Why social Security Must Fail; D. Russell

1965 FROM EDEN TO PARADISE 55 Then, he is able to determine his own values and purposes in life. Through this process, man de velops respect for himself as a hu man being, and this sense of self respect or self-approval encour ages him to display his human, moral quali ties - thus, the human "conscience" rejoices over its hu manity. "The strength of self-govern ment and the motive power of progress must be found in the characters of the individual citi zens who make up a nation."12 In 12 Elihu Root, "Experiments in Gov ernment," 1913 - a lecture delivered while Root was a Republican Senator this free society, such individual character rests on a deep sense of moral duty and a clear recogni tion of the Constitutional division between moral persuasion and le gal compulsion. Such character ac knowledges, regretfully, that there is no short cut between Eden and Paradise. ~ from New York. The great jurist and former Secretary of State under T.

Roosevelt was warning against a too rapid pace of reform. The most acces sible copy of the lecture (a partial text including the quotation above) is in cluded in the following collection of documents: Richard Hofstadter, Great Issues in American History, vol. II (N. Y.: Vintage Books, 1958), pp.283-85. DEAN RUSSELL IT IS mathematically impossible for everyone to "get his money back" under our social security program. The total group of par ticipants 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. Re gardless of the amount of these administra tive costs deducted by Dr. Russell is a member of the staff of the Foundation for Economic Education. 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 partici pants to get back as many dollars as all of the participants pay in.

Various individuals will unques tionably 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 56 THE FREEMAN February next 30 or 40 years. There just isn't any way to avoid this "group loss" when the costs of adminis tering 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 pol icies sold by private insurance companies. The premiums on real insurance offered by most private companies are keyed to an expect ed return from invested funds. Since these funds can be used for productive purposes, various com panies and persons are quite will ing 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 so cial security scheme was mathe matically and necessarily bank rupt from its inception; it was (and is) merely a political mech anism 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 finan cially and morally unsound social security program must be faced sooner or later; if not by our gen eration, then by our children and grandchildren. True. enough, in creases in premiums (up to some unknown point) can probably post pone the eventual collapse and the revolution that may follow it. In creased inflation can also be used by government to prolong the life of that unsound scheme. But our social security program must col lapse eventually, since it is found ed on continuing and automatic losses for the participants as a group. Check the Mathematics Finally, have I based my argu ment on sound mathematical rea soning ? Well, I think so, but I must admit that it was once chal lenged by a professor of econom1965 WHY SOCIAL SECURITY MUST FAIL 57 ics. He pointed out that all tax payers are compelled to pay in terest on the government's debt, including the interest on those bonds in the social security fund.

But not all of the "interest pay ers" draw social security. Further, some taxpayers pay a greater part of the interest than do other tax payers. 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 chal lenged 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 signifi cance as the accrued liabilities further mount and the "fund" de clines. Let's arbitrarily assume that one-half of that amount (2 per cent of current payments) comes from the taxes of nonpartic ipants in the social security pro gram, and that the other half is paid by the participants them selves. Now by the same measure ment, what is the total govern mental cost for administering both the bond program and the social security program? Noone knows, including the administrators. But surely it is at least 10 per cent.

And based on the inherent inef ficiencies of governmental opera tions, it could run as high as 25 per cent, if all costs (including al ternate 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 par ticipants 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 will ingly endorse such a cynical scheme. And when a nation's peo ple sink to that low moral level, the mathematics of the situation becomes relatively unimportant. ~ Self-Insured 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 WILLIAM H. PETERSON THE IDEA that the public sector of our economy is being "starved" while the private sector is becom ing more "affluent" is gaining popularity in the United States. Perhaps the most famous disciple of this idea is Professor John Ken neth Galbraith. In his book, The Affluent Society, 1 he stated: "The community is afHuent in privately produced goods. It is poor in public services. The ob vious solution is to tax the former and provide the latter - by mak ing private goods more expensive, public goods are made more abundant. " Yet jn 1927 the tax and other governmental revenue take of the net national product by local, state, and Federal authorities came to but 13.8 per cent, and in 1961 the 1 Houghton, Mifflin, 1958, p. 315. This article is extracted by permission from the pamphlet, "The Private Sector and the Public Sector," published May, 1964, by the Intercollegiate Society of Individualists, Inc.