Get Government Out of Social Security

by | Apr 29, 1999

In response to the growing recognition of the systemic problems with Social Security, President Clinton has suggested strengthening the program by investing over $700 billion of projected surpluses in the stock market. His plan, however — along with similar Republican ones — rests on two false premises. The first is that Social Security is a […]

In response to the growing recognition of the systemic problems with Social Security, President Clinton has suggested strengthening the program by investing over $700 billion of projected surpluses in the stock market. His plan, however — along with similar Republican ones — rests on two false premises. The first is that Social Security is a savings system; the second, that government can be a successful investor.

When Social Security was launched in 1935, its backers promised a fully-funded pension system. The promise was soon breached. The money taken in was used to finance other government expenditures. Ever since, rising payroll taxes have been paid out immediately to an expanding retiree base. In 1945, 20 workers funded each retiree, and the payroll tax rate was 3%; today, there are only 3 workers per retiree, and the tax is at 12.4%. Demographic trends guarantee higher taxes and lower benefits — and eventual bankruptcy.

Social Security is essentially a welfare program, deceptively packaged as an investment plan. Unlike private pension plans, the retirement benefits do not come from money previously saved and invested. Rather, the government simply confiscates a current worker’s earnings in exchange for a promise to repay him with more money taken from a future worker. Over $5 trillion in payroll taxes have gone to the Social Security Administration — not a dollar of it saved. (Had a private pension operated such a “pay-as-you-go” pyramid scheme, its executives would have been jailed for fraud.) As a result, workers do not get a market return on their “investment”; they may even get less money than they paid in.

The unsustainability of Social Security comes from the fact that it is a political, not a financial, program. It is an arm of the government — which openly confesses to the system’s non-value by legally coercing its citizens to participate in it. Yet rather than phasing in a private, voluntary and actuarially sound investment program to replace the present, fraudulent scheme — Clinton wants to enlarge the government’s power.

Under his plan, Washington would on average own 5% of the stock of major companies — more than enough to exert significant control. Corporate decisions will then be made not by objective business criteria, but through political horse-trading. Imagine the lobbying that will take place as Washington accommodates a vast range of activists — from anti-trade protectionists and anti-abortion religionists, to anti-technology environmentalists and anti-business Naderites — seeking to shape a corporation’s policies.

This is not hypothetical. Many of today’s state-run pension funds deliberately take large positions in particular companies in order to influence their decisions. The clearest example is the biggest such system, California’s CaLPERS. Its corporate “guidelines,” for example, insist on greater “diversity” among board members. It urges firms to focus on “non-financial considerations,” rather than on maximizing profits. Its statement on “social responsibility” declares that “actions taken by [CaLPERS] as a share-owner can be instrumental in encouraging action as a responsible corporate citizen by the companies in which [CaLPERS] has invested.”

This “socially responsible” investing translates into “politically correct” investing — which means: “investing” to achieve political, not business, ends. The inevitable effect of this politicization is to undermine investment returns. And, contrary to various self-serving interpretations of investment studies, calculations of total returns for pension funds show that most state-run systems under-perform private ones.

This is the effect Clinton’s plan would produce — magnified many times, once the federal government was in charge of selecting your investment portfolio. Your retirement can become only less secure if Washington is picking the stocks, and influencing corporate board decisions, not by the standard of profitability, but by the standard of political acceptability.

Many commentators endorse Clinton’s proposal as being “pro-market.” It is exactly the opposite. It entrenches the very source of Social Security’s insolvency: government control of our savings. By expanding the role of government, Clinton is taking a bad investment — and making it even worse.

The stock market is not a means of rescuing Social Security. The fraud of a Ponzi “savings” plan cannot be mitigated by the added fraud of government-directed “investment” scheme. Instead, we should demand that Washington return to us, via tax cuts, any temporary “surpluses,” so that we can save and invest our own incomes. Then, we should insist that this dishonest system known as Social Security be gradually dismantled. This is the 65th “working year” of Social Security; its mandatory retirement is wholly justified.

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Dr. Salsman is president of InterMarket Forecasting, Inc., an assistant professor of political economy at Duke University and a senior fellow at the American Institute for Economic Research. Previously he was an economist at Wainwright Economics, Inc. and a banker at the Bank of New York and Citibank. Dr. Salsman has authored three books: Breaking the Banks: Central Banking Problems and Free Banking Solutions (AIER, 1990), Gold and Liberty (AIER, 1995), and The Political Economy of Public Debt: Three Centuries of Theory and Evidence (Edward Elgar Publishing, 2017). In 2021 his fourth book – Where Have all the Capitalist Gone? – will be published by the American Institute for Economic Research. He is also author of a dozen chapters and scores of articles. His work has appeared in the Georgetown Journal of Law and Public Policy, Reason Papers, the Wall Street Journal, the New York Times, Forbes, the Economist, the Financial Post, the Intellectual Activist, and The Objective Standard. Dr. Salsman earned his B.A. in economics from Bowdoin College (1981), his M.A. in economics from New York University (1988), and his Ph.D. in political economy from Duke University (2012). His personal website is richardsalsman.com.

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