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Is Social Security Fair?

November 14, 2008

Social Security has become an unfair system that burdens the poor, often to help the rich. My explanation begins with a question for you, the reader: If the government promised fifty years ago to give ten million dollars to each retiree, would you feel obligated to take a second or third job in order to help the current government keep this promise that you didn’t make? No? Then we agree that we are not obligated to keep all promises made by past generations or past governments. Of course, nothing so extreme has been promised, so what about the promises made when Social Security was first implemented in this country?

To start with, let’s drop the pretense that it is or ever was a retirement "trust fund." The money is not and never was invested or set aside. It's used to pay current retirees, and if there is any excess left over that amount is "invested" in treasury securities. In other words, the government just spends the money and promises to repay it, which is merely a promise to somehow make future workers pay enough to support this scheme. If you "invested" your 401K money in loans to yourself that you spent now, would anyone take it seriously when you said you had a retirement fund?

Social security is essentially a welfare program by definition, because money is taken from current taxpayers to provide benefits for recipients. Some senior citizens need our help, so I don’t object to my money being used to help them survive. But given that it is a welfare program, shouldn't it be means-tested? If it is not we inevitably have those who are poor working to give money to some who are wealthy. Should a waitress at a restaurant in New Jersey be made to pay for wealthy retirees' drinks as they lounge on the beach in Florida? I don’t think so.

According to federal government information online, as of October 2012 there were 56.58 million individuals receiving Social Security benefits totaling $64 billion per month, for an average monthly check of $1,131. Figures for total income of retirees is harder to find, but a report prepared for congress shows that fully 25% of people over 65 live in a household with over $59,000 of annual income. This does not include the value of government services which are not direct cash payments, like Medicare. It also does not reflect the value of second homes and other non-income assets which could be used as income if sold.

Now, $59,000 annually, which is almost $5,000 monthly, does not make one wealthy by any means, but it is also nowhere near poverty level. This is especially true when medical care is mostly paid for and taxes are lower (investments, the primary source of income for most retirees, do not incur payroll taxes, unlike earned income). So losing those $1,131 monthly Social Security checks would not impoverish many in this group. That same report mentioned above shows that almost 10% of those aged 65 or older are living in poverty, but this includes many who receive Social Security checks every month (more than 90% of people in this age group get SS benefits). That's an important point, as I'll show in a moment.

What do all of these figures menan? One thing worth noting is that those who work and live in poverty get to pay for senior citizens who are not in need to live a better lifestyle. Draw the line where you like (there are millionaires getting monthly checks as well), but if we assume that retirees in the top 25% of income would be fine without the help, we arrive at a figure of about $192 billion annually spent unnecessarily. That is a massive transfer of wealth from young to old and from poor to middle-class and rich as well.

There are scams that rip off social security money, like the one reported on by the Treasury department in 2005. They found that the owners of 36,000 single-shareholder ‘S’ corporations paid themselves no salaries at all in 2000, though each had operating profits of more than $100,000. This was most likely to avoid paying social security taxes on $13.2 billion in profits. That means they legally underpaid about two billion in social security taxes.

Then there are the thousands of retiring teachers in Texas who worked one day as a janitor in order to qualify for both their generous governmental pensions and social security. The Government Accountability Office (GAO) reported on this legal loophole in 2002 and 2003, and estimated that it cost $2.2 billion in additional benefits. The one-day pay stub from cleaning the bathrooms (if they even did the work) qualified each teacher for about $113,000 in benefits.

But these abuses are not the primary problem. The problem is that the system is not set up to help only those who need help, and there is no trust fund. The first benefit check was paid out in 1940 to Ida May Fuller, who collected $22,889 in benefits after paying $49.50 in taxes into the system. That should have been a clue that this scheme would someday be in trouble. Now it has become a way for the old and the wealthy to take from the young and poor.

I advocate (perhaps uselessly) dumping the social security system entirely. It would be better to give help to those who need it from general tax revenues, rather than hide the nature of this supposed "retirement fund" scheme. Then we might even resolve some of the poverty among the elderly, rather than use the money to fund better retirements for millionaires and others who do not need the money.

I can’t blame recipients for not liking my analysis, or for taking what they can get. They've been told over and over that this is a kind of "right" or "contract." But in Flemming v. Nestor, 363 U.S. 603 (1960), the Supreme Court ruled that "there is no contract right to receive Social Security payments. Payments due under Social Security are not 'property' rights and are not protected by the Takings Clause of the Fifth Amendment."

Since those payroll taxes are being collected for now, one could argue that they're going to be spent one way or another in any case. Thus a retiree who still works, has a business, or otherwise makes a decent amount and pays taxes on that income might see those social security checks as a kind of tax refund. In any case, and despite any moral qualms, few of us could refuse free money, so who can cast the first stone?

On the other hand, taking from what has already been collected by a government is one thing, but advocating and voting for more of the same certainly makes one more of a participant in the crime. If you look closely at this, you cannot escape the fact that the only way you get your money is if government takes it from those who are now working, many of whom are working for less than $20,000 per year and paying $3,000 of that in Social Security taxes.

Let me propose an analogy to make this clearer...

Suppose some pandering politician in one of the poorest countries on the planet had sold investors cheap unrealistic bonds thirty years ago that now were maturing at a value of a million dollars each. If you were one of the investors, would you try to enforce payment in full today knowing that to pay these off the current government would have to take half of the average citizen's $600 annual income – take it from people who were not alive when the promise was made? No? Then here’s another question for you: If workers make $8,000 or $18,000 – at what income point would you no longer feel bad about voting for politicians who promise to take money from the poor or middle class (or anyone) to give to you?

Note: This is part of a series. You can find all of the pages listed and linked to here:

The Redistribution of Wealth to the Wealthy

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Social Security