All Commentary
Monday, February 1, 1965

Why Social Security Must Fail

It is mathematically impossible for everyone to “get his money back” under our social security program. The total group of par­ticipants must necessarily get back less than they pay in. Here’s why:

All of the costs of administering the program are, by law, supposed to be paid by the participants. Re­gardless of the amount of these administrative costs deducted by government from the “premiums” paid in, it is certain that the same money cannot be paid back to the “policy holders.” That’s why it is impossible for all of the partici­pants to get back as many dollars as all of the participants pay in. Various individuals will unques­tionably gain, especially those who get there first. But the group as a whole must unquestionably lose, especially the young people who are now compelled to pay for the next 30 or 40 years. There just isn’t any way to avoid this “group loss” when the costs of adminis­tering the program can be met only from the money paid in by the group.

As a contrast, this is not true in the case of retirement income pol­icies sold by private insurance companies. The premiums on real insurance offered by most private companies are keyed to an expect­ed return from invested funds. Since these funds can be used for productive purposes, various com­panies and persons are quite will­ing to pay for them. Thus, private insurance companies can (and usually do) pay back to everyone more than everyone pays in; the participants as a group can all win.

The Fund a Bookkeeping Entry

When our government officials tell us that our social security funds are (like private insurance premiums) also invested and earn a return of three per cent, you might laugh—or perhaps cry. For the so-called “social security fund” is strictly nominal, since it amounts to less than one per cent of today’s accrued liability. Even then, this woefully inadequate fund is “invested” by government in the government’s own bonds. The interest that the government “earns” from its investment nec­essarily comes from you and me in the form of more taxes; there is no other place it can come from. That is why the government’s so­cial security scheme was mathe­matically and necessarily bank­rupt from its inception; it was (and is) merely a political mech­anism designed for persons who can be lulled into believing that the police power of government is the proper moral and financial base on which to build a sound retirement program.

The harsh reality of our finan­cially and morally unsound social security program must be faced sooner or later; if not by our gen­eration, then by our children and grandchildren. True enough, in­creases in premiums (up to some unknown point) can probably post­pone the eventual collapse and the revolution that may follow it. In­creased inflation can also be used by government to prolong the life of that unsound scheme. But our social security program must col­lapse eventually, since it is found­ed on continuing and automatic losses for the participants as a group.

Check the Mathematics

Finally, have I based my argu­ment on sound mathematical rea­soning? Well, I think so, but I must admit that it was once chal­lenged by a professor of economics. He pointed out that all tax­payers are compelled to pay in­terest on the government’s debt, including the interest on those bonds in the social security fund. But not all of the “interest pay­ers” draw social security. Further, some taxpayers pay a greater part of the interest than do other tax­payers. Therefore, the professor deduced, it is theoretically and mathematically possible for the social security fund to pay back to all of the participants more dollars than they pay in. “Now what do you say to that?” he chal­lenged me.

Two things. First, the interest income from those bonds amounts to no more than 4 per cent of total social security benefit payments at present. And this amount will necessarily diminish in signifi­cance as the accrued liabilities further mount and the “fund” de­clines. Let’s arbitrarily assume that one-half of that amount (2 per cent of current payments) comes from the taxes of nonpartic­ipants in the social security pro­gram, and that the other half is paid by the participants them­selves. Now by the same measure­ment, what is the total govern­mental cost for administering both the bond program and the social security program? No one knows, including the administrators. But surely it is at least 10 per cent. And based on the inherent inef­ficiencies of governmental opera­tions, it could run as high as 25 per cent, if all costs (including al­ternate opportunity and such) were properly included. That would mean an automatic loss of at least 8 per cent (probably much more) to the social security par­ticipants as a group.

Second, let us assume for the moment (incorrectly) that it is theoretically possible to make the social security program work mathematically by seizing income from some persons and giving it to other persons. Only a depraved people could knowingly and will­ingly endorse such a cynical scheme. And when a nation’s peo­ple sink to that low moral level, the mathematics of the situation becomes relatively unimportant.




The greatest security a person can have comes from within himself, not from the outside. Nothing anyone can do for you can begin to match what you can do for yourself.

Samuel Goldwyn