In his recent essay in National Review magazine titled "Social Security Alert" senior editor Ramesh Ponnuru noted that Republican presidential contenders Rick Perry and Mitt Romney debated the merits of whether or not Social Security should ever have been established…Perry saying nay and Romney saying yea. His discussion of the structure of the program during the Great Depression and its impact on American society over the decades was a fine primer for those who think very little about it other than what one is likely to receive in benefits upon retirement. However, many of us readers of National Review have thought quite a lot about it, and I, for one, was somewhat disappointed that Mr. Ponnuru’s piece was more of an appetizer than a main course. Not that there was one untrue thing in the entire essay. But mark his concluding remarks that reform is necessary and that "moderating the growth of Social Security benefits…is a matter of some urgency…". This is like saying that someone really should have thought about designing watertight bulkheads for the Titanic. Come on, Ramesh; give it to us straight. We can take it.
The truth is that Social Security is one of the most corrupting and disastrous programs ever sold to the American people. Let me fast forward to the punch line—Social Security is not sustainable, is an unjust welfare program masquerading as a retirement program, and it may well bankrupt the nation. How’s that for a program that Mr. Ponnuru correctly states "remains one of the most popular federal programs, and polls consistently find that voters want to prevent benefits from being cut."?
Social Security was sold as a lie. While the government told the American people that it was a true annuity program just like one that could be purchased in the private insurance market, it told Congress that the program was nothing more than a welfare program, like many others that had passed Supreme Court muster. Well, we are long past worrying that an independent judiciary might actually read a little document called the Constitution and prevent our all-mighty government from doing whatever it wants, so lets look at what the program is, what it is not, and what the future holds.
Why Social Security Is NOT Insurance
The government was correct in its testimony to Congress in the 1930s that Social Security is NOT an insurance program. It is nothing more than a redistribution scheme, funneling current taxes from workers to retirees. Anything left over goes into the Social Security Trust Fund. But the trust fund holds no profitably invested assets out of which one would receive dividends. It merely holds general obligation bonds of the federal government. But a government bond is much different than a bond issued by a private company. The proceeds of the government bond have been spent, with no means of repayment other than by future taxes; whereas, the proceeds of a private bond are invested in productive assets that generate a revenue stream sufficient to repay the bond. Thusly, Social Security cannot be privatized: there is nothing to privatize! If Social Security did allow workers to invest some of their social security taxes in the private economy, the Trust Fund would go broke much sooner, because expenditures would outstrip revenue to a much greater degree than currently projected. Just think of it this way…if ALL Social Security taxes were invested in the private economy in order to produce a stream of revenue for later beneficiaries, from what source would current beneficiaries receive their benefits once the Trust Fund has been exhausted?
What the Future Holds
Since Social Security taxes were spent rather than invested, the capital of the nation has not been structured properly to support future beneficiaries. In an unhampered market economy workers save during their productive years and invest that savings, via banks and the stock market, in long term investments. Since workers curtail spending, there truly are more funds for financing this longer-term production structure. But the workers’ Social Security taxes did not fund productive investment. They were spent immediately by current beneficiaries. Mr. Ponnuru refers to the work of Harvard economist Martin Feldstein, whom no one would confuse with an Austrian economist, who contends that the capital stock of the nation—that is, the plants and factories that make the stuff that we want to buy—has been diminished by the program. There has been too much spending and too little savings to provide the real goods that workers will demand upon retirement. We have been eating our seed corn, so to speak, and we all are the poorer for it.
And things will only get worse. When the Trust Fund is exhausted there are only two choices—cut benefits or increases taxes (or some combination of the two). Oh, yes, I forgot the third choice—print more money and pretend that the government is honoring its obligations. That’s what it is doing now via its QE1, QE2, and QE3 programs for bailing out Wall Street and the auto companies, funding national health insurance, and paying for wars around the world so numerous that I have lost count. No doubt this will be the preferred method for meeting the Social Security shortfall, too. Of course none of these smoke and mirror proposals are real solutions. Perry is right. Social Security should never have been established, and the sooner we end the sorry program the better. Social Security cannot be reformed; it can only be terminated. The only truly sustainable retirement program is the one that each of us provides for himself.