The Truth About Social Security

by | Nov 4, 2000

Americans, it would seem, have far more attachment to the Social Security system than they have knowledge of it. I say this from observing how easy it is for Democratic politicians to make Americans anxious that Republicans are out to harm the system. That Social Security would again become a political football was as predictable […]

Americans, it would seem, have far more attachment to the Social Security system than they have knowledge of it. I say this from observing how easy it is for Democratic politicians to make Americans anxious that Republicans are out to harm the system. That Social Security would again become a political football was as predictable as sin. Two Clinton terms have revealed a Democratic Party corrupt at the core. With an election heading our way, all the Democrats can do is to stoke fear of the other party.

Fear works because the public is content to be utterly ignorant about the system they so cherish. It is kind of like loving a spouse you know nothing about.

Some might say that is the only way you can love a spouse. It is certainly the only way you can love Social Security. Americans’ ignorance about their socialized old-age retirement system is ruthlessly exploited by Democrats. The combination of fear and ignorance prevents reforms.

The truth of the matter is that Social Security is not a pension system at all. It is a pay-as-you-go intergenerational transfer financed by a payroll tax — a tax on employment. People who are working have 15.3 percent of their pay withheld each month on incomes up to about $76,000. This money becomes Social Security checks for retirees and Medicare.

(There is a pretense that half of Social Security withholding is paid by employers, but they can afford to pay it only by reducing our pay.)

All the talk about protecting the “Social Security surplus” is hogwash. There is not supposed to be any surplus beyond a reserve of several months’ benefits payments in the event recession causes a decline in payroll tax receipts.

If the pay-as-you-go system is building up a surplus, it means current workers are being taxed more than is necessary to pay current benefits. This is wrong. Just as Social Security benefits are not supposed to be paid out of general tax revenues, the Social Security payroll tax is not supposed to be used to finance other government spending.

The solution to the Social Security surplus is not to “protect” it, but to get rid of it by reducing the employment tax. It is nonsensical for a pay-as-you-go system to have a surplus. To comprehend the folly, consider the impossibility of protecting the surplus. Where are the surplus payroll tax revenues to go?

If the surpluses are put into the stock market, as Clinton proposed, an agency of the U.S. government will end up owning the economy. Business itself would end up a political football.

If the surpluses are kept in cash in the Treasury’s vault or in bank deposits, the Treasury, in effect, would be conducting a recessionary open-market operation that drains the economy of cash.

If the surpluses are used to “pay down the national debt,” the government securities market would disappear. The Federal Reserve would have to find a new instrument to use to conduct monetary policy, and investors and pension funds could no longer balance risks with U.S. government bonds.

Moreover, the national debt would not be paid down. It would be bought up by the Social Security Administration. If the surpluses are protected by paying down the national debt, it means that Social Security owns the bonds. When the bonds came due or needed to be turned into cash so that benefits could be paid, the Treasury would have to raise taxes in order to redeem the bonds.

In truth, this is a scheme for financing future Social Security benefits out of general revenues. It is an admission that the pay-as-you-go system has failed.

This admission was already made in the 1980s when a Social Security Commission concocted the accounting fraud known as “the Social Security trust fund” into which surplus payroll tax revenues were to be parked.

The money, of course, was spent. The trust fund holds Treasury IOUs, that is, what it would hold if surplus payroll tax revenues are used to buy up the national debt.

Social Security worked for a long time because of demographics — we had a young population. It is failing now because of demographics — an aging population. In the 1980s, Social Security reneged on its biggest promise by taxing the benefits of retirees with above-average incomes.

Social Security can be saved only by being privatized and converted into a real pension system with individually owned accounts invested in real assets.

Paul Craig Roberts is the John M. Olin Fellow at the Institute for Political Economy, a Senior Research Fellow at the Hoover Institution, Stanford University, and a Research Fellow at the Independent Institute.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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