Social Security in Crisis?

The trust fund held by America's Social Security Administration is projected to be depleted sometime in 2032.  People are speaking of this as if it is a crisis which requires immediate action if we wish to prevent a catastrophe.

The truth is that there is not now, and there never has been from the beginning, a genuine reserve fund which the SSA can dip into to continue paying benefits when outlays exceed inflows, as has been the case since 2010.  In the past, there were many years when inflows exceeded outflows, but the excess has always been spent by the Treasury as part of the general budget and replaced by paper issued to the SSA by the Treasury.  

It's all smoke and mirrors, and the paper held by the SSA has no value.  The only purpose it serves is to pave the way for the Treasury to provide the needed funds to pay benefits.  The Treasury has to raise new funds to pay the benefits whether there is a phony trust fund or not, and the only crisis is that in 2032 the scheme will need a new set of smoke and mirrors.

Transcript

Social Security in Crisis?

 Good day to you, and welcome to Fascinating!  I am your host Rik, from Planet Vulcan.  My ongoing mission on Planet Earth:  to plant seeds of a way of thinking, a way that is based on an understanding of evolutionary processes, with the ultimate aim of helping to sustain and increase the momentum of Earth’s long arc towards prosperous and happy societies, founded on ideals of liberty and justice.

 Of late there has been an increasing amount of concern and chatter about America’s social security system.  People are worried because the SSA trust fund is about to be depleted, which is projected to happen around 2032.  Many commentators and officials are presenting this as a serious crisis, and people are being frightened by the prospect of a reduction in benefits.

 In truth there is no crisis, because in truth there is no trust fund.  The so-called trust fund is all sleight-of-hand.  The chatter is 99% hype and 1% substance.

 If you wish to understand the social security system, you need first of all an accurate description of how it actually works, as opposed to the myths and intentional mischaracterizations that were used to sell the system to a trusting, and at the time desperate, public, and to maintain voter support.

 It is difficult for Earthlings living today to imagine the circumstances facing the average person during the Great Depression of the 1930’s.  Policy mistakes, particularly by the Federal Reserve, had made what ought to have been a short-term financial panic triggered by bank runs into a hugely damaging long-term system-wide economic dislocation, with persistently high unemployment and loss of output throughout the decade far worse than anything that has happened in more recent memory.

 People felt their world collapsing around them, and they were desperate to believe in any promise of help, and it was a relatively simple matter to convince most of them that the social security system would make penury in old age a thing of the past, and that the benefits were a practically costless boon.

 What a load off!  It sounded too good to be true, but people at the time trusted what the government was saying far more than they do today.

 Here is a description of how the system actually was designed and how it operates.

 The funding for the scheme comes from a tax on labor.  There is a “myth” that half of the payroll tax is paid by the employer and half by the employee, but that is nonsense.  From the employer’s point of view, it is simply irrelevant how the payments are labeled – the entire tax is part of the employer’s wage bill, and it doesn’t matter how you break it down.  You could claim that it is all paid for by the employer, or you could claim that it is all paid for by the employee, and nothing of substance would change.

 The payroll tax is officially labeled an insurance contribution, another “myth”.  It is actually a tax, and it had to be set up this way in order to pass constitutional muster with the supreme court.

 People have been led to believe, and most still do, that when they receive their retirement benefits, it represents a return of the “contributions” they made to the system, another “myth”.  In truth, benefits are paid from taxes collected from the people who are still working, or by the sale of securities, which is still ultimately paid for by the tax on workers.

 From a Vulcan’s-eye view, it is difficult to distinguish this scheme from slavery.  The people who are paying the taxes will never see the money they contribute, not just because the taxes they pay go to provide benefits to people who are retired at the time, but also because all the tax receipts over and above what is needed to pay current retirement benefits is spent as part of the general budget.  That money is gone for good.

 The fact that the slavery is only part-time does not mean that it’s doesn’t fit the definition of slavery: slavery is when you are forced to perform uncompensated labor for the benefit of others.

 What workers actually get from submitting to the part-time slavery during their working lives is the right to live off the part-time slavery of those who will be working when they receive benefits.

 I suspect that Earthlings in the future will look back in amazement on the spectacle of this income “transfer” (and other income transfers so common in our time) and wonder why the true nature of the scheme, which can realistically only be characterized as theft, was considered a good thing. 

 The final “myth” is the myth of the trust fund.  

 The truth is that the SSA trust fund has a net value of zero.  Or if you wish to pick nits, the value of the securities in the trust fund is exactly offset by the debt owed to the fund by the Treasury.  There is simply nothing of value in the trust fund.

 From the beginning, any tax receipts over and above what were needed to pay current benefits were “invested” in special securities issued by the US Treasury for this particular purpose.  These securities are non-negotiable and cannot be used to fund benefits.

 Translation: the money was all spent and replaced by pieces of paper memorializing the fact that that the Treasury had “borrowed” the funds from the SSA and was obligated to pay it back.  The only value these pieces of paper have is to help create the smoke and mirrors which make it appear to the unsuspecting that the SSA has a reserve fund which backs up the promise of continued benefits.

 To understand this more clearly, imagine what would have to happen when the tax receipts for any given year are less than the benefit outlays for that year.  And imagine what would be different if the trust fund full of treasury securities did not exist compared to what would happen if the trust fund did exist.

 Except for the hand-waving, the shouting and the incantations, nothing would be different; exactly the same thing has to happen whether there is a trust fund full of these “special” treasury securities or not.

 In both cases the treasury has to come up with new money to make up the benefit shortfall, either through taxation or through borrowing.  It just doesn’t matter whether the new money is used to redeem the pieces of paper in the fund, after which the SSA can pay the benefits, or whether the new money goes directly to the SSA.

 So what about the “crisis” that will hit in 2032?  With the exception of the legal technicalities and partisan battles involved, nothing will be any different after 2032 than what has existed since 2010, the first year that benefit outlays exceeded tax receipts; i.e., the treasury will have to fund the difference between receipts and outlays with new money from tax receipts or new money from the sale of securities.

 There will of course be a political battle over how to continue to pay benefits after the last of the phantom securities is redeemed. Some sort of institutional arrangement will have to be put in place to legally authorize the funding.

 And we are witnessing the usual advocacy of the Little Willy Sutton method of taxation, i.e., you go where the money is and then figure out some phony justification for the taking.  For example, many people are beating the drum and claiming that high earners are not paying their “fair share” because of the cap on the amount of income that is taxed, and congratulate themselves on their superior virtue and their advocacy in favor of the “little guy”.  

 Just make sure you don’t acknowledge that the benefit that high earners eventually receive is not figured on their earnings over and above the cap; or that the formula is already highly favorable to lower earners in terms of the benefit amount relative to income that is subject to tax.

 If the Little Willie Sutton reference is not familiar to you, Little Willie Sutton was a bank robber in the early part of the twentieth century.  A reporter asked him in an interview while he was in prison, “Why do you rob banks?”  Willie allegedly replied, “Because that’s where the money is”.

 And that philosophy guides much of what is routinely proposed with regard to taxation in general.

 Perhaps there will come a time when the true nature of the social security system will become better understood by the general public, and will be acknowledged not only as a form of slavery, but as a scheme with unacknowledged opportunity costs.

 The great 19th century French economist Frederic Bastiat was one of the first economists to explain the nature of opportunity cost in his essay about “that which is seen and that which is not seen”.

 He illustrated the concept with a parable about a broken window.  What was seen is that the glazier who replaced the window gained employment, and that was seen as a good thing.  What was not seen is that the money that became income to the glazier could have been spent on something else.  It’s patently absurd to argue that destruction creates an economic benefit.

 In the case of social security benefits, the things that are seen are the benefit payments; the things that are not seen are the possible alternative uses of the funds that go to pay the taxes.

 If the wages were not taxed, the workers could use their substantially higher incomes (about 14% higher under current parameters) either for current consumption or for savings and investment.

 In many cases, particularly for younger workers, it would be highly beneficial to the worker to increase current consumption and defer savings until later, when their earnings are typically larger and expenses such as child-rearing are typically smaller.

 And as for investment, if you calculate and compare the value of putting an amount equivalent to the contributions into even a conservative investment to the value of the expected monthly retirement benefits, the value of the expected benefits is far less.

 For example, a worker earning a modest $70,000 per year would receive a monthly benefit of about $2,000 at minimum retirement age, currently age 67.  The present value of this expected benefit would be about $405,000.

 If the contributions were instead put into a conservative investment, i.e., an investment that returned a mere 2% after inflation, the value of the account at age 67 would be about $589,000.

 For a high earner, the difference is even more striking.  Whereas the modest earner takes a 31% hit, a high earner, i.e., one whose earnings exceed the cap, takes about a 44% hit.

 If the money were invested in something that is moderately risky and diversified, the expected return would be even higher and the disparity between the value of expected monthly benefits and the value of the investment account would be even greater.

 For an investment account earning 5% after inflation, the value at age 67 would be just over $3,000,000, and the present value of the expected monthly  benefits would be $655,000 using the 5% discount rate. 

 Looking once more from the Vulcan’s-eye view, we have to note another highly distressing effect of the social security system, and that is that when you rely on your government for your income, you are by definition dependent, and this means your freedom is inevitably compromised.  Far better in terms of freedom, ceteris paribus, to be independent.

 This dream so many of you have of voting into existence a world without uncertainty or scarcity, and where you all live on nectar and ambrosia, is in the real world like the cheese in the mousetrap – and by now you ought to realize that there ain’t no such thing as free cheese.

 Deep down most of you understand that a system based on slavery cannot be sustained indefinitely, and such a system is morally reprehensible to begin with.  Your leaders mostly do not personally care about sustainability beyond the next election; they deny the true nature of the system, and actually congratulate themselves and each other for their piety and compassion; and they play on your fears and heap unearned shame upon you to stay in positions of authority, while you pretend not to see what’s coming and vote for them anyway, as long as they keep the monthly checks coming for a little bit longer.

 The sooner Earthlings jettison the Social Security System, and replace it with something that is not based on theft and slavery, and which allows true independence, the better off you will all be.

 Like the song says, “Illusions without freedom never quite add up to bliss”.

 In an ideal world, the institution of government would not be involved in old-age pensions.  Short of this ideal, there are many ways to make the system better if not ideal, and many countries in the world have introduced reforms which combine a basic level of slavery-based benefits with savings accounts, a semi-privatization.

 The first country to move in this direction was Chile in 1981 at the direction of the much-reviled Augusto Pinochet, an army general who had taken drastic action to avert a Marxist takeover of the government engineered by the elected president Salvador Allende.

 Chile under Pinochet instituted mandatory retirement accounts in the hope that they could provide full retirement income coverage for everyone in the workforce. 

 Inevitably, there were people who fell through the cracks entirely and many of those who had the savings accounts found the amount to be inadequate, so Chile has instituted several rounds of reform so as to ensure universal minimum coverage.

 Other countries who have instituted retirement accounts include the United Kingdom, Sweden, Australia, Poland, Hungary, Slovakia and Romania.

 There will be a chance when the illusory SSA trust fund is depleted in 2032 to make meaningful reforms, but no such reforms will happen without more clear-eyed assessments.

 Wake up Earthlings!  Reality cannot be faked and reality cannot be commanded.

 I invite you to have a listen to the next Fascinating! podcast and a look at the next video on our YouTube channel.  You can find access to all podcasts and videos on our web page, fascinatingpodcast.com.

 Please recommend Fascinating! to your friends if you find the lessons from nature in these essays personally valuable.

 Theme music:  Helium, with thanks to TrackTribe.

 Live long and prosper.

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 Savor your experiences.

 Treasure your memories.

 Look forward to a happy and rewarding future.

 And respect nature’s wisdom.