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HENDRICKSON: Social Security’s problems: Past, present and future

Federal entitlement has been on path to failure for years

- The Washington Times - Thursday, October 27, 2011

The Social Security System is widely regarded as an untouchable "third rail" in electoral politics. Since I am not running for public office, I'll tell you about the dark side of this granddaddy of all federal entitlement programs.

First, it started with a lie. In 1935, the Social Security Act received enough congressional votes to pass only after adoption of the Clark Amendment - a promise by Social Security's sponsors to study proposed private-sector alternatives to Social Security so that Americans could have a choice. That promise was broken once President Roosevelt signed the act on Aug. 14, 1935. Thus was an uncompetitive government monopoly foisted on the American people.

Second, it undermined our constitutional order. The Constitution doesn't authorize the federal government to become involved in the personal financial planning of American citizens, yet Congress and FDR arrogated that extraconstitutional power to themselves. Ever since, the Constitution has been progressively mutilated.

Third, it raises the price of labor, thereby reducing demand for labor. When this wage tax was first collected in 1937, a time of high unemployment, it aggravated the Great Depression's unemployment problem. The tax then was 2 percent (1 percent showing on workers' pay stubs and another 1 percent collected from the employer). Today, the combined tax on employment for Social Security and its Medicare amendment is 15.3 percent. It is no coincidence that with this significant tax on workers, unemployment rates seem permanently higher than before.

Fourth, it inaugurated the reckless fiscal policy of "spend now, pay later" that has become standard operating procedure in Washington. Elected officials repeatedly added numerous benefit increases during election years. Politicians discovered that Americans love a Santa Claus government that bestows gifts upon them, and they refined the art of buying votes with money we don't have.

Fifth, it created a moral hazard. The savings rate of Americans declined over the years as Americans grew to expect that government would care for us during retirement. So dependent did Americans become on Uncle Sam that we even stopped procreating enough children either to take care of us directly or to provide enough workers to fund promised payouts.

Sixth, it has perpetrated a massive fraud on us. During its "golden age" from 1940 to 1980, Social Security seemed too good to be true. From Ida May Fuller, the first recipient retiree, who drew out $22,888.92 after paying $24.75 into the system, up to 1980, when the average retiree would go on to receive lifetime benefits of $203,000 on payments into the system of $93,000, Americans fell in love with Social Security, elevating it to the "sacred cow" status it still enjoys. Social Security's handsome returns weren't economic reality, but an elaborate Ponzi scheme. Today, it is projected that an average-earning worker retiring in 2030 will get back $62,000 less than he pays in to Social Security.

Seventh, Social Security is socialistic in tendency. It explicitly forbids private competitors and commingles workers' taxes with general revenues under the total control of the federal Treasury. In 1960, the Supreme Court ruled in Flemming v. Nestor that Social Security "contributions" are not "accrued property rights." Commentators often regard Flemming as an indication that the government will someday default on its promised payouts. Another possibility is this: Since property rights already have been disrespected in the structure of Social Security, why won't additional property rights be trashed when the government starts to have difficulty funding promised payouts? President Obama and his liberal congressional allies would love to redistribute property from "the rich" to keep the Social Security program going.

Eighth, Mr. Obama did us a favor on Sept. 8 by explicitly calling Social Security deposits "a tax," thereby finally putting to rest the dissembling mumbo-jumbo that workers pay "contributions, not taxes." However, Mr. Obama more than offset this favor by extending last year's reduction of payroll deductions paid into the system at the very time that its expenditures exceed revenues, thereby exacerbating its fiscal woes.

Ninth, the accrued unfunded liabilities of Social Security and Medicare total in the tens of trillions of dollars. These entitlements are the major reason why the United States finds itself squarely on the path to national bankruptcy.

Tenth, and finally, look ahead: Social Security is already actuarially unsound. What will happen when biotech breakthroughs enable most of us to live to be 100? Some researchers say these developments are imminent. Wouldn't it be ironic if we literally can't afford to live longer?

Sorry to rain on your parade and your comfortable delusions about Social Security, but it has been a disaster for our country. This "sacred cow" is a destructive beast. We never should have let government get involved in something as personal, private and important as our retirement and health care. We seem too addicted to Social Security to wean ourselves from it, and soon the piper will come to be paid.

Mark W. Hendrickson is a fellow for economic and social policy with the Center for Vision & Values at Grove City College.

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