The History, Economics, and Philosophy of Social Security, The Atlas Society | Ayn Rand, Objectivism, Atlas Shrugged
HomeThe History, Economics, and Philosophy of Social SecurityEducationAtlas University
No items found.
The History, Economics, and Philosophy of Social Security

The History, Economics, and Philosophy of Social Security

10 Mins
|
September 15, 2010

March 2005 -- Editor's Note: The following is an excerpt from David Kelley's book A Life of One's Own: Individual Rights and the Welfare State. [Washington, D.C.: Cato Institute, 1998]. Figures and projections cited in the text may be out of date. This excerpt was published in the March 2005 issue of The New Individualist.

In the previous chapter, we traced the ill effects of bureaucracy and monopolization on poverty programs. They have equally bad effects on social insurance, and there is no better example than Social Security, the largest single program of the welfare state. In 1996 it consumed $354 billion, nearly a quarter of all federal expenditures. Overall, it currently provides about half of all retirement income in the country, although the proportion varies a great deal by income levels: those in the lowest 20 percent of the income distribution are dependent on Social Security for the bulk of their income, while those in the top quintile depend more on private pensions and income from savings. Because of its size, and because of the way the program is structured, Social Security is the most significant embodiment of the idea that "we are all in this together." And it is facing a crisis that will come to a head over the next two decades, a crisis rooted in its history and in its nature as a system of collective provision for retirement.

When it was created in 1935, the Social Security program was intended as a welfare program, to alleviate poverty among the elderly during the Depression. It was designed, however, not as a means-tested poverty program, but as a universal scheme of social insurance. There were numerous reasons for this approach, all of them political. One was to help the elderly poor avoid the stigma of welfare, disguising their dependence within a system of universal dependence on government. One of the authors of the Social Security Act, Senator Walter F. George (Democrat of Georgia), asserted, "Social security is not a handout; it is not charity; it is not relief.... As an earned right, the individual is eligible to receive his benefit in dignity and self-respect."

Another rationale was paternalistic: the payroll tax introduced to fund the system was a form of enforced "savings," justified by the assumption that even middle-class people who earned enough to provide for their own retirement were too short-sighted to do so.

A third major reason was to ensure political support for the system by giving the vast majority a vested interest in it. As Wilbur Cohen put it many years later, "[A] program that is only for the poor—one that has nothing in it for the middle income and upper income—is, in the long run, a program the American public won't support." As an added inducement for widespread political support, the architects of the system created a sense of entitlement by describing payroll taxes as "contributions" workers make to their own retirement accounts. In fact, there are no such accounts, and no economic relationship between the taxes one pays and the benefits one receives. But as Franklin Roosevelt explained to an advisor:

I guess you're right on the economics, but those taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions.... With those taxes in there, no damn politician can ever scrap my Social Security program.

Roosevelt was certainly astute in assessing political reality. The system he devised has earned a reputation as a "third rail," something politicians dare not touch for fear that voters will cast them out into the wilderness of private life. But political reality is a function of people's beliefs and expectations. Beyond those beliefs and expectations is actual reality—the reality of facts, of numbers, of causes and effects. And that reality is catching up with the system. To understand why and how, one must understand the ways in which Social Security differs from a genuine form of saving for retirement.

In a private pension plan, individuals save a portion of their earnings in a retirement account where the money is invested and earns interest (or capital gains if it is invested in stocks). For most people, the investment gains are a crucial part of providing for future income. Suppose a person saves $200 per month from age thirty to age sixty-five. (Most people have more than this taken in Social Security taxes.) During that period he will put away a total of $84,000. But if the money in the account earns 8 percent annually, a conservative expectation for a fund invested in a mix of stocks and bonds, it will grow to more than $450,000 by the time he retires, enough to buy an annuity paying him about $2,200 per month for the rest of his life. If his money earned 12 percent, he would retire with $1.3 million—probably enough to live on the income alone, without touching the principal.

This is the reality that Social Security mimics. Payroll taxes are described as "contributions" paid into a "trust fund" from which "earned" benefits are paid out on retirement. But the description is misleading, if not an outright lie. The taxes paid by current workers are not actually saved and invested; they are used to pay benefits to current retirees. This "pay-as-you-go" system was adopted at the outset so that retired people at that time could be given benefits even though they had not been taxed for most of their working years. Today, Social Security benefits are earned only in the vague sense that retirees once paid something into the system and are now getting something out of it. But those benefits are not earned in the sense of flowing from investment returns over a working lifetime. They flow from the government's ability to take a portion of current workers' income by force.

Thus, the Social Security trust fund is not like a private mutual fund, which contains all the money one has put into it, plus investment returns. The trust fund is more like a checking account: money flows in from taxes, money flows out as benefits, and the government tries to keep a positive balance. Currently, the balance is quite large, and growing, due to tax increases in the 1980s that were intended to build up the fund to help pay for the coming retirement of the Baby Boom generation. Nevertheless, it is only a reserve fund, with enough money in it currently to cover just over a year and a half of benefits. Social Security is still a pay-as-you-go system, a transfer of money from one generation to another.

And that is the cause of the coming crisis. The generation of retirees keeps getting larger in relation to the number of workers supporting it . In 1950, there were 16 workers for every retired person. That ratio is currently 3.3 and falling. The benefits that Social Security must pay out will soon begin rising at an accelerating pace, much faster than the revenues it receives from the payroll tax, as the Baby Boom generation starts retiring. If we look at Social Security finances in isolation from the rest of the federal government, two dates define the scope of the problem. In 2012, tax revenues will fall below expenditures. At that point, Social Security will have to start drawing down the trust fund to pay benefits. In 2029, the trust fund will be exhausted, and some new source of money will have to be found.

But the problem is even worse than that, because we cannot really treat Social Security finances in isolation. By law, the trust fund is invested entirely in government bonds. One part of the government, the Treasury Department, takes money from another branch, the Social Security Administration, and promises to pay it back with interest. The government is borrowing from itself. And what it does with the borrowed money is spend it—on the military and the courts; on the salaries of government officials; on subsidies to businesses and artists; on welfare checks. The trust fund has not been invested in income-producing enterprises from which the loan can be paid back. The trust fund is not creating wealth from which it can draw in future years. It has been lent to the federal government to conduct its other operations.

In fundamental terms, therefore, what is happening is that payroll taxes currently fund retirement benefits with some money left over to pay for the other functions of government. As this remainder declines, the government will have to increase taxes, or find some other way to borrow money, or cut other spending. What will happen in 2012 is simply that payroll taxes will no longer cover even retirement benefits, so the government will have to continue increasing other taxes, finding other ways to borrow money, or cutting other programs, in order to pay the benefits it has promised to retired people. What will happen in 2029 is not that any real fund will be used up, but merely that the amount of new money needed to pay benefits will be very large.

In that year, when those who are now in their thirties begin retiring, there will be fewer than two workers paying taxes to support each retiree. If taxes are kept at current levels, they will fall short of benefits by $800 billion. To cover benefits, payroll taxes would have to rise from 12.4 percent currently to about 17 percent. The more likely scenario is that benefits would be cut substantially. Altogether, during the period 2010-2060, when Baby Boomers will be collecting benefits, only about half of the benefits promised under current law can be paid by taxes at current levels.

Even if, by some miracle, no further changes were made in tax and benefit formulas, a young person entering the workforce today and spending his career under the current formulas will get a pretty dismal "return" on his payroll tax "contributions." William Shipman recently calculated that a low-wage worker born in 1970 can expect a monthly Social Security check of $799 (in 1997 dollars). If his payroll taxes were invested instead in a mix of stocks and bonds, he would have enough at retirement to buy an annuity paying $1,431 per month. For an average-wage worker, the difference is even more striking: a Social Security pension of $1,248 versus a private annuity paying $2,863 monthly.

Thus, the current problems of Social Security, and the much worse problems that lie ahead, are the result of two politically inspired decisions. The first was to address the problem of old-age poverty through social insurance rather than a poverty program. This guaranteed that any problem in the finances of the system would involve nearly everyone and thus constitute a profound social crisis. As Jane Jacobs put it, when mistakes are made, they're made everywhere. The second decision was to adopt a pay-as-you-go method of financing, which guaranteed that there would indeed be financial problems.

These political decisions, in turn, were rationalized by the appeal to solidarity, whose philosophical meaning we have explored in this chapter. The very structure of Social Security assumes that individuals in different generations are bound up in one community and have unchosen obligations to each other, akin to the obligations among parents and children. It assumes that people have positive obligations to support the elderly and positive rights to be supported in their own retirement years, not because of voluntary contracts they have undertaken, but simply because they belong to the same society. It assumes that decisions about basic security in old age can be made collectively, for everyone in society, on the basis of a rationally arrived-at consensus. It assumes that wealth is a collective product that can fairly be redistributed among individuals. And it assumes that the individual is not fully an end in himself, but that other members of society own a portion of his productive ability and may use and dispose of that portion as they wish.

None of these assumptions can be justified philosophically, at the level of moral principle. And the problems of Social Security are a practical demonstration of how thoroughly these assumptions clash with reality.

The pay-as-you-go method is an evasion of economic reality. The values that Social Security is intended to provide—income during retirement and protection against the economic risk of disability during our working years—require that money set aside now be invested in some productive enterprise creating wealth. The government has assumed that its ability to tax future wealth is as secure a foundation for future income as the actual creation of such wealth. But this is an illusion, since the wealth may not be there to be taxed. If we treated individuals as ends in themselves, not means to the ends of others, if we permitted them to function as self-owners and self-movers, no one would be able to use the force of government to transfer wealth from others to himself. He could provide for future income and current insurance only by saving and investing, and the nation's retirement system would not be facing a crisis.

This crisis could have been foreseen long ago, and was foreseen by some commentators. It is inherent in the nature of a pay-as-you-go system with changing demographics. It is also unnecessary. A private system of individual retirement accounts, invested in productive enterprises, is not subject to any of the problems facing Social Security. Such private systems have been adopted in varying degrees by other countries who are more far-sighted than we, and who have faced the problem of a growing elderly population sooner than we have. To the extent that the retirement system is privatized, it will have three essential features that Social Security lacks, three features essential to a genuine society of contract.

1) Individuals and families would be responsible for their own future. Those who save money in a private system will have a retirement income, those who do not will not. The frugal will enjoy the fruits of their own efforts; the improvident will suffer the consequences of their own irresponsibility. They will have to rely on charity. That's a hard principle to adopt, and it's harder still to practice. But surely it is a gross travesty of justice to serve the interests of the irresponsible by locking everyone else into a system that sacrifices their well-being.

Responsibility is a matter of cause and effect: the actions one takes now, or fails to take, have consequences for the future. In the current system, there is only the weakest of connections between cause and effect. At the basic level, of course, there is no connection whatever, not in real economic terms. The taxes one pays are not saved and invested for one's own retirement. Each generation is taxed to pay for its elders, in the hope that future generations will submit to taxation for their sake.

Social Security benefit formulas do attempt to create, through law, a correlation between monthly retirement benefits and the wages earned (and thus the taxes paid) during one's working years. But the correlation is a weak one. Among those retiring at a given time, the benefit formulas are skewed to favor low-income workers, who thus receive a higher "return" on their taxes. And the formulas apply only to thirty-five years of earnings, so that taxes paid during any additional years of work yield no return whatever.

There is an even greater variation, however, among people retiring at different points in time. Over the years, Congress has repeatedly increased payroll taxes. It has also repeatedly changed benefits—sometimes increasing them, sometimes trimming them back. As a result, people of different ages will have paid very different amounts of tax by the time they retire and can expect different amounts in total benefits. Over the course of Social Security's history, and for the foreseeable future, the trend has been downward: the later you were born, the lower the return you can expect on your tax dollars. During the early years, when all workers were paying into the system but relatively few retirees qualified for benefits, taxes could be kept low and retirees received much more than they paid. But as the system matured, this windfall disappeared. At the same time, longer life spans and demographic shifts have dramatically increased the burden that retirement benefits place on workers. The combined payroll tax on employees and employers has increased from 2 percent of the first $3,000 of income to 10.7 percent of the first $65,400. In real dollars, taxes increased 900 percent between 1951 and 1995, while benefits increased 188 percent. Today, a couple who are seventy-nine years old and earned the average income during their working years can expect a 17 percent return on their taxes, while an identical couple aged sixty-four will get a return of only 2 percent, far below what private savings would yield.

2) Along with real responsibility for their futures, a private retirement system would give individuals choice, control, and flexibility. Under Social Security, a person begins to "save" for his retirement the moment he starts working, no matter how low a wage he earns. He puts aside the same percentage of his wages every week for the rest of his career, regardless of the financial ups and downs he experiences; and he puts aside exactly the same percentage as everyone else, regardless of differences in circumstances. He is expected to retire at the same age, and to draw a pension defined by the same formula. He cannot opt out of the system, nor change its terms. In no other part of their lives are people in a free society so regimented.

In a private, voluntary system, people would be as free to choose how to provide for retirement as they are to choose whom to marry, whether to have children, where to go on vacation, which baseball team to root for. They would be free to decide when to start saving and how much to put aside in each period of their working lives. One person will start early, to watch the miracle of compound interest work for him; another will put off saving to his middle years, when his income is higher, and meanwhile invest in his education. People would be free to decide what level of income they want in retirement. One person dreams of traveling and saves for the substantial income required; another wants a quieter life requiring less money. People would be free to decide how to invest their savings, according to the level of risk they are comfortable with and the amount of time they want to spend managing their investments. And they would be free to decide how to cash in on their savings when they do retire. One couple wants to live off the interest and leave the principal to their children; another couple, childless, choose to consume the principal as well and buy an annuity. Why should we not be free to make these decisions about how to use the tenth of our income that the government now takes to make them for us?

3) A private system, finally, would give people the security of ownership. Their retirement funds would be fully and exclusively their property. The money they saved would remain theirs, rather than flowing anonymously into the public coffers, with only a tentative promise to show for it.

This is the cruelest part of the illusion that the architects of Social Security created—the illusion that it is merely a government-run savings program, where we "contribute" to accounts that will pay out benefits later. There are no such accounts, nor any property or contractual rights to benefits. As Abram de Swaan observes, social security entitlements represent a claim on "transfer capital," the pool of capital that government transfers from taxpayers to beneficiaries. But such entitlements do not constitute genuine property rights.

The participants in social security cannot dispose of their share in the transfer capital: transfer property is not transferable. They can exert a measure of control only in their capacity of citizens or union members, voters who—in theory—can influence decision-making on social-security taxes, benefits and conditions of payment.

Their diluted control is like that of the shareholders in a corporation. But "shares can be freely bought or sold, savings placed or withdrawn, but the entitlement to social security is not for sale: it constitutes an inalienable right—and an inescapable duty."

The Supreme Court ruled that workers do not have accrued property rights either to the amounts they have paid into the system or to the legislated benefits. Its reasoning was that the notion of payroll taxes as contributions to one's own retirement account can't be taken literally.

Each worker's benefits, though flowing from the contributions he made to the national economy while actively employed, are not dependent on the degree to which he was called upon to support the system by taxation. It is apparent that the noncontractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.

The Court upheld the provision of the Social Security Act stating, "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." The government, in other words, can change the terms of the deal at any time, regardless of how much money one has paid in, and it has done so repeatedly. Tax and benefit levels have frequently been changed. The government has unilaterally decided to tax the benefits of retirees, to eliminate student benefits for which deceased parents had "paid," and to increase the retirement age. No private pension fund or insurance company would be allowed such legerdemain; it would be prosecuted for fraud. The great "social contract" among generations that Social Security is said to represent involves, at its core, the suspension of genuine contractual rights.

In response to questions about the future cost of the Clinton health-care proposals, Hillary Rodham Clinton said, "When Franklin Roosevelt proposed Social Security, he didn't go out selling it with actuarial tables.... He basically said, 'Look, here's the deal: you pay; you're taken care of; you have social security in your old age.'" This is precisely the problem with Social Security, as it would have been a problem with the Clinton health-care plan: the blithe indifference to economic reality, on the assumption that "we're all in this together." And, conversely, the problem with that appeal to solidarity as a moral premise is that it encourages such indifference.

1. "Summary of the 1997 Annual Social Security and Medicare Trust Fund Reports," Social Security Bulletin, vol. 60, no. 2, 1997. The figure includes pension benefits paid by the Old-Age and Survivors Insurance Trust Fund and disability payments from the Disability Insurance Trust Fund. Figures used in this section refer to the combination of these programs (OASDI) and do not include Medicare benefits.

2. Neil Gilbert, Welfare Justice (New Haven, Conn.: Yale University Press, 1995), pp. 157-60. See also Michael Tanner, "Privatizing Social Security: A Big Boost for the Poor," Cato Institute Social Security Privatization Paper no. 4 (Washington, D.C.: Cato Institute, July 26, 1996).

3. Congressional Record, 84th Cong., 2d sess., 1956, p. 15110.

4. Quoted in C. Eugene Steuerle and Jon M. Bakija, Retooling Social Security for the 21st Century (Washington, D.C.: Urban Institute Press, 1994), p. 26.

5. "In posters, press releases, speeches, and newsreels prepared by social security officials, American workers were assured that the taxes they were paying were like insurance premiums. Having a social security card meant that one had opened 'an insurance account' with the government." W. Andrew Achenbaum, Social Security: Visions and Revisions (Cambridge: Cambridge University Press, 1986), p. 28.

6. Quoted in Arthur Schlesinger, The Coming of the New Deal (Boston: Houghton-Mifflin, 1958), pp. 308-9.

7. At the end of 1996, the Old-Age and Survivors Insurance and the Disability Insurance Trust Funds combined held $577 billion. Benefits paid from the trusts during 1996 were $354 billion.

8. "Summary of the 1997 Annual Social Security and Medicare Trust Fund Reports."

9. "Summary of the 1997 Annual Social Security and Medicare Trust Fund Reports," Social Security Bulletin, vol. 60, no. 2 (1997): 61, chart 3.

10. A. Haeworth Robertson, The Big Lie: What Every Baby Boomer Should Know About Social Security and Medicare (Washington, D.C.: Retirement Policy Institute, 1997), pp. 40-1.

11. Melissa Hieger and William Shipman, "Common Objections to a Market-Based Social Security System: A Response," Cato Institute Social Security Paper no. 10 (Washington, D.C.: Cato Institute, July 22, 1997), Appendix B.

12. For example, Peter Ferrara, Social Security: The Inherent Contradiction (San Francisco: Cato Institute, 1980); and A. Haeworth Robertson, The Coming Revolution in Social Security (Reston, Va.: Reston Publishing, 1981).

13. Chile's privatization of its pension system is one of the most successful and has served as a model for other countries. See José Piñera, "Empowering Workers: The Privatization of Social Security in Chile," Cato's Letter no. 10 (Washington, D.C.: Cato Institute, 1996).

14. William Shipman, "Retiring with Dignity: Social Security vs. Private Markets," Cato Institute Social Security Paper no. 2 (Washington, D.C.: Cato Institute, August 14, 1995).

15. Mark Weinberger, "Social Security: Facing the Facts," Cato Institute Social Security Paper no. 3 (Washington, D.C.: Cato Institute, April 10, 1996), p. 8. See also Philip Harmelink and Janet Speyer, "Social Security: Rates of Return and the Fairness of Benefits," Cato Journal, vol. 14, no. 1, Spring/Summer 1994, pp. 37-54.

16. Abram de Swaan, In Care of the State: Health Care, Education and Welfare in Europe and the USA in the Modern Era (New York: Oxford, 1988), p. 166.

17. Nestor v. Fleming, 363 US 609-10 (1960).

18. Quoted in Charles Oliver, "The Death of Social Security," Investor's Business Daily, October 20, 1994.

David Kelley

ABOUT THE AUTHOR:

David Kelley

David Kelley is the founder of The Atlas Society. A professional philosopher, teacher, and best-selling author, he has been a leading proponent of Objectivism for more than 25 years.

David Kelley, Ph.D.
About the author:
David Kelley, Ph.D.

David Kelley gründete 1990 die Atlas Society (TAS) und war bis 2016 als Geschäftsführer tätig. Darüber hinaus war er als Chief Intellectual Officer für die Überwachung der von der Organisation produzierten Inhalte verantwortlich: Artikel, Videos, Vorträge auf Konferenzen usw.. Er zog sich 2018 von TAS zurück, ist weiterhin in TAS-Projekten aktiv und ist weiterhin Mitglied des Kuratoriums.

Kelley ist ein professioneller Philosoph, Lehrer und Autor. Nach seinem Doktortitel in Philosophie an der Princeton University im Jahr 1975 trat er der Philosophischen Abteilung des Vassar College bei, wo er eine Vielzahl von Kursen auf allen Ebenen unterrichtete. Er unterrichtete auch Philosophie an der Brandeis University und hielt häufig Vorlesungen an anderen Universitäten.

Kelleys philosophische Schriften umfassen Originalwerke in Ethik, Erkenntnistheorie und Politik, von denen viele objektivistische Ideen in neuer Tiefe und in neuen Richtungen entwickeln. Er ist der Autor von Der Beweis der Sinne, eine Abhandlung in Erkenntnistheorie; Wahrheit und Toleranz im Objektivismus, zu Themen der objektivistischen Bewegung; Unrobuster Individualismus: Die egoistische Grundlage von Wohlwollen; und Die Kunst des Denkens, ein weit verbreitetes Lehrbuch für einführende Logik, jetzt in der 5. Auflage.

Kelley hat Vorträge gehalten und zu einer Vielzahl politischer und kultureller Themen veröffentlicht. Seine Artikel zu sozialen Fragen und öffentlicher Ordnung erschienen in Harpers, The Sciences, Reason, Harvard Business Review, The Freeman, Aus Prinzip, und anderswo. In den 1980er Jahren schrieb er häufig für Barrons Finanz- und Wirtschaftsmagazin zu Themen wie Egalitarismus, Einwanderung, Mindestlohngesetzen und Sozialversicherung.

Sein Buch Ein Eigenleben: Individuelle Rechte und der Wohlfahrtsstaat ist eine Kritik der moralischen Prämissen des Wohlfahrtsstaates und die Verteidigung privater Alternativen, die individuelle Autonomie, Verantwortung und Würde wahren. Sein Auftritt in John Stossels ABC/TV-Special „Greed“ im Jahr 1998 löste eine landesweite Debatte über die Ethik des Kapitalismus aus.

Als international anerkannter Experte für Objektivismus hielt er zahlreiche Vorträge über Ayn Rand, ihre Ideen und Werke. Er war Berater bei der Verfilmung von Atlas zuckte mit den Achseln, und Herausgeber von Atlas Shrugged: Der Roman, die Filme, die Philosophie.

 

Hauptwerk (ausgewählt):

Konzepte und Naturen: Ein Kommentar zu Die realistische Wende (von Douglas B. Rasmussen und Douglas J. Den Uyl),“ Reason Papers 42, Nr. 1, (Sommer 2021); Diese Rezension eines kürzlich erschienenen Buches beinhaltet einen tiefen Einblick in die Ontologie und Erkenntnistheorie von Konzepten.

Die Grundlagen des Wissens. Sechs Vorlesungen zur objektivistischen Erkenntnistheorie.

Das Primat der Existenz“ und“Die Erkenntnistheorie der Wahrnehmung„, Die Jefferson School, San Diego, Juli 1985

Universalien und Induktion„, zwei Vorträge auf den GKRH-Konferenzen, Dallas und Ann Arbor, März 1989

Skepsis„, Universität York, Toronto, 1987

Die Natur des freien Willens„, zwei Vorträge am Portland Institute, Oktober 1986

Die Partei der Moderne„, Cato Policy Report, Mai/Juni 2003; und Navigator, Nov. 2003; Ein vielzitierter Artikel über die kulturellen Unterschiede zwischen vormodernen, modernen (Aufklärung) und postmodernen Auffassungen.

Ich muss nicht„(IOS-Journal, Band 6, Nummer 1, April 1996) und“Ich kann und ich werde“ (Der neue Individualist, Herbst/Winter 2011); Begleitartikel darüber, wie wir die Kontrolle, die wir über unser Leben als Individuen haben, Wirklichkeit werden lassen.

Wohlfahrtsstaat