We pay for Social Security at cost of liberty
Published in The Tennessean, Sunday, July 3, 2011
by Richard J. Grant
About a year before the Declaration of Independence, Benjamin Franklin wrote the oft-quoted sentence, “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”
Mr. Franklin and his colleagues famously lived up to the admonition implied in his words. But he was not confident that future Americans would consistently do so. When he emerged from the Constitutional Convention a dozen years later and offered his storied description of the result, “A republic, if you can keep it,” he was worried less about physical dangers than democratic dangers.
It has become easy to believe that we can vote ourselves into financial security, but there is no substitute for work and saving. It is easy to believe that we can force people to save for their old age and to administer those savings through governmental programs even though we know that centrally planned economies are less prosperous and less secure than those that are free from governmental interference.
Several American generations have traded their liberty to save and invest for the hoped-for safety of the Social Security system. In so doing, they have made themselves dependent on the benevolence and financial competence of Congress and have imposed an economic burden on future generations. This burden consists of wealth that was never produced, economic progress that was never made, and a moral obligation that is increasingly less likely to be accepted.
For most of its history, the Social Security system has been seen as in need of reform. As the number of beneficiaries has grown relative to the number of taxpayers, the tax rate legally associated with Social Security has grown sixfold. But this is only part of the cost.
Although the rising FICA tax rate has enabled the Social Security program to show operating surpluses for most of its history, this does not mean that it creates net benefits. As the FICA tax rate has increased, and shifted resources from private to government control, it has increasingly distorted the labor market and reduced national saving. As a result, each succeeding generation has earned less from both its labor and investment income than it would have in the absence of the pay-as-you-go Social Security system.
Fifteen years ago, Harvard University professor Martin Feldstein estimated this “deadweight loss” to be the equivalent of an “annual loss of more than 4% of GDP as long as the current system lasts.” If Feldstein's estimate was a fair reflection of reality, then over the past 15 years GDP (gross domestic product) would have grown to a size 80 percent greater than it is now.
Those who claim that Social Security pays for itself clearly fail to take all this into account. They also fail to see how it adds to the federal budget deficit.
Every dollar paid out as Social Security benefits increases the unified budget expenditures by $1 and “uses up” $1 of combined tax revenue. Therefore, the trust fund has one dollar less to lend to the Treasury. That dollar must be borrowed from the public.
This has always been true, even when FICA tax revenues were greater than Social Security outlays. The “surplus” existed only in an accounting sense. The trust fund is an internal account that shows how much one segment of the government “owes” to another. Taxpayers pay it all.
Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com
Copyright © Richard J Grant 2011
by Richard J. Grant
About a year before the Declaration of Independence, Benjamin Franklin wrote the oft-quoted sentence, “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”
Mr. Franklin and his colleagues famously lived up to the admonition implied in his words. But he was not confident that future Americans would consistently do so. When he emerged from the Constitutional Convention a dozen years later and offered his storied description of the result, “A republic, if you can keep it,” he was worried less about physical dangers than democratic dangers.
It has become easy to believe that we can vote ourselves into financial security, but there is no substitute for work and saving. It is easy to believe that we can force people to save for their old age and to administer those savings through governmental programs even though we know that centrally planned economies are less prosperous and less secure than those that are free from governmental interference.
Several American generations have traded their liberty to save and invest for the hoped-for safety of the Social Security system. In so doing, they have made themselves dependent on the benevolence and financial competence of Congress and have imposed an economic burden on future generations. This burden consists of wealth that was never produced, economic progress that was never made, and a moral obligation that is increasingly less likely to be accepted.
For most of its history, the Social Security system has been seen as in need of reform. As the number of beneficiaries has grown relative to the number of taxpayers, the tax rate legally associated with Social Security has grown sixfold. But this is only part of the cost.
Although the rising FICA tax rate has enabled the Social Security program to show operating surpluses for most of its history, this does not mean that it creates net benefits. As the FICA tax rate has increased, and shifted resources from private to government control, it has increasingly distorted the labor market and reduced national saving. As a result, each succeeding generation has earned less from both its labor and investment income than it would have in the absence of the pay-as-you-go Social Security system.
Fifteen years ago, Harvard University professor Martin Feldstein estimated this “deadweight loss” to be the equivalent of an “annual loss of more than 4% of GDP as long as the current system lasts.” If Feldstein's estimate was a fair reflection of reality, then over the past 15 years GDP (gross domestic product) would have grown to a size 80 percent greater than it is now.
Those who claim that Social Security pays for itself clearly fail to take all this into account. They also fail to see how it adds to the federal budget deficit.
Every dollar paid out as Social Security benefits increases the unified budget expenditures by $1 and “uses up” $1 of combined tax revenue. Therefore, the trust fund has one dollar less to lend to the Treasury. That dollar must be borrowed from the public.
This has always been true, even when FICA tax revenues were greater than Social Security outlays. The “surplus” existed only in an accounting sense. The trust fund is an internal account that shows how much one segment of the government “owes” to another. Taxpayers pay it all.
Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com
Copyright © Richard J Grant 2011