Social Security: Prequel to Government-Run Health Care?

November 23rd, 2009

We are about to reconfigure our entire health-care system. In our hearts, we do not doubt that whatever system emerges from Congress will be a creature of the federal government, whether a “public option” is included or not. What evidence do we have about the effects of federal control in a sector of comparable size and importance to health care?

With a yearly payout of over $500 billion, Social Security is the world’s largest government program. It is the program unfailingly cited by 20th-century liberals as the one great shining moment of big government and the welfare state.

Nearly 75 years after its inception, how can we characterize Social Security?

Retirement Plan?

Social Security formally consists of Old Age, Survivors and Disability Insurance (OASDI). It provides retirement, disability, survivor and death benefits. Mention Social Security to most people, however, and only one thing comes to mind: retirement.

Is Social Security a retirement plan? Well, the literature on retirement plans divides them into two categories: defined contribution and defined benefit plans. Social Security clearly is not a defined contribution plan, where the benefits are determined outside the plan rather than inside. Pensions are the best-known form of defined-benefit plan; they specify a generic benefit and leave it up to the provider how to fund it. Is Social Security a defined-benefit program?

No. The payments superficially resemble a pension. However, the federal legislation governing pensions (ERISA) requires that pensions be (at least partially) funded. There is no true funding mechanism in Social Security, which has officially been a “pay as you go” system since 1939. That is, current benefits are not the result of past investments made using contributions, but rather derived by redistributing income from non-recipients (taxpayers) to recipients (retirees).

Social Insurance?

If Social Security is not a retirement plan, what is it?

The term most often used by its enthusiasts is “social insurance. Whatever the meaning of “social” is, we can certainly say something about “insurance.”  Insurance is the substitution of cost for risk. The insurance process transfers risk from the insured to an entity better equipped to bear risk, such as an insurance company. Is Social Security a program of insurance?

No. In 1960, the U.S. Supreme Court confirmed that the U.S. government has no legal obligation whatever to pay Social Security benefits. Despite your contributions over the years, you have no ownership whatsoever over the benefits you are now being promised. Contrast this with actual insurance. When you buy a policy by signing documents and paying premiums, the insurance company has a legal obligation to pay the benefits specified in the insurance contract. If there is no legal obligation to pay, then there is no transfer of risk. Without a transfer of risk, no insurance has been created.

Of course, you are promised benefits. Politicians and political scientists rhapsodize about the “social contract” by which it would be unthinkable, utterly unthinkable, for the federal government to default on this promise. Is there any reason to hold this sacred “social contract” in special high regard? Does it assume the status of an unwritten law that is somehow more holy than statute or contract?

In fact, the history of Social Security is a history of broken promises and lies by the federal government. They began with the original promise that the tax rate would never exceed 3% on the first $3,000 of earnings. They continued with the characterization of taxes as “contributions.” We were continually reassured that these contributions were being “set aside” for us to draw on in our old age. We were promised that the benefits would never be taxed. We were promised that the benefits would never be contingent upon a means test. We were told unequivocally that the Social Security Trust Fund was inviolable, that it was sound, that it was broken for awhile but now fixed, that its assets were secured in a lock box, that the Trust Fund was protected from intrusion by politicians seeking to use it for purposes of fiscal manipulation.

Social Security is described as “social insurance” governed by a “social contract.” There is no insurance and there is no contract. The late, great economist F.A. Hayek once characterized the word “social” as the greatest weasel word of all. To distill its true meaning in contemporary discourse, he suggested, replace the word “social” with the word “not.”

Safety Net?

Was Social Security once a noble, high-minded enterprise that became corrupted by time and exploited by evildoers? Do its origins reflect a purity of motive and clarity of purpose?

In the midst of the Great Depression, Social Security was marketed to the public as a relief measure designed to alleviate the suffering of the poor. In the middle of the sharp recession of 1937-38, taxes were raised to begin raising money for the program. Nobody collected a dime of retirement benefits until 1940.

Although the structure of Social Security does not correspond precisely to a Ponzi scheme, its operation has displayed several Ponzi-type features. The first recipient paid $25 in taxes, received $100,000 in benefits and lived to be 100. From the outset, benefits have been financed by collection of new monies (tax receipts) rather than by investment, even as its administrators proclaimed the opposite. Benefits have continually been increased in excess of actuarially-sound levels.

Is there a compelling rationale for the existence of Social Security? Its adherents claim that, in its absence, millions of Americans would die or live in poverty.

The private instruments that most closely resemble Social Security are the deferred annuity and the immediate annuity. Even allowing for the vagaries of rate of return computation in a system like Social Security, it seems safe to generalize that contributing the equivalent of Social Security contributions to a deferred annuity would produce a retirement far more comfortable than that experienced by Social Security beneficiaries. We know that private annuities are perfectly capable of supplanting Social Security because they have done it in several foreign countries for a couple of decades. Nobody is eligible for Social Security in the first place unless they have worked and “contributed” to the program, so there can be no doubt that recipients earn income that could fund a private plan.

Prequel to Health-Care Reform

Social Security is held up as the crown jewel of 20th-century federal government intervention. We are unable to discover a cogent rationale for it or a discernible purpose to its operations.  Is there any reason to expect anything better from health-care reform?

Category: Annuities, Economic Analysis, Economic News, Retirement Planning | Tags: , ,

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