All Commentary
Monday, November 1, 1965

Social Security Re-Examined

In a sense, it might be said that the Social Security program of the United States is the best in the world. At least, it would be diffi­cult to name another country in which so high a proportion of per­sons over 65 years of age can re­tire in such comparative luxury at taxpayers’ expense. Many older persons are simply amazed at how well they can manage on their So­cial Security payments, while the more skeptical of those now ap­proaching or already beyond re­tirement age continue from long habit to make other provisions—to save on their own—for those lean years in later life.

The tenacious American tradi­tion of private saving and invest­ment in productive property large­ly explains why a system of social­ized security might appear to func­tion more effectively in the United States than in most other coun­tries. Economically advanced and comparatively prosperous indus­trialized societies can bear a great deal of socialistic intervention that would be unthinkable in undevel­oped countries. The question is: “How much intervention can be borne in the United States?”

Illusions to Be Exposed

In examining that question, let us first clear away any possible il­lusions concerning the Social Se­curity program. It should be ob­vious to all by now that Social Se­curity is in no sense of the word a savings program whereby a por­tion of a person’s property is set aside to be returned to him for use at some later date. Nor is Social Security at all like an insurance program with several persons pool­ing their savings in some cumula­tive fashion to cover contingencies and catastrophes that might befall certain members at indefinite fu­ture dates.

In other words, Social Security involves no fund or stockpile of goods and services from which por­tions may be drawn. It is purely and simply a compulsory income tax; property is taken from nearly all productively employed persons and redistributed—sometimes to those same persons, but primarily to others—according to a formula based on present and past earnings of the recipients. Social Security is nothing but the compulsory redis­tribution of property on a day-to-day basis.

Who Pays?

A second possible illusion has to do with the incidence of the tax. Who is really paying it? This seems reasonably clear in the case of “self-employed” persons; but otherwise, there is the widespread misconception that the employer pays half of it. The harsh eco­nomic fact, of course, is that the Social Security tax is, to the em­ployer, just another part of the cost of hiring labor. If he didn’t hire the man, he wouldn’t have to pay the tax. But if he could hire without paying the Social Secur­ity tax, one of three things must happen: (1) he could hire more help for the same total wage cost; (2) he would be obliged by com­petition among employers to pay higher wage rates to get the help he needs; or (3) he would be obliged, again by competition, to sell his products at lower prices in order to clear the market. In any event, with rare and strictly tem­porary exceptions, the saving to any employer—if he were relieved of Social Security tax liability—would be passed along to employ­ees either in the form of increased wages or in the form of reduced prices for goods and services in the market place. In effect, then, the employee does pay all of the Social Security tax levied on his account, including the half he might have thought his employer was contributing.

The foregoing also should help to clear up the illusion that Social Security offers something-for­-nothing to everyone. It is true, in strictly materialistic accounting terms, that some of the early beneficiaries under the program were eligible for heavy windfalls at ratios of 20:1 or higher. But it is also true that scarcely any per­son now under 50 years of age stands a chance of getting back with interest his “investment” in Social Security. Some will have to pay for the multi-billion-dollar windfall accruing to those early beneficiaries. The youngsters are the ones now scheduled for gener­ous portions of nothing-for-some­thing—at an annual cost of $746 a year on any job paying $6,600 or better, when the “health and welfare” tax presumably “levels off” at 11.3 per cent. Though pre­cise calculations are impossible for any program that is subject to the whims of politics, it appears now that a young man just entering the labor force could, for the same amount, buy from private life insurance companies two or three times as much old-age secur­ity as his Social Security taxes are scheduled to yield.

In the face of these stark real­ities, how can such a program re­tain its popularity among Ameri­cans? The answer apparently may be attributed to another illusion about the nature of things in gen­eral and economics in particular.

“Economics” of Redistribution

Economics used to be a study in scarcities, based on the assump­tion that human wants are unend­ing and that the means of satis­fying such wants are limited. The problem was to obtain the most efficient use of scarce resources—land, labor, capital—to maximize the yield of goods and services most wanted by consumers. It was believed that human beings pos­sess a certain dignity, entitling them to respect as individuals, each capable of knowing his wants and more or less self-responsible for their fulfillment. The institu­tions of private property and vol­untary exchange grew out of and implemented the belief in the dig­nity of the individual.

In that context, economics con­cerned the ways and means of sat­isfying the most urgent wants of individuals through the responsi­ble individual ownership, use, and willing exchange of scarce goods and services. The individual’s own­ership of property, including his freedom to offer his services for sale, affords him entry to the mar­ket.

The first rule of the market is that each buyer also must be a seller—that all participants are suppliers seeking to gain what each wants most by giving up that of his own which he values least. In other words, self-interest is best served by serving others. And the free market price for each com­modity or service is the price which most nearly balances the combined demand at that price against the available supply at that price. The market price thus serves as the signal to consumers to step up or to curb their use of various items and encourages pro­ducers to concentrate on the out­put of items most sought by con­sumers. Thus, shortages and sur­pluses are averted and waste of scarce resources minimized in the market economy. Such, briefly, was the essence of economics in the classical sense, with emphasis al­ways on the most efficient and pro­ductive use of all available re­sources.

The material abundance flowing from the competitive market econ­omy following the industrial revo­lution has led some so-called economists to the erroneous conclusion that the problem of production has been solved. The “new-eco­nomics” is primarily concerned with the redistribution of wealth so that society may be able to con­sume all that it is capable of pro­ducing. They see that the wants of individuals are unending, but seem to overlook the continuing scarcity of means to satisfy such wants. Market prices, to them, are but barriers to the deserving poor; and they reject the first rule of the market: that a buyer must first have something to offer in exchange. But to take the prop­erty of those who have earned it by efficiently serving others, for redistribution to those who offer nothing in exchange, can only be accomplished by compulsory meth­ods.

The Public Sector

Thus, the “new economics” calls for government action to break down the institutions of private property and voluntary exchange. Goods and services are to be allo­cated, not by competitive market pricing, but by the coercive meas­ures of the “welfare state.” The false premise is that producers will keep on “coming to market” with useful goods and services, despite the certainty of being con­fronted there by armed bands de­manding something for nothing.

This is the illusion of the “new economics,” perfectly exemplified by the Social Security program. There is no denying the desirabil­ity of security for older persons; almost everyone would like that. But one of the quirks of human nature is that a great many in­dividuals will not voluntarily fore­go current spending and consump­tion in order to save or put aside enough of their own property to yield a decent living after they have retired from the labor force. So, if all people are to be guaran­teed an income in old age, it will be necessary to force people to pay for this.

Dr. J. K. Galbraith, among others, has observed this tendency of persons to use their property primarily for the things they want most; and he refers to the result as the “affluent private sector” of the economy. On the other hand, noting that a great many persons neglect spending for the things he believes they ought to want—such things as providing for income during old age—he finds this “public sector” relatively starved.

As the financial statements of a great number of life insurance companies will attest, there are persons perfectly willing to save for their old age; and it is a profit­able business to serve those will­ing customers. Many other types of business also efficiently and profitably cater to the wants of those who desire to save and in­vest in productive private enter­prise as a source of future income. But there is no profit to be had in supplying a commodity or service to persons who are unwilling to pay for the item. Businessmen won’t and can’t voluntarily con­tinue such an operation. So, if old-age security is to be guaranteed to those who do not choose to pay for it, the losing operation will have to be conducted in “the public sector,” taking property from those who have earned it, for re­distribution to others—by force.

Subsidized Poverty

Now, we are gaining consider­able experience under the “public sector” in the United States, with government at all levels currently spending for us some two-fifths of our total earnings.

Much of this “public sector” spending, of course, goes for our education—some $40 billion a year of tax monies. And there are those who contend that education spe­cifically, and the advance in knowl­edge generally, together account for nearly half of the growth of “real national income.” If that were true, it would represent a sizable dividend from the “public sector.” However, there is one small problem in that the better educated we become, the less we seem to be able to care for our­selves in our old age and other times of adversity. The “public sector” spending for social wel­fare payments of all kinds has now climbed to $47 billion a year. Some $17 billion of that goes for payments under the Old Age, Sur­vivors, and Disability Insurance (OASDI) feature of the Social Security program. But, unfortun­ately, the need for other types of social welfare seems to increase even faster than the need for So­cial Security. The conclusion would seem to be that the starva­tion of the “public sector” is of a type that is aggravated by feeding it; the subsidizing of poverty in­creases it.

To question the propriety of various government spending pro­grams is not to deny the useful­ness of education and the advance­ment of knowledge nor to malign the charitable instincts of those who wish to devote their own re­sources to the assistance of others. But a reasonably educated person cannot escape the fact that the wherewithal of capital formation and the means for charitable un­dertakings both stem from the same source; namely, the savings of productive individuals. The ac­cumulation of a surplus of person­al property beyond one’s immedi­ate needs is the foundation of cap­italism and the only true foundation upon which the principles and practice of charity can stand.

This is the reason why true charity cannot flow from the com­pulsory processes of government. To promote the welfare of one per­son at the expense of another is no contribution to the general wel­fare. The framers of the Constitu­tion of the United States sought to guarantee the rights of individ­uals to own property. They under­stood that whatever government can do to secure those individual rights to property is a contribu­tion to the general welfare—and that no government can promote the general welfare in any other manner.

When government resorts to the tactics of a Robin Hood, it has ceased to be a protector of prop­erty or a guarantor of security. Instead, it becomes the instrument of plunder by which one citizen or special interest group may loot the earnings and savings of others. Government cannot create secur­ity in this fashion, by taking one man’s earned security and giving it to others in accordance with politically determined need; it only destroys security.

What starts out as a popular pastime of soaking the rich turns into a program of taxing every­one who works for a living. And as socialism advances, the weak and dependent find themselves competing with the youthful and strong who also have been driven by hunger to the public trough. Such competition in sheer despera­tion is far more ruthless than that which is sometimes frowned upon in the open market. When people lose respect for the lives and prop­erty of one another, then the weak and dependent may expect to be early victims of murder and theft.

Self-Reliance Is Best

If the less productive members of a society truly seek security, let them rally to the defense of the freedom of choice and freedom of action of those who work for a liv­ing and who are personally pro­ductive. Let them voluntarily deal with one another in a market place kept free of compulsion. Such vol­untary trading directs the instru­ments of production and the means of economic security into the hands of those most capable of serving all mankind. It stimulates every individual to develop his own talents to their maximum productivity. It encourages saving instead of squandering. The free market, and not its displacement by governmental controls, is the only route to the kind of personal security which makes for harmoni­ous social relationships.

A feeling of personal security depends upon something more than the legal guarantee of a handout in time of need. Security is an attitude not necessarily satisfied by an “equal share” or even by an abundance of material goods and services. To be truly secure is to be without cause for anxiety, and that kind of security stems from the mind of an individual who knows that he has done his very best with what was properly his own. Such security is fed by one’s respect for the rights of others to life and property, a respect upon which is based one’s own claim to those rights.

Though older persons may not serve well in the armed forces, or in defense plants, or in the various other activities incidental to the support of big government, that need not preclude their being loved and respected as individuals. That is not sufficient reason for a law which tends to put an end to in­dividuality and its expression at age 65. If the young men and women of today’s generation have lost a sense of love and respect for their aging parents, that is some­thing which the government can­not restore through its devices of compulsion. That is a form of in­security which must be borne by parents if they have failed to teach their children to respect the sanc­tity of the individual and the rights to life and private property.

The same time-weathered code of ethics which advocates honoring one’s father and mother recom­mends respect for the life and live­lihood—the private property—of others. To violate any part of that code destroys the meaning of the rest of it. Society cannot enforce a law which guarantees security to the aged by denying the producer the right to the product of his own efforts. The best that society can do is to give the individual a chance to honor and respect his elders. This means allowing the individual his choice concerning the use to be made of his own life and his own productive efforts. It is possible for an individual to honor and respect others who are tolerant of his freedom to choose. But rare indeed is the individual who can extract love and honor from others by compulsory means

Such things as love, respect, honor, and justice in the relation­ships between persons are measur­able and meaningful only to the extent that individuals voluntarily reject an opportunity to dislike, disrespect, dishonor, or deal un­justly with others. And old-age security also falls into that cat­egory. Since a weak person can­not force a strong person to help him, it would seem wise to put the appeal on some basis other than coercion. This means retrieving the responsibility for old-age se­curity from the hands of govern­ment.

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.