Thinking About Social Security

During the past week I have had conversations with at least 3 people about Social Security.  In a variety of ways it seems to be on the mind and there seems to be a fair amount of confusion out there.  So, let me offer some thoughts.

First, yes, Social Security is an entitlement.  The U.S. Senate glossary of terms defines entitlement as follows:

entitlement - A Federal program or provision of law that requires payments to any person or unit of government that meets the eligibility criteria established by law. Entitlements constitute a binding obligation on the part of the Federal Government, and eligible recipients have legal recourse if the obligation is not fulfilled. Social Security and veterans' compensation and pensions are examples of entitlement programs.

That is, recipients of the Social Security entitlement automatically receive the benefits for which they are eligible based on the eligibility criteria (40 “quarters” of eligible earnings).  No one is dependent on annual Congressional appropriations to receive their Social Security benefits. 

Not all social programs are entitlements.  For example, SNAP (food stamps) is also an entitlement program.  In contrast, the Housing Voucher Program is not an entitlement program because Congress appropriates a certain sum of money for the program which may or may not be enough for all who seek funds from the program.

Entitlement programs require mandatory spending.  Mandatory spending is generally governed by statutory criteria; it is not normally set by annual appropriation acts.  The Congressional Budget Office notes “Social Security and some other mandatory spending programs are in effect indefinitely, but some (for example, some agriculture programs) expire at the end of a given period.”  Essentially what this means is that the Government could (though it is unlikely that it will) alter or end the program.

The money that you receive in your Social Security payment is not the same money that you put into the program.  The Social Security taxes that you paid along with the amount that your employer contributed on your behalf was put into the government’s Social Security coffers and used to pay other individuals who were receiving Social Security benefits while you were working.  Not unlike a ponzi scheme, the money you paid with the promise that it would be returned to you was used to pay off the promise that was made to someone else.

Social Security was created because FDR and others in power at the time (during the Great Depression) believed that workers were not making wise choices for their own retirement and that the government could create a retirement plan for all workers.  This would mean that workers would pay a larger portion of their paycheck to the government in the form of additional taxes specifically designated for Social Security.  Rather than choose their own retirement plan, all workers would participate in the same government run plan.  (The current Payroll Tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.) 

Now, I can’t help but think that if I had been able to keep the money that I paid to Social Security, and had invested it wisely I would have a far better retirement income than I have under Social Security.  But the question is, would I have done that or would I have spent that money on shoes and wine or some other frivolity?  Had I wasted the money away, I might be less well off than I am with Social Security. 

The important thing to note here is that whatever I would have done with that money and however I would have ended up in retirement would have been my choice and not that of the government.  I had the freedom to choose and would have been left with the consequences of my choices.

So, Social Security is an example of turning over one aspect of our freedom to the government – we have ceded to them our freedom to choose how to plan for retirement.  In return they have promised us that we will have the amount that they decide is fair based at least in part upon the amount that we and our employer contributed on our behalf. 

So far, this has worked to ensure that everyone who worked at least 40 quarters will have some sort of income when they retire.  But it has removed the ability of those workers to use that money - the Payroll Taxes – in ways that might be better suited to them.  Private retirement plans allow the individual to determine not only how much money they will invest, but also when they will collect the money they have put in, how much they will collect, etc. 

Social Security is entirely run by the government.  The government is in full control. The Social Security program requires workers and their employers, along with self-employed individuals, to pay into the system throughout their working years. Congress decides how much of your paycheck is taxed in order to contribute to the Social Security fund.  The government decides when you contribute.  The government decides how much to give you, and when you can start collecting those benefits.  There are only a few very narrow exceptions of who can opt out of the program. 

The number of people reaching retirement age and the number of people currently working to pay those people’s benefits will affect the amount you receive in Social Security benefits as will such things as when you retire, how much you earned, and your marital status.   You may see a better or worse return in terms of getting back more or less than you contributed.  And your return may be better or worse than if you had created your own retirement plan.

Because it is owned and controlled by the government, Social Security is a form of socialism.  That does not make it a bad program.  There are many who might not have the income they do if not for social security.  But there are also many who might have done better if they had been left in control of their own retirement taxes, had them to use or invest wisely at the time they earned them rather than paying them to the government, and had the benefits of their own choices when they retired.

As an entitlement, like any other right granted from the government to the people, the government has the ability (if not the likelihood) to terminate that entitlement.  An entitlement is not a right that is owned by the people.  It is “owned” and controlled by the government. 

Like any other entitlement people learn to depend upon it.  They become in that piece of their lives dependent upon those in power rather than themselves.  Few actually think about this as they look forward to the certainty of their monthly payments.  Few think about how they might differently have spent their Social Security taxes had they not been required to give them to the government.  While now expecting the government to take care of them, few even realize that they might have had a choice instead.

The reality is that, much as we accept and perhaps like it, Social Security is a piece of socialism. For better or worse, we have relinquished a part of our freedom to government control.