Free Market Institute Blog
Ida…May Not?
The very first Social Security check, numbered 000-000-001, was sent to Ida May Fuller, in 1940. This unassuming Vermont woman had worked a bit more than two years, contributing to the new Social Security program, which began during FDR’s New Deal in 1935, and was declared constitutional by the Supreme Court in 1937.
Ida paid $24.75 into the retirement system, but since she lived to be 100, she drew just short of $23,000 in benefits, receiving about $1000 for each dollar she contributed.
That’s a pretty good rate of return. If a worker today contributed $100,000 over the course of his or her career received Ida’s windfall, their Social Security benefits would total $100 million over their retirement…which just might make Charles Ponzi, the Italian immigrant whose name was immortalized for his Ponzi schemes, blush. I remember reading that the Social Security program is not actually a Ponzi scheme, because it is legal. This is a bit like saying a murder for hire scheme isn’t murder if it’s run by the federal government.
On my middle class teacher’s salary, my lifetime benefits would be about $265 million, so about $10 million per year if I retire at 67 and live to 94.
Since Social Security was created right before a baby boom occurred, it made it a gigantic success, ensured its political popularity, and–given our current Baby Bust–will doom it to oblivion.
It’s easy to see how this program was popular.
But as benefits increased over time (from 25% of an average salary to 40% of an average salary), and the number of workers paying into it dropped, the unfortunate math involved with this system illustrates its problems.
The cost of the system (which is illustrated by C, as in the percent of the median wage) works out to this simple equation:
B
C = _____
W
B is the benefits as percent of the average wage, and W is the number of workers per social security beneficiary.
B started out at 25%, and W was 159.
Today, B is 40%, and W is moving toward 2.
Which means that “C”--the cost of the program–was something like a payroll tax of .15% during Ida’s life.
And when W hits 2, with B being 40%?
The tax rate will be 133 times larger, at 20%, which of course, is on top of a myriad of other taxes we pay.
That cruel math (not cruel politicians!) suggests–well, mandates–that in order to keep payroll taxes from skyrocketing, we need to reduce B (remember that each day, 10,000 Americans turn 65, and they vote), and/or increase W (somehow increasing the labor force).
Neither option is easy or politically popular.
The above analysis assumes a federal program like Social Security that forces workers and employers to pay into is constitutional. (Naturally, the government doesn’t force us to accept our benefits!)
Is a mandated retirement system constitutional?
According to the Supreme Court’s 1937 decision in Helvering v. Davis, yes. How so?
Certainly taxes are constitutional, if they align with the powers allocated to Congress. But taxes are the mechanism by which the Congressional powers are executed–a means to the end.
So, what’s the end? The opening to Article 1, Section 8 states that Congress’ power to tax exists for an end: “to pay the Debts and provide for the common Defense and general Welfare of the United States.”
The 10th amendment was inserted to limit the federal government’s encroachment upon state powers. If a proposed federal law doesn’t align with one of those powers listed (for example, coining money, setting up a post office, patent offices, enacting tariffs, declaring wars, and the like) it devolves to states or localities.
Basically the Court ignored the enumerated powers in article 8, and promoted article 8’s preamble as a gateway that allows any federal law if it aligns with “general welfare” or “common defense.”
“Congress,” the Court reasoned, “may spend money in aid of ‘general welfare,’” and that concept isn’t static, but actually “adapts itself to the crises and necessities of the time.” Besides, security for the aged is a national problem; if state X enacts its own social security program, needy people might move from state Y to take advantage of state X’s generosity, dooming state X’s program.
My response?
- The above reasoning is a bit curious: state X would likely connect its retirement benefits to the taxes paid by residents of X. So you can’t live in Mississippi, pay no retirement taxes, and schlep to Califironia at age 65 to take advantage of their system. California politicians may be a bit dim-witted, but are they that dim-witted? If so, perhaps those states deserve to go bankrupt.
- Given changing demographics, different subsections of the population–like Ida Fuller’s generation–have a much greater benefit windfall; today’s millennials are the losers here, so the system has a systemic special, not general welfare element, which makes Boomer-Gen Z conversations a bit contentious.
- And different sections of the population, and certainly different individuals, have shorter life spans: those specific subsets (say, Asian Americans vs. Black Americans) get a specific windfall that also doesn’t align with the idea of “general” welfare. Smokers here lose out to marathon distance runners and professors, because they typically live shorter lives, funding others’ payments but getting a tiny fraction of what they paid in. To some extent, this is true of annuities, of course, but outside of Social Security, we’re not forced to buy annuities.
- Besides, one could find all sorts of (quite fluid) “national” problems that the federal government could, and does, address because of New Deal court rulings: drug addiction, school curriculums, the plight of sugar beet farmers, and the like. So all federal spending is constitutional! Unless, perhaps, it egregiously violates someone’s individual rights. This misunderstanding of the principles underlying the enumerated powers has eviscerated nearly all constitutional limits on the federal government.
And the problem of “old age poverty” may be dicier because of Social Security: I would have loved to invest my retirement monies into a stock index fund when I started working in 1980; it would grow at the rate of stock appreciation (say, 8%) rather than the rate of individual GDP growth (say, 2%).
Along with its lousy rate of return problem, Social Security has lowered savings rates (why fully fund your retirement now? You already “contribute” 14% of your salary to pay for other people’s retirement). Lower savings rates decrease economic growth, which exacerbates the old age poverty problem.
Yes, Social Security has been politically popular, the “third rail” of politics that no one can touch.
But touch we must.
