It’s dangerous to depend on the government’s promises to take care of you in old age.
That’s because recently Social Security trustees said the program will run out of money in a few decades. This worries workers who will be depending on Social Security.
Social Security Gets Long in the Tooth
As Social Security recently turned 83, many baby boomers, fearful of more cuts, think the program will be comatose in a few decades. Millennials are convinced they won’t collect a cent.
Indeed, “80 percent of millennial workers say they’re worried Social Security won’t be there for them,” according to a study by the Transamerica Center for Retirement. (i)
That means many Millennials, “face unique concerns for saving for retirement,” says Mark Henry, an advisor in Charlotte, North Carolina. (ii)
While most respondents in the Transamerica Center study, “A Compendium of Findings about American Workers,” expressed concern about Social Security, the poll also found something odd.
I Will Depend on It, But….
“Most workers,” the study said, “are concerned about Social Security, but are also depending on it as a meaningful source of income in retirement.” (iii)
I have covered the advisory industry for various publications for over 30 years. And most advisors, who often specialize in retirement planning, say the average client shouldn’t expect Social Security to be a significant part of their retirement income. The average Social Security payment is only some $1,400 a month or some $17,000 a year.
Yet for millions of Americans Social Security is either a significant part of their retirement income and, in some cases, their sole income. (iv) That source of income can be called into question.
At current funding and spending levels the Social Security system’s trust fund, a trust fund that pays people in old age and which once ran huge surpluses, will be depleted in the coming decades. It will only pay part of its old age and disability fund obligations beginning in some 20 years, the trustees write.
“Today’s report shows that, as a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed.” The trustees also said the Social Security disability insurance trust fund “is projected to become depleted sooner.” (v)
The problem, Social Security officials say, is the system is running in the red: More money is going out than coming in. More people are projected to collect for longer periods and fewer people will pay into the system. This is a trend expected to continue over the next 20 years, (vi) but that is really not the biggest problem as I will later explain.
Social Security taxes hurt the economy, depressing savings rates. They build a culture of government dependence. Payroll taxes have been raised many times over the past 40 years. (vii) For millions of young and low-income Americans they are a huge cost. (viii)
Counting both the Medicare and Social Security “contribution” —this is the Orwellian/Newspeak term used by the government—this tax, including Medicare is 15.30 percent. (ix) Half is “contributed” by you. The other half by your employer. If you are a freelancer, then you pay it all.
So why, despite these high taxes, is America’s flagship welfare state program again facing long term problems?
Social Security: A Recent History
The problem is not birthrates. Instead, it is that the government is a lousy, dishonest, money manager. This is one of the charges made by a former Social Security official, who complains that surpluses were arrogated for other things. (x)
Social Security, in the 1960s to the 1980s, often ran huge surpluses. There were periodic crises. They were often followed by bi-partisan fixes. A few things temporarily put the system in the black: Taxes were raised and benefits cut back. The population grew at a faster rate than today and many new workers entered the economy. These seemed to be no problems as Social Security supporters argued that population would solve all of the system’s problems. (xi)
Politicians in this era increased benefits, especially just before voters went to the polls. For instance, in 1972, just before the elections, benefits were increased. A Republican administration and a Democratic Congress started arguing over who deserved the credit. (xii)
Taxes to pay for Social Security were often raised, but usually after the elections.
Politicians in the 1970s and 1980s quietly believed that it was easier to hike taxes on young people who didn’t vote as frequently as the elderly.
The latter were much more likely to organize, demanding the government provide them with more and more benefits, but their demands led to periodic crises.
Band Aid Solutions
Despite these periodic problems in the 1970s and the 1980s, the solution—which was actually a Band-Aid—was higher taxes, along with quiet cuts. That seemed to work. The system accumulated huge surpluses.
But the seeming short-term success carried the seeds of long-term woes. Pols noticed these huge surpluses and started spending them on things Social Security money was never authorized to fund. Surpluses were used by governments both left and right. But this practice of stealing from Peter to pay Paul had actually been going in various ways for a long time.
“For the government,” wrote economist Murray Rothbard almost 60 years ago, “does not invest the funds it takes in taxes, it simply spends them, giving itself its own bonds, which later must be cash when the benefits come due.” Benefits can only be paid, he noted, by further taxation, which means we “pay twice for one payment of Social Security.” (xiii)
At a retirement planning conference I attended some twenty-five years ago, Jeffrey Burnham, an economist who analyzed Social Security, said the history of the system was that whenever there were big surpluses, politicians spent them. (xiv)
And that is what has happened for decades.
Social Security surplus “trust” funds should have been put aside for the time when fewer workers “contributed.” The surpluses weren’t saved. They were spent. Governments both left and right embraced the welfare state in various forms. Governments both left and right spent the surpluses. They only thought about the next election and the next generation could figure it out.
We’re the next generation.
That is how we got into the mess we are in now. This is a time when the Social Security needs change and there is only one logical answer. These assets need to be taken away from dishonest, short-term thinking, politicos who play around with our money.
However, today just about everyone can agree there is a Social Security problem. And once again we hear the familiar solutions in the political mainstream: Raise taxes and quietly cut benefits. We need completely new solutions, which I will discuss at the end of this piece. In the meantime, even those against radical change agree some change is need now.
Social Security reform, says Catherine Collinson, CEO of the Transamerica Institute and its Center for Retirement Studies, “is needed to mitigate Social Security’s funding shortfalls, but policy makers have made little progress in identifying and implementing specific changes.” (xv)
A problem for Millennials, unlike previous generations, advisers say, is that any cuts to Social Security would hurt them more than previous generations.
“Millennials face unique concerns for saving for retirement,” Henry notes. “Previous generations could rely on company pension plans, which are declining in number.” (xvi)
It is unlikely that Social Security will go broke as long as the government has a central bank and has the exclusive right to print money.
But Henry predicts payments to Millennials will probably be effectively cut as they already have to Baby Boomers. He notes Social Security payments were once not taxed. But, since the 1980s most Social Security recipients, unless poor, pay taxes on payments.
In the last presidential election, New Jersey Governor Chris Christy, in the Republican presidential primaries, said that Social Security benefits should be “means tested.” That policy, if ever implemented, would mean that, those thrifty enough to develop private retirement resources, would be cut off or have their Social Security benefits reduced.
Christy’s comments were something unthinkable a few years ago. Until recently, Social Security was considered the “third rail” of American politics; you couldn’t touch it. (xvii) The only acceptable position was to expand it. (xviii)
If history is a guide, more of these old answers will be a disaster for the next generation.
Social Security and You
Please think, young taxpayers, about what is ahead for you. You will pay into a program for maybe fifty years or more. Then, you will pay taxes on the payments received. Isn’t that double taxation?
Social Security’s supporters through the years have often tried to depict it as a kind of insurance, which it isn’t. F.A. Hayek argued over a half century ago that Social Security’s promoters were dishonestly selling the idea as a kind of social insurance. (xix)
Social Security has nothing in common with insurance.
Consider this analogy: A person purchases an annuity contract from an insurance company. He or she pays the premiums. Now the insurance company is obligated to pay the contract holder for the rest of his or her life. Legally, the company cannot go back and say, “oh, you must pay more premiums.” The insurance company has a legal obligation to pay the contract holder, the owner of the annuity.
Unfortunately, under Social Security, the government is under no legal obligation to pay. This last part has been affirmed by the United States Supreme Court in the 1960 case of Flemming vs. Nestor. (xx)
The court, in denying that the government was obligated to pay someone who had paid taxes for years and was later deported, held that “to engraft upon the Social Security System a concept of accrued property rights would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands.” (xxi)
Actually, the law that created Social Security back in 1935 had a clause that allowed Congress to change any part of the program, which meant it could reduce or end benefits anytime. (xxii) You, as a Social Security “contributor,” have no contractual rights.
Still, barring a depression, it would be disaster for the government to stop paying Social Security benefits. But it can, and already has, reduced them and could continue doing so.
What’s to Be Done?
Advisor Henry speculates that the Social Security retirement age could be pushed back. “If the system is in trouble, will they say you can only get full payments by waiting to age 75?” (xxiii)
Assuming the worst, what should people preparing for retirement do?
“Start saving on a regular basis as soon as you can. It doesn’t have to be a lot at first, but do it every pay period.” Henry says. With considerable money in private investments,” Henry adds, “anything you get from Social Security will be a bonus.” (xxiv)
Can this ramshackle Social Security program be reformed? Unfortunately, reform attempts always fail in the long run. Part of the problem, said a former Social Security Commissioner, is that many people have come to regard the program as a religion and it is very difficult to criticize a religion. (xxv)
A New Approach
Radical change, I believe, is the only answer. And it must be based on a principle of justice; one that recognizes that tens of millions of Americans have been forced into a program that is a mess.
F.A. Hayek, in the previously mentioned comments on Social Security in Western countries, would ask “Does anyone really think that the average semi-skilled worker is better off” (xxvi) because the government spends the money for him?
Clearly the answer, more than half a century after Hayek’s analysis, is no.
Most Americans, if they had just obtained an average rate of return in the stock market—stocks on average get about nine point five percent a year over the long term (xxvii)—would be much better off than being forced to rely on Social Security.
For instance, say one contributes $300 a month into an account for forty years. One earns nine percent a year, which is slightly less than the long-term return of the stock market. At the end of the period, one has some, $1,414 million before taxes. Isn’t that much better than about $17,000 a year from the government plus a small cost of living adjustment each year?
Moving as many people as possible into private retirement accounts would also have another benefit: It would help boost low national savings rates. More private savings would increase the capital stock. That would lower the price of money. The latter is otherwise known as interest rates.
The simplest Social Security reform is this: Let people stay with Social Security if they want because many have been programmed by the government and mainstream media to think Social Security is the only answer to retirement savings. They have also made arrangements for retirement based on promised Social Security payments, which would be difficult to change now.
But let the rest of us, young and old, escape. Make the latter whole for our years of “contributions.” Then let us then invest in private retirement saving. Will some badly invest their money? Certainly. But probably no more so that those who have managed Social Security funds over generations.
And, no matter what someone saves or doesn’t, no matter how skillfully one invests or doesn’t the issue is this: It is the worker’s money, not the government’s. The latter is a sentiment that would have been supported by our third president. He was a man who abolished many taxes, reduced government red ink and wanted citizens to help themselves.
“If we can prevent the government from wasting the labors of people,” Jefferson wrote, “under the pretense of taking care of them, they must be happy.” (xxviii) The fruits of labor, Jefferson believed, belong to the taxpayer, not the government.
(i) “The Transamerica Center Study: A Compendium of Findings About American Workers” is the Center’s 18th Annual Transamerica Retirement Retirement Savers study. It can be found at:
(ii) Personal interview
(iii) P10 of the study: Greatest Retirement Fears Range From Financial to Health. Workers’ most frequently cited retirement fear is “outliving my savings/investments” (52 percent), followed closely by “Social Security will be reduced or cease to exist in the future” (48 percent)
(iv) According to a Social Security 2017 Fast Facts report, “Social Security was the main source of income, providing at least 50 percent of total income for 50 percent for aged beneficiary couples and 71 percent of aged non-married beneficiaries. It was 90 percent or more for 23 percent of aged beneficiary couples and 43 percent of age non-married beneficiaries.”
(v) See the 2018 Social Security Trustees report first page Highlights overview section at https://www.ssa.gov/OACT/TR/2018/II_A_highlights.html#
In the same sections also see, “Under the Trustees’ intermediate assumptions, Social Security’s total cost is projected to exceed its total income in 2018 for the first time since 1982, and remain higher throughout the projection period. Social Security’s cost has exceeded its non-interest income since 2010. For 2018, cost for the program is projected to exceed total income by $2 billion and non-interest income by $85 billion. As a result, asset reserves will decline during 2018.”
(vii) Writing in 1998, Peter Ferrara and Michael Tanner noted that “payroll taxes and earnings ceilings have been raised more than thirty times since the program began.” (Social Security became law in 1935). See Ferrara and Tanner’s “A New Deal for Social Security,” p 44, (Cato Institute, Washington, D.C. 1998).
(viii) Personal aside: I remember when I was a young worker in my 20s. I had a low income. I noticed that the payroll taxes were eating up a tremendous part of my salary. It made it more difficult for me to accrue private resources.
(ix) I once got into argument with my Congressman, the infamous Rep. Anthony Weiner, at a town hall in Kew Gardens about 20 years. He kept insisting that the total payroll tax was “only” 7.65. In insisted that it was, in fact, double that. For those who want to know more of my adventures with Weiner, please see “The Real Trouble with Weiner
(x) See “The Big Lie. What Every Boomer Should Know About Social Security and Medicare” by A. Haeworth Robertson (Retirement Policy Institute, Washington, D.C., 1997). He is a former actuary of the Social Security system. He writes on p 31 that any money not required to be immediately paid out by the Social Security Trust fund “is loaned to the federal government, which promptly spends the money for other purposes and issues interest bearing funds to the trust funds.”
(xi) Paul Samuelson, the Nobel Prize winning economist who predicted the Soviet Union would overtake the American economy in the 1970s, in the 1960s wrote a column for Newsweek in which he said a growing population could solve all of Social Security’s problems
(xii) For more on this please see my “The Disastrous Deal of 1972 at https://mises.org/library/disastrous-deal-1972. I wrote that putting on colas and adding more benefits became an issue in the presidential election between President Nixon and his Democrat challenger, Senator George McGovern: “Adding 100 percent cost of living increases (colas) was great politics. Both a Democratic Congress and a Republican president were easily re-elected. Nixon, who wanted the taxpayers to know that he had approved the increases, exploited its political value to the maximum. Senator George McGovern, a long-shot underdog presidential candidate running against Nixon who later would have to counter the political fallout from a disingenuous announcement by National Security Adviser Henry Kissinger a few days before the election that “peace was at hand” in Vietnam (it wasn’t), complained that Nixon was playing Social Security politics by taking credit for the hike.
The mailing notifying Social Security beneficiaries that payments were higher “implies that older people are indebted to Richard Nixon for the 20 percent increase…[That’s] very much like Scrooge trying to take credit for the spirit of Christmas,” McGovern complained
(xiii) From Murray N. Rothbard’s “Man, Economy and State,” (Nash Publishing, Los Angeles, 1962), p 829
(xiv) Personal observation. I was attending the conference for Financial Planning Magazine
(xv) From the press release accompanying the report
(xvi) Personal interview
(xvii) Typical of these Social Security is sacred sentiment were the complaints of a former Social Security commissioner who said Social Security was now regarded as a religion and it is very difficult to criticize a religion. This was the complaint of Dorcas Hardy, who wrote the book “Social Insecurity.”
(xviii) Personal observation
(xix) See F.A Hayek’s “The Constitution of Liberty,” pp 285-305, (University of Chicago Press, 1960)
(xx) See “The Social Security Fraud,” Abraham Ellis, pp169-171
(xxii) For more, please see my “Revolution of 1935” at Mises.org
(xxiii) Personal interview
(xxiv) Henry, who I interviewed last year in the story I was doing for Financial Advisor Magazine on retirement planning, was very skeptical about Social Security. His comment that the would-be retiree should just try to get “anything that you can get” and shouldn’t expect much shows you how the prestige of Social Security has fallen. Most planners/advisors I know doing retirement planning, agree. They say most clients should depend on Social Security for a very small percentage of retirement income. Some tell clients to expect nothing.
(xxv) See Dorcas Hardy’s book “Social Insecurity” (Villard Books, New York. The theme of the book is that the system will be “in serious trouble soon after the start of the 21st century.”
(xxvi) Constitution of Liberty, page 294
(xxvii) See “Stocks for the Long Run” Jeremy Siegel, (McGraw Hill Education, New York, 2014).
(xxviii) Citizen Jefferson; the Wit and Wisdom of an American Sage,” John P. Kaminski, editor, p116, (Roman & Littlefield, New York, 2006)