Who, Whom? An Investigation into Social Security

Social Security is unsalvageable yet few own up to this fact. A pay-as-you-go system has been sold to the American public as old age insurance. The brute truth is that insurance requires investment; investment requires saving; and no Social Security funds have ever been saved and invested. They have been used instead to pay current recipients, the very definition of a Ponzi scheme. Economist Charlotte Twight refers to it as “forced non-saving.” That it has lasted as long as it has is a testimony to the size and productivity of the American economy, but the demographic truths—a fall off in live births coupled with the coming retirement of the Baby Boom generation—insures its doom. Increased migration--by improving the ratio of workers to retirees--could postpone the inevitable for a few decades, but eventually this system, like all Ponzi schemes, will simply collapse.

The Social Security system unfunded liabilities can be calculated in a variety of ways. By one reasonable estimate, Unfunded Social Security Liabilities are over $15 trillion. This money represents a huge transfer. The interesting question is: a transfer from whom to whom?

It is said “we owe it to ourselves,” but since few us of can cut a check for $15 trillion, this is not the best way to look at the problem. Assuming we don’t “solve” this problem with currency hyperinflation, every dollar owed to a future recipient is now in someone’s hands. What are the details of the transfer?

Money is sent to the elderly to allow them comforts in their senior years. What would happen if we didn’t do that? The elderly, as a group, are already the most affluent in society. This only makes sense: they are the ones who have worked and earned the longest. They are the ones who most often live in homes with paid-off mortgages. Granted, if not for the false promises of Social Security, some (most) elderly would presumably have saved more to take care of their retirement needs. Some might need further help. In wealthy countries like our own, children and extended families would most likely be the first to help. They are after all the ones with the most interest and concern. And in a sense they are also the ones with the most to gain. In the end, as a rough approximation, assets held by the elderly not depleted to care for themselves are repaid to the children who cared for them in the form of a more valuable estate willed to them at death. 

With Social Security, this is all, so to speak, socialized. Money is taken from people in the children’s generation and given to people in the parent’s generation. Money that would have been transmitted for the most part within the family system is spread instead throughout the taxpayers. 

What is the result? 

There are net winners and net losers. The net losers in the present system are working men and women without parents. Their money goes into the system to benefit strangers. Other working men and women with living parents also pay into the system but their obligations to their parents are thereby reduced, and their parents’ estates maintain value that would otherwise be depleted, value that eventually returns to them. 

The net gainers in the present system are retired people without children. They receive money from the system when otherwise there would be no filial obligations to assist them. Note, though, that the social gain is not that great; if a person has no children, there is less reason, all else being equal, for him to not deplete his estate caring for himself in his dotage.

What happens if we simply end the system…immediately. Although eventually everyone in society would benefit from eliminating a Ponzi scheme, during the early years, there would again be gainers and losers. The net losers in a system that eliminated the Ponzi scheme of Social Security would be older workers and retirees without children. They paid into the current system but have no younger generation to care for them. The net gainers in eliminating the system would be younger workers without parents, benefiting more the younger they are (the less they’ve paid into Social Security.)

In sum, Social Security on net transfers money from workers without parents to the retired without children. Looked at this way, the problem is more tractable than often imagined. “The retired without children” is a much smaller group than “the retired.” Thus the real beneficiaries of Social Security are significantly fewer than normally imagined.  “Workers without parents” is a group that is diminishing over time as medical advances allow more and more people to work to retirement even while their parents are still alive. So the group most mistreated by the current system is also diminishing. 

Thought Experiment: 

Consider a replacement system: 

1. Eliminate Social Security, both collections and payments
2. Provide payments to the elderly without working children from general revenues
3. Create a tax on workers whose parents have died to fund the above payments
4. Announce that people have a legal obligation to do what they can to prevent their parents from becoming wards of the state.

Since the group in 2) is much smaller than “all people 65 years and older,” and the group in 3) is smaller than “all working people,” the government intervention into the economy is correspondingly much less. Matters improve further when both groups are means-tested. Then poorer workers are not burdened by an additional tax and wealthy retirees are not unnecessarily put on the dole.

Why tax only those without living parents to pay for elderly strangers? There is no good reason in justice, though perhaps there is in equity. After all, this group isn’t also burdened by caring for an elderly member of the family. And presumably at least some of those without living parents have already received some financial benefit in terms of an estate when their parents died. 

Why treat the elderly without children differently from the elderly with children? In truth, those who did not have children gained financially relative to those who spent assets raising children. Can’t they live off these additional assets? And in fairness this seems appropriate in a generation or two. But at this point large numbers of people had money taken from them via Social Security taxes and were told, in effect, “Don’t bother saving for yourself; the State will care for you in your old age.” So there is SOME moral obligation here. Admittedly, there is also a moral obligation to not take money from some via taxation to benefit others. There is a moral obligation not to use federal power to transfer assets from one private party to another, as was done in the widely reviled Kelo decision. But relative to the current system, this modest suggestion, while not eliminating coercion among the generations, significantly dampens it. It may, in fact, dampen the problem sufficiently that the remaining difficulties could be handled via voluntary charity rather than coercive taxation.

Advantages of the proposed alternative to the current system include:

• Increases in salary and lowering of the unemployment level as the Social Security tax is removed from both individuals and employers. There is a general consensus among economists that the burden of the portion of the FICA tax putatively paid by the employer in fact falls on the employee. So removing this burden will lead to an overall increase in income for employees. And to the extent that any of the burden does fall on the employer, removing the tax should lead to increases in employment as the cost of hiring is decreased.

• Improved intergenerational cohesiveness. Families in modern society are too often estranged. While some might like it that way—one wag has said that Social Security allows his parents to be independent of him and is thus worth every cent he pays into it—it has negative social effects. Those without strong family connections are more likely to commit crimes and less likely to optimize socialization skills. A culture in which it was clear that caring for the elderly is the primary responsibility of their adult children would over time improve family, and eventually societal, relations. Knowing one will eventually be dependent on one’s children should ameliorate the child abuse problem. A century ago there were many poor people and many poor families, but the social pathologies we now associate with poverty were largely absent, and without government mechanisms to care for the poor and the elderly, informal but highly effective social mechanisms developed to manage their needs. Government programs crowd out such informal networks, and thereby stultify and coarsen the culture, but there is no reason to think they won’t redevelop when government interventions are removed.

• Improved retirement options. Now few people save for their retirement, both because Social Security claims they have it handled and because the FICA bite eliminates from their budget funds that might have been used to save/invest for the future. With so little demand, the market is unresponsive to the needs of future retirees. And yet of course it is evident that many investment opportunities now exist to provide for one’s retirement. Imagine how many more options there would be if the market were allowed to flourish in this area by increasing consumer demand in such products.

You might say, and you'd be right, that in today's political climate no one would propose this alternative. Given the quality and moral stature of today's politicians, that is yet one more argument in its favor...

The Tea Party Movement and the Original Tea Party

Originally written Fall, 2010 [before the 2010 election]

More than any other movement in the last generation, the Tea Party movement seems motivated by ideology. It seems as if a mass of individuals has spontaneously rallied to the flag of less government, of Constitutional principles, of individual liberty and autonomy. If they can accomplish what they hope to accomplish, it will be a great public good.

That last sentence is a double entendre. It is true when “public good” is read as “public benefit,” but surprisingly it is also true when “public good” is used in its standard economic sense, where “good” is meant as in “goods for sale.”

Economists use “public good” to refer to goods, like national defense, said to exhibit the properties of non-excludability and non-rivalry. A good is non-excludable when, provided to one, it must be provided to all. A good is non-rivalrous when, provided to one, it is still available to be provided to others. Such goods, economists argue, tend to be underproduced in the market. Why spend time and effort producing a public good when consumers can obtain it without paying because they can’t be excluded?

Ironically, political activity to bring about less government is itself a public good—if successful, you benefit from less government even if you didn’t work to bring it about, and less government provided to one is provided to all. Therefore, economists expect underproduction of the good “less government.” Thus, per Jefferson, does government grow and liberty recede.

Yet there are episodes in American history—the Revolutionary period and the time of the original Tea Party, for example—where ideology trumped economic reasoning…where large numbers of people committed personal risk to bring about social benefits far beyond those they could internalize…where people offered their lives, fortunes, and sacred honor. And in the modern Tea Party movement this may be happening again today.

Today’s Tea Party participants have been called “extremist” by current D. C. denizens, but is this true in a broad historical context? How does today’s movement compare to the actions of those responsible for the original Tea Party?

At that time, America was a collection of English colonies, and England was the most powerful empire on the planet. Like all empires, it thrived by fighting wars and collecting taxes. Thomas Paine, in his book Rights of Man, even argued that while it might seem that the government raised taxes to fight wars, it actually fought wars in order to raise taxes!

So it was not surprising that, in the mid-18^th century, toward the end of the French and Indian War (1754-63)—England’s 4^th war against France in 70 years—a gargantuan war debt led England to demand more revenue from the American colonists. Granted, such taxes were quite modest when compared to the taxes Americans pay today. But they were extensive. The Stamp Act of 1765 mandated the purchase and use of government stamps for various goods, services, and documents. Government stamps had to be attached to court actions, wills, contracts, leases, deeds, land grants, mortgages, insurance policies, ship clearings from port, pamphlets, newspapers, dice, playing cards, advertisements. Penalties for non-compliance were severe and imposed by an admiralty court without trial by jury.

How did the colonists respond? Did they hold rallies, peacefully petitioning their governing officials for relief, as the modern Tea Partiers do? No. Their response was implacable resistance. Violent mobs burned the homes of judges and tax collectors attempting to enforce the law. Government officials were hung in effigy. The Royal Governor of Massachusetts was forced to flee the colony. England had to repeal the unenforceable Stamp Act the same year it was passed. Five years later, in 1670, it gave up collecting the equally unenforceable Townsend Duties, save, ominously, the duty on tea…

The act and duties were unenforceable because the colonists refused to pay them. No one in the current Tea Party movement is calling for mass refusal to fill out income tax forms; no one is calling for businessmen to perform a “Vivian Kellems” and refuse to collect withholding taxes. So who is being extreme?

The duty on tea, a remnant of the Townsend efforts, when combined when England’s allowing the East Indian Company to ship directly to the colonies—bypassing the English middlemen—actually led to a lowering of the price Americans paid for tea. Yet there was widespread opposition, based on concerns that if they allowed this tax, there would be no stopping future taxes. That is to say, an ideological argument. Meanwhile, the taxes today’s Tea Party members oppose expanding are an order of magnitude more than those opposed by their ideological ancestors; but no one is calling to reduce the tax burden to what King George III wanted to impose on the colonists. Who is extreme?

The reason for the original Tea Party—the illegal dumping of tea from a ship in Boston Harbor before the government made good its threat to remove the tea from the ship and forcefully collect the tax—is because the English government pressed the issue. At that period in American history, the more common way of avoiding such taxes was simple: smuggling. The American colonists were widespread scofflaws, routinely flouting taxes by simply not paying them or collecting them. Today, many in the Tea Party movement oppose growing economic regulations and confiscatory taxation, but unlike those in Peter Zenger’s time or those Americans who refused to find guilty any who worked on the Underground Railroad, smuggling black slaves to freedom in defiance of the law, no one today is urging widespread jury nullification as the solution to stifling regulation and unjust laws. Again, who are the extremists?

Today’s Tea Party movement seeks less government, but typically makes an exception for “defense,” even as America’s global empire fights two overseas wars and has garrisoned permanent troops in South Korea for 60 years. Today, the U. S. military budget constitutes about 50% of military spending for the entire planet. But even while the US spends as much on war preparation as the rest of the world combined, many in the Tea Party movement, interested in cutting the federal budget overall, still see the military budget as sacrosanct. Meanwhile, it was a common concern at the time of the original Tea Party that England wanted to impose a “standing army” on the colonists. A major justification in England for taxing the colonists was that the revenue was needed to pay for the English Redcoats sent to defend them. But the Americans of the time not only didn’t want the taxes, they didn’t want the troops, which many saw as an effort to awe and subdue them. A major reason for the 2^nd amendment, recognized in 2008 by the Supreme Court’s Heller decision as a fundamental individual right, was to have militias composed of “the people” as a means of defense rather than impose a standing army. Yet the current Tea Party movement doesn’t even want to cut the military, let alone disband it. Extremism should be made of sterner stuff.

Today, our ruling class in Washington thinks even the mere suggestion that anything passed by Congress might be unconstitutional is evidence of extremism, even if the claim comes from a graduate of Yale Law School like Joe Miller of Alaska…even if, as is increasingly the case, it comes from judges on the federal appellate bench evaluating Obamacare. When former Speaker of the House, Nancy Pelosi, was questioned during the 2010 campaign about the constitutionality of Obamacare, her response was “are you kidding?” This from a woman who as a precondition of her job has sworn to support the Constitution—one might think such a pledge would involve taking claims of unconstitutionality with at least some seriousness and decorum. Yet many Americans at the time of the original Tea Party—radicals like Sam Adams, Thomas Paine, Patrick Henry, and Thomas Jefferson—were loath to ratify the Constitution, a document today’s Tea Partiers view as sacred writing. Many Americans at the time of the original Tea Party saw it instead as an effort to centralize power, creating a more powerful national government than allowed by the Articles of Confederation.

So on issues as diverse as veneration of the Constitution, support of the military, civil disobedience, and willingness to use force to defend one’s rights, when compared to those colonists who dumped tea in Boston Harbor, who stood up to the most powerful empire in the world, it seems clear that today’s Tea Party movement is not too extreme. To bring about the change they desire, it may not yet be extreme enough.