Grand Illusion: Social Security Is a Government Insurance Program

Grand Illusion: Social Security Is a Government Insurance Program

By Gary North

I received this email from a self-professed fan. But in his note, he felt obliged to add this:

I do take one strong exception to your statement that Social Security is the largest Ponzi scheme ever. Social Security is an insurance policy. We pay real money to receive real benefits. It currently has over 2 trillion dollar surplus. And, if we simply remove the cap so that the wealthy continue to pay in at the same rate as everyone else, it will be solvent for all time. So, instead of painting yourself as one of the few intellectual right-wing extremists out there, why don't you use your obvious intellect and be honest about Social Security instead of parroting Fox News talking points?

It never ceases to amaze me that there is anyone out there who still believes any of this. At the age of 17, in 1959, I was taught the truth in a high school civics class. The program is not funded in terms of any insurance program.

First, the Supreme Court of the United States in 1960 declared that the Social Security program is not an insurance program. The case was Fleming v. Nestor. On the Social Security website, we read this.

There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled "RESERVATION OF POWER," specifically said: "The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress." Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.

In this 1960 Supreme Court decision Nestor's denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor's benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right. http://www.ssa.gov/history/nestor.html

Second, there is no money in the Social Security Trust Fund. There is merely a stack of IOUs issued by the Treasury Department. The SSA says of these assets, By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are "special issues" of the United States Treasury. Such securities are available only to the trust funds.

There is no money in this fund. The government has spent every dime.

Tax income is deposited on a daily basis and is invested in "special-issue" securities. The cash exchanged for the securities goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund. http://www.ssa.gov/oact/progdata/fundFAQ.html#a0=1

These IOUs are not money. To get money to pay beneficiaries, the SSA must turn in some of those IOUs to the Treasury. The Treasury must then use money out of the General Fund to pay the SSA its money. If we do not count interest paid by the General Fund, Social Security System is now in a massive deficit position, and this will accelerate in 2019. The Trustees' Report for 2013 says this.

The deficit of non-interest income relative to cost was about $49 billion in 2010, $45 billion in 2011, and $55 billion in 2012. The Trustees project that this cash-flow deficit will average about $75 billion between 2013 and 2018 before rising steeply as income growth slows to the sustainable trend rate after the economic recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. http://www.ssa.gov/oact/trsum/

Third, my critic says that the rich should be taxed more. Because of the graduated income tax, money paid into the General Fund is paid mostly by rich people. The income tax system extracts 106% of the income from taxpayers in the top 40% of income. People in the bottom 40% receive free money from the government. They pay no income taxes. This is reported by the Congressional Budget Office.

My critic is typical of Tea Party supporters above the age of 65. He wants his welfare, and he wants to soak the rich to make sure he gets paid. This is the second-largest welfare state program in history, after Medicare, and he thinks it is a wonderful thing. He thinks he has both a moral and legal claim on other people's money. He hates the welfare state . . . except that portion of it in which subsidizes him with other people's money. He has tens of millions of welfare recipients on his side. This is why the costs will grow, the deficits will grow, and the Social Security system will eventually go belly-up, taking with it a generation of fools who do understand that government IOUs are not money, and political promises are not an insurance program.

Social Security, Medicare, and Medicaid are why the federal government is steadily going bankrupt. The disparity -- unfunded liabilities -- between what the politicians have promised the voters and what must be paid out is around $200 trillion in present value. This is why, at some point, younger voters are going to send Congressmen to Washington with this command: "Stiff the geezers!" That is exactly what Congress will do. I say: "The sooner, the better." And I'm one of the geezers.