All Commentary
Wednesday, January 1, 1997

Book Review: The Social Security Fraud by Abraham Ellis

A Demolition of the Shaky Case for Social Security

The Foundation for Economic Education • second revised edition, 1996 • 209 pages • $14.95 paperback

Dr. Peterson, an adjunct scholar at the Heritage Foundation, is Lundy Professor Emeritus of Business Philosophy at Campbell University in Buies Creek, North Carolina.

U.S. Supreme Court Justice Louis Brandeis stated his opinion in Olmstead v. United States in 1928: The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding.

Just six years later, with the New Deal, a zealous, presumably well-meaning President Franklin D. Roosevelt, if also presumably without much understanding, said in a message to Congress calling for a system of social insurance: Among our objectives I place the security of men, women, and children of the Nation, first. Fear and worry, based on unknown danger, contribute to social unrest and economic demoralization. If, as our Constitution tells us, our Federal Government was established among other things ‘to promote the general welfare,’ it is our plain duty to provide for that security upon which welfare depends.

That’s a stretch, FDR’s citing the General Welfare Clause as authority to launch Social Security. Note his cited phrase specifically says promote and not guarantee, and general, not individual, welfare.

Nonetheless, Social Security began in 1935, the same year as Child-Welfare Assistance, now known as Aid to Families with Dependent Children (AFDC). Social engineering was off and running, with both welfare schemes incurring the wrath of the Law of Unintended Consequences. For instance, both Social Security and AFDC, if in different ways, have contributed to the breakdown of the American family.

Abraham Ellis, an English-born lawyer practicing in Manhattan, does a solid job in demolishing the shaky case for Social Security—shaky legally, analytically, and empirically. Rightfully, he tags the scheme as a fraud, as but one more means, through the years, of extracting heavy taxes from the already tax-squeezed American citizen. The fact is that today, for most working Americans, payroll taxes are bigger than income taxes.

Initially, though, the Social Security tax was deceptively and of course politically light—one percent each on employee and employer. You needn’t ponder long on why Congress magnanimously suspended payroll tax increases scheduled for 1946 and 1949. Workers, after all, vote. Yet today the combined tax is more than 15 percent, up more than sevenfold.

That’s bad enough, but the record of the White House and Congress in further administering Social Security is just as bad or worse, as politics has ever reared its ugly head. For example, in 1956 women, who also happen to vote, were allowed to receive reduced benefits at age 62, unlike their male counterparts whose eligible age held at 65. In 1965 widows had their eligible age reduced to 60. Compassion is never in short supply in Congress.

Abraham Ellis has a fun chapter on Social Security Semantics. Social Security taxes are still tagged as contributions; the system has a fictitious actuarial aura in its official description as Old-Age, Survivors, and Disability Insurance. Social Security trust funds imply actual investment set-asides for future obligations while the funds themselves are virtually sham dummy accounts, with strictly pay-as-you-go intergenerational transfers; fund trustees—not going to prison for the deception—simply accept federal IOU’s and hand over the cash receipts to the U.S. Treasury for general government expenses; current workers carry ever more retired workers on their aching backs, now in the range of three workers per one retiree. In 2029 the ratio will be two to one. So the Ponzi-pyramid scheme unravels; so the $350 billion cash cow laden with tens of millions of votes sinks into the muck of Welfare State politics.

In the introduction, FEE president Hans Sennholz wonders about the applicability of the touted privatization of Chilean social security to the American situation. He says reform here has to proceed from the high ground of goodness and morality; any other ground, no matter how rational and economical, is bound to disappoint.

The note on morality is appropriate. For in the upside-down world of Social Security, Abraham Ellis could have well come up with the crack: There’s a Fraud in Your Future.

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.