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There Is No Social Security Santa Claus

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At this annual time of good cheer it might seem Grinch-like to challenge the spirit of Santa Claus, but the reality is that there is no jolly, bearded, rotund man in a red suit who brings us goodies for free. And the Congressional Budget Office has recently reminded us of this in reference to Social Security.

The Congressional Budget Office’s December 2015 report on “Long-Term Projections for Social Security” makes it very clear that the U.S. government’s promise of assuring every American a federally funded retirement pension faces a very uncertain future.

Not that this is new news. Critics of the Social Security system have offered warning signals for decades. But the system’s financial unsustainability is, now, more likely just around the corner.

Financial End of the Line for Social Security

Since 2010, Social Security’s total payments to retirees, survivors of beneficiaries, and to those covered under Disability Insurance benefits have exceeded Social Security taxes collected from the American working population.

Indeed, in the Federal government’s fiscal year that ended on September 30, 2015, Social Security taxes collected amounted to $786 billion, while with outlays to all beneficiaries totaling $877 billions; beneficiary outflows, therefore, exceeding tax inflows by 11.5 percent.

This expenditure was paid out to around 60 million Americans, or nearly 19 percent of the population of the country, and represented an outlay equal to almost 5 percent of the nation’s Gross Domestic Product.

The Congressional Budget Office estimates that in ten years, in 2025, Social Security payments will be 30 percent greater than collected taxes, and 40 percent larger than taxes collected in 2040.

Where did the needed money come from to cover the Social Security system’s 2015 short fall of $91 billion? From interest income that Social Security Administration collected from the U.S. Treasury.

You see, during all the earlier decades from the time that the Social Security system was set up in 1935 until 2010, Social Security taxes collected were greater than benefits paid out. And for all those years, the annual surpluses were “lent” to the rest of the Federal government to help cover parts of the almost unending overall annual budget deficits that Uncle Sam ran nearly year-after-year.

Taxing and Borrowing from Peter to Pay Back Paul

The U.S. Treasury had dropped into the Social Security Administration account a series of IOUs in the form of issued government securities representing promises to pay back that “borrowed” money out of general tax revenues in future years.

In other words, the only way the Federal government can “make good” on Social Security taxes collected in the past and then spent, year-after-year, to partly cover Washington’s budget deficits, is to tax people, again, in the future, to “pay back” taxes previously collected and spent on everything other than Social Security in the past.

But the additional problem in this fiscal merry-go-round is that the Congressional Budget Office has also projected that for the foreseeable future the Federal government will continue, year-after-year, to spend more than it takes in in taxes from all sources. The overall Federal government’s debt will to grow from its current level of $18.5 trillion to more than $24 trillion by 2025

Thus, to pay back what it “owes” to the Social Security Administration, Uncle Sam will have to borrow more money to pay back previously “borrowed” money.

However, by 2029, the Congressional Budget Office estimates that all Social Security revenue sources (including “interest” payments to be received from the U.S. Treasury) will have been exhausted to cover benefit shortfalls. At that point under current law, the Social Security Administration will be limited to then dispersing to eligible beneficiaries only what it annually collects in Social Security taxes.

Tax Well Dries Up, Social Security Benefits Fall

In 2030, Social Security taxes collected will only cover an estimated 71 percent of scheduled payments to those receiving promised monthly Social Security checks of a certain amount. Under the current tax schedules and beneficiary eligibility rules, those beneficiaries, on average, would start being paid 29 percent less than was promised and they had received up until that time.

That is, in 2030 – just 15 years from now if the projections are correct – any $100 of promised monthly Social Security benefits will have to be reduced to $71. That shortfall, under current law, would be nearly 35 percent by 2089; a Social Security recipient, at that time, would only receive about $65 of a promised $100 of monthly benefits, if current tax law and recipient eligibility still applied at that time.

The Social Security Trust Fund has estimated that the present value of this unfunded liability of benefits promised under current legislation relative to anticipated Social Security taxes to be collected amounts to around $24 trillion. (Others have calculated that this unfunded liability is even higher, by at least an additional $10 trillion.)

All of this plays out against the background of an aging population. In 1960, there were over five workers paying Social Security taxes for every one recipient of Social Security benefits. In five year, in 2020, there will be only about 2.5 workers paying into the Social Security system for every recipient. And this trend will continue as the decades progress, with a shrinking work force relative to a retiree segment of the U.S. population.

False Promises and Fiscal Slight-of-Hand

So what is to be done? Inside “the Washington beltway,” the answers usually revolve around the following: (a) increasing Social Security taxes; (b) raising the age eligibilities to receive Social Security benefits; (c) reducing the schedule of Social Security payments to recipients; or (d) some combination of these options.

No doubt, both Democrats and Republicans will continue kicking the can down the road with periodic stopgap fixes of one type or another. But the underlying and fundamental truth of the entire Social Security episode will be ignored and denied.

That truth is that Social Security was never a retirement savings account system in which government compelled people to put a side a part of their income by taxing it away, with the government then serving as the wise and judicious investment steward of their accounts.

It has been an intergenerational redistributive scheme, with the current working age population taxed to pay for the Social Security benefits of those currently retired. The “game” could go on for so long precisely because there were far more working age people being taxed than retired people eligible to receive those benefits.

Plus, the resulting “surpluses” in the Social Security accounts served as a useful slush fund to feed the insatiable appetite of the government to spend far more than it was taking in as taxes from the taxpaying portions of the population.

But as the phrase goes, “the jig is up.” Finally the end of the road of the Social Security system in its existing form is being reached, as the Congressional Budget Office’s recent report is making crystal clear.

The Politics of Paternalism and Dependent Citizens

So really what is to be done? From the perspective of the friend of freedom, the first change must be a fundamental philosophical one. From the start, Social Security has been an immoral system, and one inconsistent with the founding principles upon which the United States was established.

It has violated the principle of individual rights, that is, that each and every individual is sovereign over his own life, liberty and honestly acquired property. Social Security was implemented on the premises that an individual’s income was not his own; and that the government had the right and authority to take a portion of it, and use it in ways that those in political power thought better than those who had peacefully and productively earned that income.

Individuals were too weak-minded, too thoughtless and irrational to reasonably plan for their own old age, it was assumed. Government had to play compulsory financial planner who would determine the retirement prospectus for everyone in the society.

As part of this worldview, if some were considered to have not planned sufficiently for their own old age, it was the duty of others in the society to be taxed to cover the government-established standard and allotment of what a retiree required and should be guaranteed by forcing others in the society to pay the bill.

A Philosophy of Individual Rights and Responsibility

A truly free society is grounded in the idea of individual self-responsibility. One aspect of this is that self-responsibility is an essential ingredient for the nurturing of responsible individuals.

The famous nineteenth century economist and social philosopher, John Stuart Mill, once said that until a people were ready for freedom they could only hope to be ruled by a benevolent dictator. His contemporary, the British historian, Thomas Macaulay, replied that this reminded him of the fool in the story who said he would not go into the water until he knew how to swim.

Individuals are unlikely to learn self-responsibility, including thoughtful planning for their later years, if responsibility for such planning is totally or significantly shifted from the shoulders of the individual to that of the political paternalists. The very taxes that the government extracts from the population for their presumed “golden years” reduces the financial ability of those individuals to have the means and the motive to think ahead for themselves.

But what about those in society who may have failed to have had the means or mindset to sufficiently planned for their later years? In a free society no individual may ethically claim a right to another’s income; but the experience of the nineteenth and early twentieth centuries, especially in America and Great Britain, suggests that in societies in which people are allowed to keep that which they have honestly earned, out of their prosperity there emerges a strong and ethically respectable and responsible sense of benevolence and charity towards others in society that can be more than sufficient to assist those less well-off than others. (See my article, “A World Without the Welfare State”.)

The next step is to admit that there are many in the society who have been taxed for decades, and are now heavily or totally dependent upon what government doles out as monthly Social Security payments.

Sell Off Government Land, Pay Back Plundered Taxes

A few years ago, I looked into the market value of land owned by the Federal government in the United States. The territory of the United States totals about 2.3 trillion acres of land, out of which the U.S. government owns and manages about 640 billion acres—or around 28 percent of all the land in the country.

Over a reasonably short period, say, five years, a vast majority of this land could be sold at public auction, with the proceeds being used to pay back what has been taxed from the American citizenry in the form of Social Security levies.

Just how much revenue might be available from these land sales? Even with admitting the fluctuations in land, resource and raw material values over the last few years due to the “great recession,” based on a variety of government departments, bureaus, and agencies responsible for control and management of these lands, federal land and the mineral reserves may have, in 2015, an estimated total value of about $5.5 trillion.

This includes the mineral reserves of copper, nickel, gold, zinc, platinum, lead and silver. In addition, there are 257 million acres of grazing land under Federal control and 250 million acres of timberland.

The revenues from the sales would be disbursed beginning with the oldest groups, starting with retirees, until as many Social Security beneficiaries and taxpayers as possible had their wealth returned to them. As each group was being paid back, Social Security taxes on workers would be commensurately reduced, leaving them free to plan more of their own retirement. At the end of five years, all Social Security legislation would be repealed.

It is no doubt that at the end of this sale of government-owned land in the United States there would still remain current working-age taxpayers into the Social Security system who will not be fully paid back all that the Federal government had taken from them, and some who may not be paid back at all.

But this will merely be a demonstration of the false promises and unrecoverable costs of one central part of the welfare state. One compensation, however, will be the end to Social Security taxes, so all those still in their working-age periods of life will then have this portion of their income once again to use and invest as they choose to plan for their own future as they think and decide best.

Additional Benefits of Privatized Government Lands

An additional benefit of this proposal for winding down and abolishing the Social Security system is that it will, at the same time, transfer a vast amount of productive and valuable land and resources to the private sector. Over time, they will be applied and used for market-oriented profitable uses that will increase the wealth and prosperity of multitudes tens of millions of people in the society as producers and consumers.

This will help to reduce poverty, increase the standards and quality of life for virtually all Americans over time, and provide people will the financial and material wherewithal to better plan and prepare for their own future and that of their families. At the same time, this will also generate the greater wealth out of which those who choose to practice such benevolence as conscience and ethics leads them to, to assist those who may still need a “helping hand.”

Thus, the infamous episode of false benevolence and compulsory paternalism known as Social Security, finally, maybe brought to an end.

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    Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).