The Social Security Shell Game

To make heads or tails of the Social Security debate requires an understanding about what Social Security truly is.  But that understanding is exceedingly difficult to attain, given that both sides of the debate are prone to making misleading, or altogether false, statements about the nature of the program. 

Take Nancy Altman, co-director of Social Security Works.  She takes the then-incoming Trump administration to task for not having campaigned on the issue of Social Security reform, but because Paul Ryan said after Trump’s election that “with a unified Republican Party, we can get things done,” she immediately turned to her thoughts about how Republicans are dead-set to destroy Social Security, and Democrats are dead-set to save it at all taxpayer costs necessary. 

In her mind, you see, Social Security represents “government at its best,” and that it “work(s) fine” with no need of “fixing” or “saving.”  This would, of course, be news to any actuary of a soundly administrated insurance company which might look its general account’s looming $32 trillion shortfall in projections, reasonably expected to become practically manifest in 2034.

But in her most recent article on HuffPo, Nancy Altman posits (in the same article, mind you) that Social Security is both “the people’s pension” and a “solution” to “wealth and income inequality.”

So, which is it?  Is it a public pension program for individual investors, or is it an entitlement program meant to equalize economic outcomes?  I’m consistently told that these are entirely different things.

Is Social Security a public pension program?  

Nancy Altman regales her readers with the assertion that Republicans are now looking to “destroy” Social Security, the culmination of a Republican agenda that began in 1936. (Nice to see that she doesn’t buy into the pervasive “party-switch” myth, which suggests that Republicans became Democrats and vice versa at some undefined time after the 1960s.)

She offers a brief historical lesson: “In the 1936 election campaign, repealing and replacing Social Security was the Republican battle cry.”  Republicans, she argues, wanted to replace Social Security with a program that would pay “all seniors an identical subsistence level amount,” rather than Social Security’s pension program which allows people to “retire with dignity and maintain their standard of living as they age.”

In this argument, she eschews the talk about income inequality, but argues that Social Security is a pension program, and that Republicans want, and have always wanted it to be, a welfare or “entitlement” program. 

It’s a disingenuous argument, evident by, again, the fact that she also describes Social Security as a mechanism to “solve” income inequality (a useless abstraction which any sane person knows can never be “solved” in free marketplace where people of different means, talents, and ambition compete).   But let’s address the fact that her history is incomplete and misleading.

FDR was not shy about making the argument that the Social Security Act of 1935 provided “old age insurance,” and called payments into the program “premiums,” “just as you’d pay premiums on any other insurance policy.”  But the Supreme Court had killed Social Security’s baby brother, the Railroad Retirement Act of 1934 (which had sought to create a similar public “pension” for federal railroad workers), on the grounds that Americans could not, in accordance with the Constitution, be forced by the federal government to purchase insurance, in this case, a government-administrated “annuity” (that was the Court’s language in opinion of the Railroad Retirement Act ruling, not mine).  After that, we began regularly calling those “premiums” our “payroll taxes” as an irrefutable fact of life. 

There’s good reason for this change in the narrative, and the timing is important.  Too few Americans know, but the Court’s rebuke of the Railroad Retirement Act was among the primary impulses for FDR’s court-packing scheme, where FDR threatened to add judges to the Supreme Court to uphold his New Deal legislation (much of which was being shot down by the Court on Constitutional grounds and with prudent jurisdictional license in many cases, just to be clear).  As a result of FDR’s executive threat to castrate the Court by adding six Justices of his choosing in 1937, Justice Owen Roberts flipped position -- by which I mean that he had written the majority opinion against the Railroad Retirement Act, only to uphold the Social Security Act in spite of the same lingering issues having been unresolved.  In an instant, the Social Security Act was constitutional on the grounds that the mandatory purchase of the government’s “annuity” (which the government could not constitutionally do, as recent precedent had suggested) could be viewed as a “tax” (which the government did have a right to do).  This was the famous “switch in time that saved nine,” meaning that because the Court complied, FDR did not add Justices to the Court.

It would seem a wasted opportunity to not mention that in 2012, Justice John Roberts flipped positions in ruling on Obamacare’s “individual mandate” to purchase health insurance on the exact same grounds -- that Obamacare punitive measures for not purchasing health insurance was not coercing Americans to buy health insurance contracts, but rather, amounted to a “tax,” and it was therefore lawful.  It seems that history not only rhymes, but indeed, sometimes even the names will repeat.

It is important to note, however, that Social Security was the Obamacare of its day, and just as Republicans have run on “repealing and replacing” Obamacare since 2010, so, too, did Republicans running in opposition to Social Security after its passage.  Social Security was likewise viewed as a massive expansion of federal authority, and was widely believed to have been unconstitutional. 

Is Social Security an Entitlement Program? 

So, let’s say that Social Security is not an entitlement program, but forced payment into an insurance contract that promises Americans will enjoy a return on their investment, should they be so fortunate as to live long enough.

Why, if that’s true, does each and every effort to reform Social Security curiously resemble the reforming of an entitlement program?  Consider the solutions offered.  Taxing the Social Security benefits of high income earners at a higher level (as they don’t need the money, and therefore the arbitrary curtailing of their benefits is justified)?  Raising the payroll tax to create the revenue needed to reconcile a projected shortfall (just as higher taxes are routinely offered to make welfare programs more sustainable)?  Delaying payments to later years for Social Security beneficiaries (that’s some contract, if benefits meant to be collected fully at 67 can arbitrarily become benefits fully collectable at 68, 69, 70…)?

Here’s my favorite, because it completely illustrates my point.

While driving through Berkeley, California, I heard a truck driver call into a local radio station.  His argument, as he made it, struck me, because immediately I understood how seductive it would be across the political spectrum. 

“I drive a truck for a living,” he said.  “I pay 6.2% of my income to Social Security, and I think it’s terrible that people who make more than $118,500 a year don’t have to pay 6.2% of their entire income to Social Security.  Over 95% of Americans pay 6.2% of their entire income to Social Security.  Now I’m a conservative, but that’s just not fair, dammit!”

Once the concept of “fairness” is introduced, we can be pretty safe to say that we’ve left the realm of practical finance and entered the realm of social engineering.

But okay, let’s say we make an individual who make $200K annually pay 6.2% of his entire income to the Social Security coffers.  Does this reform involve proportionately raising the Social Security benefits for said individual to reflect that increased contribution?  If it does not (as I’m sure it didn’t in this gentleman’s construction of thought), how can it be construed to be anything other than high income earners paying for the benefits of those who earn less? 

As it stands, the man making $200K annually can expect the same Social Security benefit as a man making $118K annually.  So, for what reason, beyond the simple emotional plea that he makes too much money and should therefore pay 6.2% of his entire annual income to the Social Security coffers like most other folks, is this being suggested?

Is Social Security both an entitlement program and a public pension program?

The truth is, Social Security is a pension program, complete with the incredible taxpayer liability that threatens public pension programs across the country.  Social Security is also an entitlement program, complete with the corruption and politicization that has created and maintained our current welfare state, which is our greatest anchor to economic growth. 

In terms of packaging to the electorate, Social Security can be one or the other, or somewhere in between.  “Somewhere in between” is the truest estimation.  Politically, the public pension, and Social Security in particular, is a brilliant concept.  Practically, however, it’s a cancerous affront to economic liberty. 

That is not to say that millions have not paid into, and thereby earned, the benefits they do, or will, receive from Social Security.  But many thousands of people began collecting Social Security benefits the moment it was enacted who had not paid a dime into the coffers, financed by the businesses and individuals who provided the wealth needed to pay out collectors.  It was designed to be an entitlement at the time, and its form today is nothing but that of a government entitlement program, complete with the wastefulness and maladministration that comes with bloated government bureaucracies managing large sums of money for the faceless millions that bureaucrats care little for beyond a vote in the ballot box every odd year. 

The intent here is not to upset anyone.  The intent is to foster an understanding that the only way that Social Security can be meaningfully reformed is for us to accept that it is an entitlement program, at least at some level.  I, for one, believe that an American who paid into Social Security his or her entire life is truly entitled to the benefits due.  I am against our government compromising or clipping that benefit for those Americans, in spite of the fact that I believe the federal government was well beyond its constitutional tether in creating the program from the start.

But to loosely quote Milton Friedman, we should not begin our discussion about how we reform Social Security on false pretenses, as Nancy Altman, among so many others, has done.  Social Security is in dire need of reform, and it does no good for Americans paying or collecting to assume that it does, or was ever meant to, function as a collective of personal accounts with specified premiums paid toward a specific individual benefit.  Nor should we consider the cutting of benefits within the same ideological prism as curtailing purely subsidized welfare benefits.

I am, however, deeply in favor of privatizing contributions and benefits for future collectors in ways that will not compromise existing liabilities.  There may still be ways to do that, though the time for that grows shorter with passing years.

But yes, we will discuss higher payroll taxes for high income earners, because it is unlikely to ever be unpopular in a purely democratic viewpoint.  Yes, we will discuss later ages for collection of benefits, because demographic realities have changed such that it is necessary.  Yes, the government will look to take more from the productive, because that is what the government does to finance a pittance for vast swathes of constituents while preserving its own sense of purpose.

In spite of all its unconstitutional genesis, and the fiscal realities which would have made it dead long ago, reforming Social Security is an imperative.  But as we look to reform it, we should, at least, be on the same page when we begin.

William Sullivan blogs at Political Palaver and can be followed on Twitter.

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