President Obama is calling for an extension of the “payroll tax holiday” to stimulate economic recovery. But cutting the payroll tax only aggravates the problem of runaway entitlement spending that is wreaking havoc throughout the western world. What we need is a holiday from lies about Social Security.
The Social Security Act of 1935 was the first federal entitlement program. The term “entitlement” has a variety of definitions in political theory, but in everyday politics it means simply that Congress does not have to vote for annual spending increases for the program. If an individual meets certain established criteria, he or she is “entitled” to receive the benefits. With Social Security, you are entitled to certain benefits if you reach a certain age and have (with your employer) “contributed” payroll taxes into the system.
The fundamental problem with Social Security is that is a “defined benefit” pension system masquerading as a “defined contribution” program. Politicians have been understandably more reluctant to raise taxes (euphemistically called “contributions”) than they have been to raise benefits. The inevitable result has been promises that far exceed resources.
It is true that part of the problem was demographic—that life expectancy in 1935 was 65, and has risen to 78. But the greater part of the problem has been demagogic, not demographic, as politicians use benefits to bid for votes. Even before the system began paying out, Congress extended pensions to spouses and surviving children in 1939. Benefits were extended to millions of previously-exempted workers in 1950. Cost-of-living adjustments were also added that year. A disability program was added in 1956, which today has become a long-term unemployment or welfare program. In the early 1960s, Congress lowered the retirement age. Ten years later, cost-of-living adjustments were made permanent, and minimum benefits were raised. The first serious effort to have contributions catch up to this runaway benefit train came in the 1980s, and they are not nearly adequate.
The problem is not new. Indeed, the very first recipient of Social Security benefits showed the problem. Ida Mae Fuller retired in 1940 after having paid twenty-two (and a half) dollars into the fund. She collected over twenty-two thousand dollars over the next thirty-five years. This is a lottery, not social insurance. While an extreme case, there is no doubt that the vast majority of Social Security recipients have received far more in benefits than they have paid into the system, because Congress has repeatedly added and extended benefits.
The first thing that Congress should do is pass a “Truth in Social Security Act,” which would tell the story of the payoffs over the years. This should be easy to tell. Every year, the Social Security Administration sends me a statement detailing how much I have paid into the system, and projecting how much I (or my wife and dependents) will collect if I continue to contribute at the current rate. But the Administration does not include such details as the fact that there will be no funds left for anyone by 2037.
Over the last year, the “payroll tax holiday” reduced employee taxes from 6% to 4%. (Notably, the act did not reduce employer “contributions,” and thus could only stimulate consumer spending, rather than payrolls.) Nobody in the administration explained why this would not also reduce the ultimate Social Security benefits of payroll tax vacationers.
Some critics have called Social Security a Ponzi scheme. That’s not fair—not fair to Charles Ponzi, that is. He could only keep his scheme going as long as he could gull new participants into the scheme. We have no choice. Social Security is better called “a Ponzi scheme with a gun.”
The guys with the guns ought to tell the truth. But Social Security was conceived in dishonesty. F.D.R. understood that the payroll-tax system of funding Social Security was untenable. “I suppose you’re right on the economics,” he told Luther Gulick. But the payroll taxes “are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scarp by social security program.”
True, no damn politician ever would grasp the “third rail of American politics.” But a real statesman would at least tell the truth that can be the first step toward reform.