Social Security Bankrupt: Why Our Favorite Welfare Program Is the Best Thing to Ever Happen to the Rich

One of the more dangerous arguments in the debate about the Social Security system is the growing belief that Social Security is part of a social safety-net that protects the elderly or the poor. The argument is dangerous because it expands the charter of Social Security at a time when the system lacks the resources to serve its primary goal.  

Social Security is supposed to be old-age insurance which provides some financial certainty to people who no longer have a viable option to work. Old age is an uncertainty, one which can create great expense. Insurance spreads the risk of old age across a large population, and concentrates resources on those who incur the cost. Unfortunately, the trustees of Social Security project that even in a good economy the program cannot fulfill that role for people who are 64 and younger.

The argument to broaden the scope of the system has bled into the lexicon of both parties, and become a standard for media analysis of any proposal to reform the system.  The problem here is that there is no basis in the argument. The history of the program does not support the argument. The cashflows do not support the argument. Comically enough, the design of the system makes it uniquely unfit to serve as a social safety net.

Social Security Was Not Originally a Safety Net

The Social Security Act Of 1935 includes many things, some of which deal with needs of the elderly, unemployed, and children.  Separately, it created the Social Security Old-Age Insurance. If Title 2, "TITLE II- FEDERAL OLD-AGE BENEFITS," was intended to provide a safety net for the poor, there would have been no need for Title 1, "TITLE I- GRANTS TO STATES FOR OLD-AGE ASSISTANCE". Title 2 is what created the Social Security Old-Age Insurance program.

FDR structured the law in this way because he did not want his program to be subject to political priorities. Originally, Social Security was supposed to be a self-funded contributory benefits system. FDR referred to these contributions as "politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits." A social safety net has no rights. It is a political priority. 

AJ Altmeyer, who was the chairman of the Social Security Board said in 1944, rejected the idea that Social Security was a public dole in congressional testimony.

"I believe that I am safe in saying that the people of this country, that the Congress of the United States, and that the members of this Committee favor a system of contributory social insurance for providing protection against the inevitable economic hazards that beset the workers of this country, rather than a Government dole."

Social Security Cannot Serve As a Safety Net

Social Security is uniquely unfit even to play a role in a social safety net. Millions of Americans are not covered by Social Security. Many of them do not qualify because of a spotty job history that created need in the later years of life. So the system excludes those who would need financial support most. Even if everyone were covered, Social Security does not even have visibility into the poverty that it is supposed to alleviate. As a social safety net, the system blindly throws money at people who may or may not be in need at all.  

The Social Security system is highly progressive, in which high-wage earners subsidize those who are lower-wage earners. This makes old-age insurance more affordable for a wider audience.  Yes, the formula rewards people progressively less as they earn more.  Yes, the formulas reduce benefits for people who saved for their own retirement. At the same time, the Social Security system does not pay a penny based on need. 

Social Security's Benefit Formulas Reward Everyone But the Poor 

The benefits formula for Social Security has more than 2,000 rules which change the benefits based on whether you have kids or how many times you marry. The benefit formula rewards people for living longer or working longer. The formula allocates the largest amount of resources to people who contributed the most in the past, live the longest, have the most qualifying ex-wives, and have the most children after the age of 65. Nowhere do the formulas base benefits on need.

Social Security pays the most money to someone like Pete Stark. Who is Pete Stark? An ex-Congressman who is wealthy by congressional standards. He is apt to collect the maximum payment allowed by Social Security. He is apt to live longer than most Americans. He married three times, giving the system three potential wives to collect survivor benefits from Social Security. The last wife produced three children all of whom have been eligible for Social Security almost since birth. It is not possible to call a system that lards benefits on someone like Pete Stark a safety net. 

In contrast to the haul of Pete Stark, Social Security will allocate zero resources to people who worked for Central Falls, a small town in Rhode Island which faces bankruptcy. Like many towns and municipalities, Central Falls did not put its employees into Social Security. With their pensions gone in bankruptcy, the people who retired from the city will have significant needs and no way to collect from Social Security. 

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Brenton Smith

Professionally, I manage credit risk in bank deriviatives. Politically I write commentary for www.FixSSNow.Org on the issue of Social Security reform.

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