# Social Security: Time to Cut Our Losses **URL:** **By** Donald Feder **Published:** February 1, 1981 --- “In the past, Congress has always “solved” Social Security problems by raising taxes.” One of the grimmer ironies of the 1980 campaign came to public light shortly after election day, when the Federal Reserve Bank of Boston issued a reporting that Old Age Survivors Insurance (OASI), the major program of the Social Security system, will begin running out of money in 1982, will be $3 billion in the red by 1983, and will be $27 billion in debt by 1985—the very same Social Security system which both Jimmy Carter and Ronald Reagan had repeatedly assured the voters was fundamentally “sound.” Or perhaps they meant sound as the dollar. I asked an official of the Social Security Administration what he expected between now and 1985, and was told that Congress had already taken care of the problem. How? I inquired. Easy, I was told. On July 21st, the House voted to allow the Old Age and Survivors Insurance trust fund to borrow approximately $9 billion from the Disability trust fund (another Social Security program). And what happens when the Disability fund runs out of money? What will OASI do when it’s time to repay the loan? Tune in tomorrow for the continuing saga of _The Social Security Crisis_. In the past, Congress has always “solved” Social Security problems by raising taxes. Like a junkie going after one more quick fix, Congress has raised Social Security taxes, by either increasing rates or raising the wage base, no fewer than 14 times in the past 16 years. In 1977 it enacted the Social Security Financing Act, the largest peacetime tax increase in American history—a $227 billion hike over a ten year period. In 1978, the maximum employer-employee contribution was $2,140. It went up to $2,806 in 1979, and will hit $3,950 in 1981. By 1990 it’ll be $8,078. And that still won’t be enough to prevent the financial collapse of the Social Security system. And heavy taxation isn’t the only burden Social Security imposes on us. The damage it’s done to our economic base is at least equally significant. Over the past thirty years, F.I.C.A. taxes have drained substantial resources from the private sector. If that money hadn’t been taken from wage earners, and if they were themselves responsible for their retirement security, it is reasonable to suppose that much of that income would have been invested with financial institutions. Said investments would have in turn provided industry with the financial resources to expand their capital goods, which leads to increases in productivity. Instead of being invested, billions of dollars are paid out to recipients almost as quickly as they’re collected. Retirees use their benefits for current consumption, and the cycle of savings leading to investment leading to expansion of output is never started. To get some idea of the devastation wrought by such drains on investment capital as Social Security, consider the following: between 1948 and 1965 the growth of output per man-hour in the U.S. was 2.5 percent. In the 1965-1973 period, the growth of output fell to 1.6 percent. There was a further decline in 1973-1978 to 0.8 percent. And by 1979 we were experiencing a negative growth rate, a decline in productivity, of 2 percent. Yet, as production declines, unemployment increases, which results in a loss of Social Security revenue. For every one million workers laid off for one month in 1980, the system lost $100 million. And this, of course, necessitates an increase in Social Security taxes—which drains more money from the investment market and further retards economic growth, with the result that there is more unemployment, and so on. Viewed in this way, Social Security is a kind of self-destruct mechanism which the politicians have built into our economy. Of course, the politicians don’t want us to think of Social Security that way. They want us to think of it as something reasonable and prudent like a pension plan, a method of saving now to provide for future needs. But by stealing the terminology of the insurance industry, the politicians have effectively obscured the true nature of the Social Security system. With a private pension, the purchaser pays a premium, which the insurance company then invests. The investment’s dividends, along with the principal, form the trust fund. When the annuity matures, the company begins making payment to the purchaser from the accumulated principal and interest. More important, the premium charged is always enough to pay the promised benefits. As Ashley Bla-den, senior vice-president for investments of the Guardian Life Insurance Company of America, explains, > “When a mutual life insurance company like the one I work for makes a promise of benefits in the future, it assumes that just about everything that could go wrong will, and it charges a pre- mium that will almost certainly be more than adequate. Then, as time reveals how much of the premium was unnec- essary, the excess is refunded as a policyholder’s divi- dend....” Were an insurance company to operate on the assumption that current claims could always be paid out of the premiums of future policyholders, it would soon be faced with bankruptcy, and its officers with imprisonment. But that’s precisely the way Social Security works. It’s the essence of a pay-as-you-go program. No money is invested. There is no real trust fund. Every penny collected is immediately doled out to beneficiaries. The much-vaunted Social Security trust fund had $32 billion in it in 1978, less than half-a-year’s outlay at the then-current rate of expenditure. It should also be pointed out that most of that $32 billion was being held as government securities, rather than private sector investments (like accounts in commercial banks) which lead to the expansion of capital goods. Like a chain-letter, Social Security can work well only as long as there is an abundance of suckers paying into the program—more than the number of individuals drawing benefits. In the beginning, this fact posed no problem. In 1945 there were 50 workers paying taxes for every person receiving Social Security payments. By 1977 the ratio had declined to 3.3 to 1. And it is projected to decline still further, to 2 to 1, by 1995. It’s simply a matter of demographics. Life expectancy is increasing while the birthrate declines. And while the work force grows at an annual rate of 3.7 percent, the yearly increase in the retirement population is 5.5 percent. Even a child, or a welfare state liberal, should see where all of this is leading us. We will soon reach the point where it’s physically impossible for workers to support retirees—unless we confiscate 100 percent of the workers’ income. And long before we reach that point, the workers will revolt—thus ending the Social Security program. Thirty-five million individuals currently receive Social Security benefits—one out of every seven Americans. Benefits have grown from $32 billion in 1970 to $104 billion in 1979. By 1984 they will have almost doubled again, to an annual outlay of $184 billion. Most Social Security recipients are elderly and incapable of supporting themselves. Although there is a considerable amount of welfare in Social Security (for instance the wife of a recipient receives a monthly check equal to half her husband’s pension even though she never contributed to the system), the majority of recipients paid into the program faithfully during their working years because they relied on receiving a pension at retirement. It would be both inhumane and unjust to deny them those benefits now. But Social Security must be radically changed to assure continuation of the pension they were compelled to purchase. At the same time the young, who have no real hope of ever receiving Social Security, have to be relieved of the crushing burden of F.I.C.A. taxes. Most of the solutions being proposed for the Social Security crisis are at best stopgap measures—Band-Aids over an abdominal wound. Liberals favor raising taxes or juggling the money in the various Social Security trust funds. Conservatives usually opt for cutting benefits and raising the retirement age. Ronald Reagan’s Social Security advisors have recommended raising the retirement age to 68, reducing benefits to an average of 25 percent of the worker’s last paycheck (they’re presently 41 percent), and including new federal employees in the program. But why have the program at all if only a fortunate few will live long enough to collect Social Security payments, and those will be greatly reduced? The problem with these solutions is that they do nothing to remedy the basic inequity of Social Security—the compulsory nature of the system and the disparity between heavy taxes today and the prospect of modest benefits, if any, in the future. Nor do any of these proposals address the central administrative problem of the system: the non-existence of a trust fund to cover liabilities. The exact extent of these liabilities is a matter of conjecture. Estimates range from $4 trillion to $9 trillion in unfunded liabilities, that is, obligations which are owed to those covered by the system but which exceed projected revenues. One begins to appreciate the enormity of this debt when one realizes that $4 trillion is 75 percent of the total wealth of this country! Michael Watcher of the University of Pennsylvania’s Wharton School of Finance believes that “most people under 35 have virtually no chance of collecting Social Security and should avoid the system if they can save for their old age.” And financial writer Howard Ruff considers Watcher to be a screaming optimist. If someone must be hurt by the resolution of the Social Security crisis, it should be those in the best position to help themselves. We must guarantee the benefits of retirees, or those near retirement, as they are obviously in the most precarious financial position. But equally important is phasing out Social Security taxes, which are an unconscionable burden for workers and ruinous to the economy. We must begin by eliminating the welfare aspects of Social Security, such as Supplementary Security Income (SSI) and the unearned spouse’s benefits. Then we must assure full coverage to those presently retired as well as those within ten years of retirement. We should also limit increases in Social Security payments to average annual wage increases, instead of tying them to the inflation rate. For people in the 35 to 55 age bracket we should offer a reduced Social Security program—half the benefits for half the payments. These individuals are in a position from which it’s easier to wean them away from Social Security. Of course, they may prefer to opt out of the program completely, with the understanding that they’ll lose whatever benefits have accrued to them (really not a bad deal for those closer to 35). To those under 35 we should say, “Sorry, folks, you’re on your own. Your Uncle Sammy has lied to you, lo, these many years. There is no trust fund. You don’t get a pot of gold at age 65. But, as a consolation prize, we are relieving you of the burden of F.I.C.A. taxes. The 15 percent of your income you’ll save as a result can be invested to provide for your retirement.” These steps won’t entirely solve the problem. Even with this gradual phase-out of Social Security there are still enormous unfunded liabilities to be reckoned with. We must establish a trust fund, one whose assets will grow at a reasonable rate from investments in the private sector. This could be accomplished, at least in part, by selling a large portion of the 742 million acres of federal land. As a side benefit this would get the government out of the land-management business, and open vast areas in the West to energy exploration. Let’s face it, Social Security is a raw deal for the young and an uncertain promise for the elderly. It’s a fiscal paper tiger, which doesn’t offer security to anyone. We’re in the position of a wise investor with a bad stock: it’s time to cut our losses. Donald A. Feder is an attorney and the Executive Director of the Second Amendment Foundation. He is also a freelance writer with a weekly political column in the Bellevue, Washington, _Journal American_. His writing has also appeared in the _Boston Globe_, _Boston Herald American_, _Seattle Times_ and _Seattle Post-Intelligencer_.