Social Security and the Generation of Obligations

by Alasdair Denvil

A few years ago, I was on the train in India. Everything was pleasant enough until it came time to get off. Although I had some unwieldy luggage, it was nothing I couldn't handle by myself. But no sooner had the doors opened than the aisle was flooded with valets (read: teenagers in red jackets), so many of them that it was impossible for me to get my things off the train. Unless I hired a valet to help me, that is.

It's with this in mind that I cringe when I listen to Al Gore and other Democrats talk about the "solemn compact between generations" represented by Social Security. This is an awfully strange thing to say, given the job Social Security was supposed to do.

Let me explain. Social Security started out as a paternal insurance fund. The government didn't believe the average American worker (call him Mr. X) would be disciplined or foresighted enough to plan for his own retirement. So they regularly took some of his income away so that it could be returned to him when he retired.

But for various reasons, things didn't go as planned. Social Security benefits were increased while taxes were cut, more entitlements were added, moneys were diverted to unrelated government programs, and the fund managers were unable to predict the changes in and effects of population, income, and inflation. The upshot is that when it came time for Mr. X to retire, his money had vanished. So instead, Mr. X received the money contributed by Mr. Y, an average American from a younger generation who was not likely to retire any time soon. But then came another problem: where would Mr. Y's retirement money come from? Well, from the even younger Mr. Z. But then where would Mr. Z's retirement money come from? And so on.

This, then, is the story of how Social Security went from being an insurance fund - where each worker paid for his own retirement - to a "pay-as-you-go" scheme - where each worker pays for the retirement of the older generation, and has his own retirement paid for by the younger generation. In other words, Social Security was never intended to be a "solemn compact between generations"; it only got to be so as a result of government mismanagement.

And, as compacts go, Social Security is a pretty lousy one. I voluntarily put into my 401K roughly the amount I am forced to contribute to Social Security. And yet, conservatively speaking, my 401K will perform just as well, if not two, three, even four times better. And that's not even considering the much larger 401K contributions made by my employer. Imagine how well it might do if I could divert some of my Social Security taxes into it? Like the valets on the train, Social Security represents 'help' that I would be better off without.

Of course, there is great opposition to ending Social Security or diverting funds from it, opposition based on the aforementioned view that we have an obligation to take care of the elderly. But remember that Social Security only adopted this obligation through mismanagement. And, while we do have an obligation to take care of the elderly, that doesn't mean the help has to come through a government program. Particularly not if that program compromises our ability to fulfill our obligation to take care of ourselves, to see that we don't become a burden on others (which, once again, is the obligation Social Security was originally supposed to carry out).

"But don't you remember the crash of '29 and the Great Depression?!" comes the objection. "What happens if people lose their money in the stock market?! We'll wind up having to support them anyway!" Perhaps, but long-term investors rarely lose money in the stock market. More to the point, though, we've _already_ lost the money we put into Social Security. The government had a moral and legal obligation to save Mr. X's money for Mr. X. And it failed. Without a stock market crash or an economic collapse, and despite the good intentions of thousands of well-educated government officials, the money disappeared. And now Mr. Y is paying for him, and Mr. Z is paying for _him_, and so on.

I'm not saying we should deny Social Security benefits to older Americans. They paid into it and based their plans on it. Since money was taken out of Social Security to pay for unrelated programs, I say we take money unrelated to Social Security - that is, from the budget surplus - and use it to pay the benefits they deserve.

But let younger Americans out of this trap. Don't force them into this vicious cycle and then white-wash government mismanagement with talk of a "solemn compact between generations." Like the train valets, Social Security has become a self-supporting system of the worst kind: an offer of help so overwhelming and inefficient that you are forced to take it, even though it leaves you worse off than if you had just been left to take care of things by yourself.

2000 Alasdair Denvil