All Commentary
Wednesday, April 1, 1981

Book Review: Social Security: The Inherent Contradiction by Peter J. Ferrara

CATO Institute, 747 Front Street, San Francisco, CA 94111 ), 1980
484 pages • $20.00

Social Security absorbs one-fourth of the federal budget. Its sacrosanct nature and mythology makes it virtually immune from serious criticism. It has long been misrepresented and deceptively described by welfarist politicians and liberals to create a false impression among vot ers about the shortcomings of the program. As Milton Friedman has expressed it, social security is the only institution that could take a tax structure no one would support on its own and a benefit structure no one would support on its own, slap them together, and emerge with a combined tax-benefit structure that is often highlighted as the showpiece of America’s welfare state!

Nevertheless, the glitter has been penetrated somewhat by the realities which have become apparent in recent years. Social Security is a pay-as-you-go system, not a system whereby “contributions” are saved or invested—the government’s assertion that “contributions” are in vested in interest-bearing securities means only that the government writes itself a promise to tax future production to cover benefits as they become due.

A pay-as-you-go scheme in its initial phase will run huge surpluses because there are many current taxpayers but few or no current beneficiaries entitled to payments. Meeting the obligations of the program is not a cause for concern because there are few obligations to be met. The system appears to be financially sound. However, after the first generation of beneficiaries, the program builds up huge liabilities which require accelerated extractions from current production. The focus of concern is then switched from paying out surplus benefits to the raising of taxes to meet the ever-accelerating benefit obligations.

In 1977 Congress passed one of the largest tax increases in U.S. history to save the system from bankruptcy. Social Security taxes—amounting to about sixty dollars annually for the first fifteen years of the program—had turned into a monster gobbling up $3,000-$4,000 dollars yearly with escalations already built into the structure. To pay benefits currently being promised, tax rates will have to be raised to 25-33% of the taxable payroll, contrasted to 12% today.

The rate of return from a pay-as-you-go system comes not from increased output but from increased taxes. Social Security is sometimes described by its proponents as a “compact between generations.” Here is what really happens. When a social insurance plan is first imposed, the current retired generation makes a deal to share a portion of the wealth produced by the current working generation, which saddles the next working generation with the responsibility for paying the resulting indebtedness. When the next working generation becomes the current working generation, they face a huge debt owed to the now current retired generation. Since they have to make good on these liabilities regardless of whether they continue in the program, they decide to keep the program and vote to tax the next generation even more to finance ever-greater benefits to themselves. Future generations have no way to prevent this “compact between generations” being imposed upon them.

As Ferrara observes, it is not surprising that the decision to tax future generations to provide benefits to current generations can easily lead to the imposition of a program that makes all future generations worse off than it makes the current generation better off!

The social security compact between generations is, Ferrara writes, corrupted by self-dealing wherein the first generations take unfair advantage of the generations to come. “Under traditional principles of equity, therefore, the social security compact between the generations is unfair, immoral, fraudulent, and voidable.” As the number of retirees increases in the future, the strain to meet the obligations will become enormous, and could provoke serious taxpayer resentment if not support for programs of euthanasia.

It is hardly questionable that the time is ripe for significant reform of the social security program. Ferrara advocates that the entire insurance portion of the social security program be turned over to the private sector. Individuals would be allowed to provide for their old age and other contingencies by investing in private insurance, savings, and pension plans with the funds they would have paid in social security taxes. The stark reality of the current program, the author contends, is that it “is simply not working” and that, as the public has already been warned in the words of the Wall Street Journal, “The social security program will return like Banquo’s ghost until really serious and courageous efforts are made to solve it.” There is no reason to believe that social security, with the persistence of the Egyptian sphinx, must remain in its present form for all time to come. It can and must be changed in manner which is consistent with greater in dividual choice and autonomy.