Twice the government has argued before the Supreme Court that Social Security is not insurance. In 1960, Health, Education and Welfare Secretary Arthur Sherwood Flemming submitted a brief to the courts stating: "The contribution exacted under the Social Security plan is a true tax. It is not comparable to a premium promising the payment of an annuity commencing at a designated age."
In a ruling that denied a man's property claim to Social Security benefits, the Supreme Court said, "It is apparent that the noncontractual interest of an employee covered by the Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments."
(This first appeared on the predecessor blog on 15 April 2005.)
Many supporters of the current Social Security system claim that it is a form of insurance. (See AARP Bulletin, April 2005, p. 38) I would like to ask these supporters some questions.
(Q1) If SS is a form of insurance, what eventuality does it insure one against? (Q2) If SS is a form of insurance, why are the premiums so large? (Q3) If SS is a form of insurance, why does one receive a payout even if one does not suffer the loss against which one is insured?
To answer (Q1), one might say that SS -- or at least the retirement program thereof -- insures workers against destitution in their old age. But if this is the answer to (Q1), then (Q2) kicks in: why are the premiums for destitution insurance so large? Surely only relatively few become destitute after retirement, and to keep them off of cat food, it is not necessary for everyone to pay huge insurance premiums. If a worker makes 90 K per annum and (with the help of his employer) pays 12.4% for the destitution insurance, then he pays $11,160 per annum for the insurance, which comes to $930 per month. I say that is a lousy deal.
It is a lousy deal even if you make only $45 K a year. Would you pay it you weren't forced to? ($90 K is the 2005, cap, and if you don't see that the worker is shouldering the entire 12.4% burden, then your grip on economic reality is weak indeed.) And don't forget that the 'cap' is not much of a cap inasmuch as it is temporary: it will increase. Indeed, a few short months ago it was $87,900. And not only will the cap move up, the retirement age will most likely be increased. What a deal! And don't forget this. If you are a blue collar worker who puts his body on the line to make a living, then you really get the shaft if the retirement age is increased. A seventy year old professor can function passably well at that age, but not so a seventy year old iron worker high up on a scaffold.
But of course, under the current system, one receives a payout whether or not one ends up destitute. As long as you have contributed for 40 quarters, you receive a payout regardless of how much or how little net worth or income you have at the time the payout begins. But then in what sense is SS insurance? If it is not insurance against destitution, what is it insurance against?
My point is that there is no clear sense in which SS is insurance. It is more like a retirement program. But if so, why aren't there private accounts? You have your very own SS number, but there is no account corresponding to it. What's worse, the SS trust fund has no money in it. What it contains are intragovernmental bonds.
Do you understand what I am saying? The whole thing is a bloody conceptual muddle -- which is part of the reason why there is endless partisan bickering over it. It is not insurance and it is not a retirement program. It is better described as an intergenerational wealth transfer arrangement with the the long-term sustainability of a Ponzi scheme. It takes money from the young who (most of them) need it and gives it to the old who (manyof them) do not need it.
I am not writing this out of self-interest. I've made mine. Any SS I get will be blown on computers, books and mountain bikes. I'm thinking about you young whippersnappers -- you ought to be outraged at this SS ripoff. Admittedly, my motivations are not entirely altruistic: I greatly enjoy thinking, writing, and 'bullshit management.'
The new line from the White House is: no need to fix it [SS] because there is no problem. As Office of Management and Budget Director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.
In an earlier post I pointed out against Robert Samuelson that Social Security (SS), though in ways like a welfare scheme, is not a welfare scheme. Others are chiming in with Samuelson:
Social Security is a welfare program masquerading as an insurance program. People may think of it as forced savings, but that isn't how the program really works.
The trust fund and individual account aspects of Social Security are accounting gimmicks. The payroll taxes we pay in are not really saved for our retirements. They are already paying for the benefits of the current retirees. When we retire, if we are very lucky, we will live off the payroll taxes of the poor working stiffs who remain. The trust fund is stuffed with IOUs; the government has already spent the surpluses. Al Gore's lock box has been picked. Millions continue to draw benefits after they've already gotten back everything they paid in plus interest.
The second paragraph is wholly unexceptionable. But consider the fact that to be eligible for SS benefits, a worker must have completed 40 quarters of employment. That fact alone suffices to make it literally false that SS is a welfare program. Add to it the fact that the amount paid out also reflects how long one has been employed and what one's level of compensation has been. So although it is true that SS is like a welfare program in the ways Samuelson mentions, it is not, strictly speaking, a welfare scheme.
Language matters. Precision matters. And if not here, where? If you say what you know to be false for rhetorical effect then you undermine your credibility among those who you need to persuade. Conservatives don't need to persuade conservatives, and they will not be able to persuade leftists. They must pitch their message to the undecided who, if rational, will be put off by sloppy rhetoric and exaggeration.
I note that W. James Antle, III, the author of the linked article, refers to the SS system as "the liberals' Ponzi scheme." But of course it is not a Ponzi scheme. A Ponzi scheme, by definition, is a scheme set up with the intention of defrauding people for the benefit of those running the scheme. But there is nothing fraudulent about the SS sytem: the intentions behind it are good ones! The SS system is no doubt in dire need of reform if not outright elimination. But no good purpose is achieved by calling it a Ponzi scheme. That's either a lie or an exaggeration. Not good, either way. The most you can say is that it is like a Ponzi scheme in being fiscally unsustainable as currently structured.
Conservative exaggeration is politically foolish. Is it not folly to give ammo to the enemy? Is it not folly to choose a means (exaggeration and distortion) that is not conducive to the end (garnering support among the presently uncommitted)?
Here is how I define a welfare program. First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts.
Part of the problem with the SS system is that no one quite agrees on just what it is or is supposed to be. Some call it a Ponzi scheme. (Steve Forbes, Judge Andrew Napolitano) But obviously it isn't. Ponzi schemes are fraudulent in intent by definition. SS is not. What Napolitano et al. presumably mean is that it like a Ponzi scheme in being unsustainable. But that is not quite right either for it is sustainable if one is willing to do one or more of the following: raise taxes, limit/postpone benefits, reduce spending in other areas, increase the money supply thereby inflating the currency.
To call the SS system a form of welfare as Robert Samuelson does is closer to the mark but still wide of it. How can it be called welfare when the recipients of it (most of them anyway) have paid in a lifetime's worth of contributions? The average hard-working Joe who has contributed all his life via payroll taxes will bristle, and with justification, if he is branded a welfare recipient when he retires. He will insist that he has worked hard and long, and now wants what is due him: the money that was coercively taken from him plus a reasonable return.
So SS is not a welfare scheme either, Samuelson's slanted definition notwithstanding, though it is like one in some respects.
My understanding is that when it was originally set up, in the '30s, SS was envisaged as destitution insurance. The idea was that a decent society does not allow its members to fall into the gutter and eat cat food if through no fault of their own they end up destitute at the end of their lives. But of course if it is destitution insurance, then, like all insurance, the 'premiums' will be small relative to the payout, and only those who end up destitute would get a payout. But the system is nothing like this now. It has transmogrified into a retirement program, but one without individual accounts and the sort of fiscal discipline that they would bring.
So it's not a Ponzi scheme, not a welfare scheme, and not a form of insurance, if these terms are used strictly. (And if you are not using them strictly, then you shouldn't pretend to be contributing to a serious discussion.) Conceptually, SS is a mess, a mess that aids and abets all the unhelpful rhetoric that we hear on all sides.
If memory serves, Speaker Boehner (before he was speaker) called for means-testing. The moral absurdity of that should be evident, especially when espoused by a supposed conservative. You work hard all your life, you play by the rules, defer gratification, exercise the old virtues, and end up well off. And now the government penalizes you for having been self-reliant and productive. Disgusting. You expect that from a liberal. But from a conservative?
As one further indication of the conceptual mess that is the SS system, consider that the FICA tax is called a tax. It is no doubt a coercive taking, but what other kind of tax brings with it an expectation of getting one's money back down the line? Property owners pay real estate taxes to the county. But no one who pays these taxes expects to be able to pay a visit to the Assessor's office sometime in the future to recoup what he has paid. That's not the way a tax works. So why is the FICA tax called a tax? This is just another indication of the conceptual obfuscation built into the SS system.