baby boomers can expect a rate of return of less than 2 percent, and Generation Xers can expect less than 1 percent. Children born today can expect a rate of return from Social Security of almost zero, assuming that the program can pay full promised benefits.
5 posted on 11/30/2002 5:44:52 PM PST by Republican_Strategist
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To: Master-Kon
Blacks have shorter life expectancies than whites, they can expect to collect fewer Social Security benefits. For example, in 1996 the life expectancy of a black male at birth was 66.1 years. This means a black youth can expect to pay Social Security taxes for his entire work life and die almost a year before achieving the right to collect full benefits at age 67. (However, reduced benefits will still be available at age 62.) Prospects are better for black females, but their life expectancy of 74.2 years is less than the 79.6 years for a white female. All these life expectancies are expected to increase in future years - but the rate of return will still be lower for blacks. Further, a smaller proportion of blacks go to college, so blacks as a group begin their working lives earlier and thus start paying payroll taxes sooner than whites. But on the average they receive no additional benefits for the extra taxes they pay because Social Security benefits are based on 35 years of work history. Paradoxically, even though black workers get a lower rate of return, their overall expected loss from Social Security (discounted value of taxes minus benefits) is slightly smaller. Why? Because they earn lower incomes, they pay less in taxes. Thus, although their return is smaller, their "investment" in Social Security is also smaller. By contrast, the average white worker is forced into making a larger "investment" in Social Security.
6 posted on 11/30/2002 5:48:59 PM PST by Republican_Strategist
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To: Republican_Strategist
If the current SS System = Enron, then Dubya's "privatization" plan = Arthur Anderson.

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:

This month's total SS tax receipts = Next month's total SS tax disbursements

The only change necessary to the current system is that monthly payments to eligible recipients would be a variable amount, not fixed.


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.

7 posted on 11/30/2002 5:55:48 PM PST by Willie Green
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To: *Social Security
8 posted on 11/30/2002 6:01:48 PM PST by Libertarianize the GOP
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To: Willie Green
To his credit, Bush concedes Social Security is bankrupt and he proposes a partial privatization, with 2 percent of payroll taxes diverted to private accounts. Workers could keep more of their earnings, invest it in markets and own their assets. But it's not nearly enough. The system should be abolished.
9 posted on 11/30/2002 6:04:22 PM PST by Republican_Strategist
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To: Republican_Strategist
Placemarker bump.
10 posted on 11/30/2002 6:13:07 PM PST by El Sordo
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To: Republican_Strategist
Ponzi-scheme BUMP. Eradicate SS bump. And some people wonder why I don't trust FedGov... Hmmmmmmmmmmmm
11 posted on 11/30/2002 6:26:27 PM PST by dcwusmc
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To: Republican_Strategist
Children born today can expect a rate of return from Social Security of almost zero, assuming that the program can pay full promised benefits.

For this, Charles Ponzi went to prison.
FDR was elected President 4 times.

12 posted on 11/30/2002 6:29:53 PM PST by TheGrimReaper
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To: Republican_Strategist
Why do we continue to accept this socialist program?

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.

13 posted on 11/30/2002 6:36:06 PM PST by Texas Eagle
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To: Republican_Strategist
" Why do we continue to accept this socialist program?"

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.

14 posted on 11/30/2002 6:47:55 PM PST by spunkets
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To: dcwusmc
Stop the madness!

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!

15 posted on 11/30/2002 6:56:27 PM PST by sarasmom
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To: sarasmom
Stop taking out the "contribution" and let US have it to invest as WE see fit. Let our money help create NEW wealth! Let us enrich ourselves!
16 posted on 11/30/2002 7:05:24 PM PST by dcwusmc
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To: Willie Green
Where is Hillary when we need her?
17 posted on 11/30/2002 7:08:58 PM PST by Mark
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To: Mark
Good point. SHe is the smartest woman in the world and could fix this very quickly. Hillary is wonderful. While she is at it, she could fix all the worlds problems.
I think I am going to get sick after saying that !!!!
18 posted on 11/30/2002 7:15:28 PM PST by Maxy
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To: Republican_Strategist
Because not one single Republican has the cojones to stand up and call it what it is, let alone enough Republicans to sponsor a bill to end this Government sponsored thievery.


19 posted on 11/30/2002 7:19:39 PM PST by Lurker
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To: Lurker
I don't know why we are arguing about it. We all know that as long as the 65 and older population block votes at a higher rate than the rest of us, no Administration in Government will propose, and no Congress ever elected will pass a repeal of Social Security.

What is most likely to happen, is that the government will continue to send out the checks, every month, whether they have the income from taxes to pay for them or not. And they will print dollar bills for the Federal Reserve Banks to issue to cash those checks. The resulting inflation will effectively reduce the benefits, to zero in the end, while the politicians maintain the fiction that the government is meeting its obligations to the retired.

20 posted on 11/30/2002 8:38:46 PM PST by VietVet
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