Carte Blanche: Social Security And Reality

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At a time when activists are so concerned about sustainability, it is ironic that we never hear of the pure mathematical unsustainability of government entitlement programs. This is not usustainablilty by some abstract theory in order to advance a political doctrine, but raw accounting and reality. The political establishments of conservatism and progressivism have pushed their battles to the implementation of programs like “Medicare for All” when we are not even financially secure in our current state. Social Security has made a brief appearance in the news with its recent increase in benefits to associate with the rising cost of living, by 1.8%. From 1982 to 2018, the program managed to balance net income and benefits at about $1 trillion, until this year, when expenses will exceed revenue. This will only continue with benefits increases scheduled every year. If nothing changes, Social Security will be insolvent by about 2035. Facing the realities of Social Security has unfortunately become extremely unpopular in society.

From its inception, Social Security was designed to intertwine generations and with the cronyist objective of placing a burden on smaller businesses. Before the 1935 legislation, about 15 percent of employees had employer-sponsored pension plans, generally from the largest companies. To compel smaller businesses to fund a universal pension plan was a dream for these companies. As Murray Rothbard writes in The Progressive Era , “the bigger businesses almost all backed the Social Security scheme to the hilt, while it was attacked by such associations of small businesses as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers.” President Roosevelt signed the Social Security Act when the average life expectancy was sixty-one. At the time, ten workers paid taxes for one retiree. Throughout the history of the program, government has claimed that it is and is not an insurance program on various occasions depending on financial convenience at the time. History also shows that since 1935, politicians have used Social Security to easily expand benefits and buy the votes of the elderly. Benefits were expanded in 1939 and 1956 initially. Conveniently after the U.S. completely left the gold standard in 1971, Social Security benefits were adjusted to rise with the cost of living annually, beginning in 1972. With the rapid increase in the number of retirees and expenditures, Congress slowed growth of benefits in 1977 and nearly doubled payroll taxes. The program did develop a well-known trust fund with a surplus in revenues, which was completely borrowed by the rest of the federal government and remains in treasury bonds. Continuing to 2018, benefits continued to increase with the cost of living up to the present date.

In the current state of public opinion, admitting the reality of the program is political suicide. Nearly all Democrats and Republicans will never touch the current structure. Progressives are deluded with the Keynesian pseudo-science that says “deficits don’t matter” and the nonsense that Social Security cannot impact the federal deficit in the first place. Conservatives lecture the “deficit-hawks” to get on board with reality and embrace the end of fiscal responsibility. However, the facts show that ignoring the problem will lead to an outcome much worse than that of reducing and ending it in the present.

The financial situation of Social Security has changed dramatically over time, painting an entirely different picture from 1935. The main factor is the extent to which it expanded in beneficiaries to unsustainable levels. In 1965, the program paid 20 million recipients and increased to 62 million in 2015. The danger of this increase is that it is not sustained by a proper ratio of worker contributions. In 1940, the ratio of covered workers contributing to payroll taxes to recipients was 159.4.  In 2013, the ratio was down to 2.8. This increase in recipients directly skyrockets the required expenditures over time. From 1987 to 2017, spending on Social Security increased 214%. During World War II it compromised 0.22% of the federal budget, while it made up 24% in 2013. Despite the massive expansions, the Social Security budget has been balanced from 1982-2018 with an increased tax burden on workers and employers, which must also continuously grow. Workers now pay 6.2% which is matched by 6.2% from the employers. This tax was 1% in 1935. The Cost of Living Adjustment (COLA), increases benefits every year. This increase was 2.8% in 2019, creating an unbalanced budget, which will require payments to be pulled out of the trust fund or taxes to be increased, leaving a limited future either way.

Much worse than the current spending levels of Social Security are unfunded liabilities. This is a calculated figure that the federal government has promised to pay out to recipients in the future. This number is $19.7 trillion for Social Security, $30.4 trillion for Medicare, and $124 trillion for the entire U.S. budget. Some calculations have projecting this much higher. The increasing cost of the program creates a deal that is progressively worse off for each generation of retirees. When the program was new, people born in 1900 received about seven times more in taxes than they paid in. As JustFacts calculates ,“For workers who earned average wages and retired at the age of 65 in 1980, it took 2.8 years of receiving old-age benefits to recover the value of their payroll taxes (including interest). For workers who retired in 2003, it will take 17.4 years. For workers who will retire in 2020, it will take 21.6 years. This assumes Social Security will have enough money to pay scheduled benefits for this entire period, which it is not projected to have.” Unfortunately, the backup “trust fund” is composed of nothing but treasury bonds of $2.9 trillion. Although the bonds are redeemable on demand, they are nowhere near sufficient to fund the program. With no significant action from Congress, Social Security is unsustainable.

There is an overwhelming myth among the establishment that Social Security cannot add to the federal deficit. They say this because it is convenient rhetoric and because by law, the Social Security budget is separate from the federal budget. However, if federal law says that 2+2=5, it does not become true, does it? Just because the program has a separate budget that often displays a net balance does not make it excused from remaining apart of all federal revenues and outlays. Social Security itself shows its contradictions about its own budgeting and the trust fund. It states that the program has its own budget separate from the U.S. Treasury, and pays recipients from the accumulated trust fund. It then proceeds to note a few paragraphs later, “When the Social Security program collects more in taxes than it spends, it generates surplus money. By law, the only thing the program can do with surplus money is loan it to the federal government… Federal law requires the federal government to pay back to Social Security any money it has borrowed plus interest. This money becomes a part of the national debt.”

So if a government program’s finances are arbitrarily separated from the rest of the government’s budget, where all surpluses are then loaned to the federal government as an easy source of credit, it does not matter that the program is “off-budget” by law, as it contributes to the deficit all the same! As an actuary writes, “... each dollar of FICA surplus, back when it existed, decreased the degree to which the federal government needed to borrow from outside, and each dollar of Trust Fund bond redeemed, is another dollar which the requires the issuing of more bonds.” The burden is shown by the fact that future generations will have to make their own contributions plus pay higher taxes to pay off the debt, including $2.9 trillion the Treasury needs to pay Social Security. An easy way to shatter the myth is to imagine the Social Security budget is exactly the same, but FICA taxes are included in federal revenue and outlays are included in federal expenditures. Then there would be no logical way to fall for this myth because it would just be another enormous spending project in a Treasury that has insufficient revenue.

The reality of Social Security is that if Congress does not take steps to begin its gradual reduction, the federal budget will be met with three possibilities, or as Scott Bittle and Jean Johnson describe in Where Does the Money Go? As “Three Seriously Bad Choices.” The authors reason that these are the only choices left if no action is taken by 2040, because the Government Accountability Office projects by that time (probably between 2035-2040) nearly every tax dollar collected will be needed to pay for Social Security, Medicare, and interest on the national debt.

The first choice they deduce is for Congress to cut expenditures for everything else in the budget besides the remaining programs. Obviously, this is unfavorable and unrealistic, especially to those who defend Social Security. The second option is to confiscate enormous amounts of payroll taxes from working generations in the future. Not only would this be required to balance Social Security in the long run to fund all liabilities, but to pay back the federal debt already accumulated. Finally, for the third choice, Congress can kick the can down the road until the only option is to dramatically slash benefits on recipients. Many workers that were forced to pay into the program their whole lives will then receive nothing in return.

As horrifying as the three options sound, they are sadly more probable than Republicans and Democrats modifying the program in the present. The main reason for this is not ignorance, but the fact that politicians and older adults have contrasting horizons of time preference than that of the younger adults that seek a prosperous future. Politicians want to be elected and older adults that make up a large voting block want to collect their benefits.

Besides these special interest though, there are younger adults that religiously defend Social Security for ideological reasons. This is irrational and will lead to a worse outcome for them in the future, with far less individual freedom. Those that balk at all solutions to slash benefits in the present need to understand the only future alternatives. There is no version arithmetic that conforms to their emotional satisfaction. The only rational view of Social Security for younger people is the gradual reduction and abolition of the program entirely, leaving a free-market for pensions and retirement.

It must be understood and explained how the proceeding generations pay more taxes and receive fewer benefits, and how the overall structure of deficit spending financially preys on younger people. They should have 100 percent confidence explaining to older Americans why their benefits should be slashed, as truth knows no identity. They seem to have all the confidence in the world lecturing the young over why their present and future net worth should be slashed so that they can keep it in the present! Undoubtedly they will continue to play the victim, but the idea of squeezing as much value as they can in the present at the direct expense of productive individuals is pure hedonism and holds no moral ground.

Reject all lies of Social Security being “an insurance program.” Social Security is the coercive state socialist model of pensions and retirement and should be referred to as such. Insurance is a voluntary gamble where the insurer and the insured hold equal cards under a fixed contract. Social Security is involuntary where the government can rewrite the rules of the contract at any point time, holding every card. To call the program a Ponzi scheme is an understatement. The only possible way to reason that it is not a Ponzi scheme is on the basis that Ponzi schemes are voluntary and those who figure it out can withdraw their money, generally ending in criminal charges for those that created it. In our case, we can never avoid the losses and those told to protect us from criminal activity are the criminals themselves.

Advocating a real solution is difficult, as the mainstream shuns any proposal that would make an impact to prevent insolvency in the future. Regardless of popular opinion, the program is unsustainable. Avoiding a budget crisis without cutting spending is like trying to walk through a door without opening it. Young people should grasp reality, and create a strong voting block of their own for a fiscally responsible future. It is a lot easier for Congress to ignore the problem if younger adults dogmatically follow the entitlement program cult. However, the more they unite around their obvious interest against Social Security, the more likely a plan will appear to gradually reduce the program.