Six Misconceptions About Social Security

Social Security is headed for bankruptcy! No one disputes this fact, too many retirees to workers in the future. The dispute is over what to do - you know - reform proposals. Proposals range from raising the retirement age, to raising the payroll taxes, to cutting benefits, to eliminating the limit on earnings subject to the payroll tax, to having government trustees invest a portion of the Trust Fund in private assets, to letting individuals invest a portion of their payroll taxes into their own retirement accounts or into stocks, bonds, and mutual funds. The debate is on!

In the spirit of intellectual inquiry and academic interest in a genuine reform of Social Security, the following six misconceptions are offered to clarify the discussion.

Not! From its inception in 1935, Social Security - officially known as Old Age and Survivors Insurance (OASI) - has been compulsory. Try telling your employer you plan to end your "contribution" and see how voluntary it is! The Federal Insurance Contribution Act (FICA), is a misnomer of the first magnitude. Social Security payroll taxes are taxes.

More importantly, Americans do not have a legal right to these taxes. In 1960 in Flemming vs. Nestor, Mr. Nestor sued the Federal government claiming he had a right to collect Social Security benefits since he had paid his Social Security "contributions." The U.S. Supreme Court ruled that he, and all workers, have no such property right. "I paid in, I contributed, and therefore I deserve my benefits," is, therefore, a common mis-belief among Americans. Congress can change, as the current debate reveals, any and all criteria as to benefit amounts, tax rates, retirement age, etc. They can cut or eliminate benefits regardless of workers' so-called "contributions."

This misconception is easy to identify and confirm. Blow the dust off your United States Constitution booklet, and go to Article I, Section 8. Our Founders enumerated 20 powers or areas for the Federal Government. All other areas "are reserved to the States respectively, or to the people" (Amendment 10). Can you find a power giving the Federal government the responsibility to care for the retirement welfare of American citizens? I will give you five minutes to find the answer! For the record, there is no such power and no such amendment has ever been passed giving such authority. Social Security is unconstitutional.

Well, it is true that workers today pay 6.2% of their earnings (up to an earnings limit of $72,600) and the employer pays the 6.2% as well. Yes, that adds up to 12.4% in payroll taxes. (Self employed pay 15%.) But as economists often say, "There ain't no such thing as a free lunch." That 6.2% "mandated benefit" is not free; it forces employers to reduce workers' market- determined salaries or fringe benefits. Otherwise, the mandated cost would inflict losses on employers, causing unemployment. In other words, mandated benefits simply replace market- determined benefits and/or monetary compensation. Economically this means that workers, in fact, pay the full 12.4%. The bottom line is don't be fooled: It's your money the employer is sending to Washington, D.C.

Superficially, Social Security appears to be just a government pension plan for the elderly. Rather, it is a pyramid or Ponsi scheme. It is not based on sound principles of insurance. Private insurance companies invest the premiums of their customers in stocks and bonds and other income-producing assets. Real wealth is created. Later, the earnings from that wealth is used to pay annuities or pensions. But Social Security is not a savings-and-investment program. Social Security taxes (premiums?) create no wealth. The payroll taxes are not invested, but are used to pay current retirees and survivors under the program. It's called a pay-as-you-go system. Some call it an intergenerational income-transfer program. It is indeed!

Now understand this, please. A pyramid or Ponsi scheme (illegal in all 50 states) works under the unsound and unethical principle that early investors are paid handsome returns with cash taken from later investors. As long as more and more investors (suckers) are attracted, the scheme works and appears to be successful. Eventually, however, the system collapses with the inevitable decrease in the number of new investors. In like manner, Social Security seemed to work well in the early years when there where few eligible retirees and lots of workers. A person retiring in 1940 could get an inflation-adjusted return of 135%!! But as the ratio of workers to retirees has declined over the decades, so has the average expected return, now 4% in 1999. A minus return is a distinct possibility in the near future. One wonders what Mr. Ponsi would have thought about Social Security "stealing" his idea.

In fiscal 1998, our government ran a $70 billion surplus, the first since 1969. Some politicians propose saving Social Security with these and future surplus funds. It's ironic, but the budget surplus was generated by "raiding" the Social Security trust fund and other trust funds in the first place! Here's what happened and happens generally.

In 1998 the Social Security trust fund had its own surplus of $99 billion dollars. It wasn't invested to create real wealth and an income stream. That is not permitted. These funds are, by law, borrowed or "invested" into a special class of non-marketable U.S. Treasury securities ( government IOUs). The SS surplus then ends up in the Treasury's general fund and is subsequently spent on other government programs. Some Trust Fund! Since1970 these SS surpluses have financed, in part, government deficit spending. However, in 1998, with a booming economy, "borrowing" from the SS trust fund actually helped generate a Federal budget surplus. But understand this. If the trust funds had not been "raided," the general budget would have had a significant deficit, just like the preceding 28 years.

And in all likelihood all the talk about what to do with these "supposed" budget surpluses would not have emerged!

The key point to understand is that the Social Security trust fund is nothing more than a pile of IOUs. These non-marketable IOUs are not assets but unfunded liabilities, government investing in its own debt. They represent payroll taxes that have been diverted to general spending. When Social Security outlays eventually exceed payroll taxes, expected in about 2012, the government will need to raise taxes, cut its spending, or borrow more money to pay off the debt (IOUs) to the Social Security trust fund when the SS managers redeem the IOUs.

So, to answer the question, can Social Security be saved or "fixed" by not "raiding," or by "raiding" less of its own excess revenue (Present Clinton's proposal)? Of course not, it is still a Pyramid scheme relying on more and more workers to retirees, just the opposite demographic as to what is actually occurring - more retirees to workers in the next century.

Social Security can be saved by Privatization Investing retirement money into the creation of real wealth is an essential element to any economically sound reform of Social Security. Thus privatization, the act of converting a government- run program into a private activity, appears appropriate at first glance. However, a private pyramid scheme is just as unsound as a government one. Current proposals to have government trustees invest a portion of the SS trust fund into the stock market, or to establish "private accounts" where individuals make their own investment decisions (within certain government guidelines of course), is privatization-lite at best. Truly these proposals are not boni-fide privatization reforms in any meaningful sense of the word. The latter idea would be better classified as a mandatory savings program - a truly socialist proposition with its own grievous flaws. Americans would not be free to use "their" money as they see fit. For example, they could not withdraw it or decide how much to "contribute." Taxation and government oversight can never be a feature of real privatization.

The Social Security system, passed in 1935, is not a legitimate, savings-investment, insurance program. Taxes are not invested into real, income-earning assets. There is no trust fund but in name only. Americans have no property right in their supposed "contributions." The Social Security system today is a compulsory, redistributive, unconstitutional, pyramid scheme that contains the seeds of its own destuction given the demographics of the next 30 years. Reforming or "tweeking" a corrupt system is not a meaningful option. There is only one true privatization reform of Social Security. There is only one Constitutional solution. There is only one economically and morally sound system. Our nation must begin the difficult but manageable process of dismantling the Social Security system - yes, in total. The sooner the debate begins on how best to do it, on how to transition to free-market retirement options with their vast array of investment and retirement program choices, the sooner all Americans will remove the social insecurity in their futures.

SS pays more than just retirement benefits. There are lots of people that are way under 60 years of age or have never worked that still collect checks from SS.

You are sooo correct! I wish someone would push a button on the main computer at SS headquarters and find out just how many people under 62 years of age get benefits. It would drive the "seniors" nuts. Then we might get some reform.

Not that it really helps anything, but Social Security payments are available only to those who have worked and paid into the system (or their dependents.) Supplemental Security Income (SSI) is for the poor and the non-workers, and those payments come from the general tax fund.

"People that claim to be "unable to work" are often on SS. THey are not retirement age."

You are correct. One does not have to be retirement age to collect Social Security payments. Social Security also covers workers who become disabled prior to retirement age. However, in order to collect Social Security Disability Income (SSDI), one must have a qualifying employment record. Those who don't have qualifying employment records might be eligible for Supplemental Security Income (SSI), but only if they meet the strict poverty standards that program requires.

Please don't misunderstand me......I am by no means a cheerleader for the Social Security system. I'm just telling you how it works.

Congress will confiscate all private retirement funds to save Social Security. Your IRA's and any other tax deferred instruments, and your company retirement funds. There are far too few people who are planning for the future and their votes will be minor compared to the destroyers. You will be better off with regular savings and real property. The mutual fund peddlers will deny this, but wait and see what happens.

I have no wish to pass this insane burden on to my beloved child.I missed the original cuttoff and the subsequent reinstatement of the GI bill.Bad timing on my part.Good lesson on the fact that life is not fair.

Just curious, but do you think the GI Bill has anything to do with SS? Or are you just demonstrating something which is "unfair"?

We received my husband's SS statement recently. Here is what I see as a problem (not necessarily a huge problem, but a problem nevertheless).

If my husband dies, I can collect benefits for myself and our two children to the tune of $3000 per month.

If my husband dies, he is well insured. I would not have a house or car payment. I would have sufficient funds to go back to school and gain a skill allowing me to support my family.

My husband has paid in less than $20k. I would be paid well over the amount that he has contributed.

This money may well have been intended to keep widows and children from being poor, but quite frankly, I would be very well off financially (until the youngest turns 16)if my husband died.

>>Because not one single Republican has the cojones to stand up and call it what it is, let alone enough Republicans to sponsor a bill to end this Government sponsored thievery.<<.....They would be voted out of office in a heart beat. Baby boomers want what they "invested" in the system. The majority are not well off enough to live off their savings in their old age. How many have savings in excess of $750.000? That's what it takes nowadays.

Just demonstrating that government programs are not set in stone. I used the GI Bill as an example of an instance where changes in cut-off dates, and program options did not benefit me, personally.They were of great and I believe proper benefit to those before me, and those after me.I would have loved them, but I was outside the dates.

SS has to change greatly.I am not altruistic when I say I am willing to suffer the pangs of the required cuttoff.I would consider it sunk cost, as long as it stops somewhere,preferably before my childs generation has to fund my generation.

The REAL reason that Social Security is insolvent is because 1/3rd of the people that should be paying into it were murdered while inside of their mothers wombs.

Imagine how much money would be in the fund if 40 million more people were paying into it.

Because People are Morons, and Most dont realise these simple facts.

I did fifteen minyutes on it in a room full of Minority stdents and had them all nodding in agreement by the end.

The Federal Insurance Contribution Act (FICA), is a misnomer of the first magnitude.

That is an understatement. If you buy Life Insurance you are, in effect, betting that you are going to die. Under FICA, they are betting you are going to die before you can collect. Look at how much you and your employer (read you, also) contribute to FICA. Imagine how much straight Term Life Insurance you could purchase for that amount of money.

The system we have now created in this country is one of duty to smoke and duty to die. The day you turn 18 it is your duty to smoke like a chimney so your cigarette taxes will help fund the Tabacco Bill. You also need to work very hard so you can pay your FICA taxes. If the government has it figured right, the smoking will help insure you will contract lung cancer and/or heart disease around the time you turn 60. At about the time you are applying for your first Social Security Benefit, you'll do your duty and die. Pretty neat system.

SS is all of what the author charged, but mostly it's a safety net

do you really think that america would let irresponsible seniors die in the streets? hell, we don't let nature take its course in the 3rd world

perhaps it would be more honest to see who doesn't provide for their future and let them wear the scarlet W, but a forced savings plan isn't the worst travesty if we were allowed to invest it

in a utopia, perhaps we could provide incentives to saving so attractive that very few would pass them up and simultaneously make welfare less attractive (eg, dorms not dwellings and a work requirement, even for senior recipients--licking envelopes or whatever)--then you might not need to 'force' savings

Quick question, can anyone here provide a step by step explanation on how Medical Savings Accounts work, exactley? I know its a well liked conservative idea, and has been very successfull in Singapore, I'm not sure if they have it in Chile, how does it work exactley?

"The REAL reason that Social Security is insolvent is because 1/3rd of the people that should be paying into it were murdered while inside of their mothers wombs."

And seniors think that they are going to escape the cold, hard logic of retribution. Wait until the government tells them which medical treatment they can receive, based on a cost-benefit analysis. Expensive. Unwanted. Physically weak. Sorry, but you're just going to have to die [visit your local abortion clinic for confirmation on the logic of this]. I don't think that the blue-hairs realize yet exactly what hell they've unleashed on themselves.

DNC SS futures: Abortion-abortion-abortion.

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