Jewish World Review
February 22, 1999
by Thomas Sowell
Nothing seems so insecure as Social Security. However, before we start "saving" Social Security, we need to stop and think about why it needs saving in the first place. Then maybe we can avoid making the same mistakes all over again.
Some people blame the problem on the large numbers of "baby boomers" who will be retiring in the next few decades. But why don't we hear about private annuities that are worried about the number of baby boomers who will be retiring?
Social Security's problems go much deeper than the size of the generation that is going to be retiring. In fact, Social Security's problems go all the way back to the beginning --- to the way it was set up, to the lies that politicians told about it and to the misconceptions and political irresponsibility that have now come home to roost.
Private insurance companies aren't panicked about the annuities they are going to have to pay to baby boomers because insurance companies operate in an entirely different way from Social Security. Insurance companies take their customers' premiums and invest them to create real wealth. Later, the earnings from that wealth can be used to pay annuities or life insurance benefits whenever they become due.
For example, if an insurance company uses its customers' premiums to build an apartment complex, then the rents coming in from those who live in the apartments can be used to pay the annuities or insurance benefits owed to those whose premiums built the buildings. The size of the previous generation or the next generation doesn't matter.
The reason it matters under Social Security is that there has never been any real wealth created. The government has simply been robbing Peter to pay Paul. This worked great when the baby boomers were paying into the system and their money was being used to pay benefits to a much smaller generation that was retired.
Now it has become obvious to everyone that this game will not work any more when the huge baby boomer generation itself retires. There will not be enough people working to pay them all the benefits they were promised, unless Social Security taxes are raised by huge amounts or the government welches on its commitments to the retirees.
The biggest lie about Social Security is that it is some kind of "insurance." But, unlike insurance premiums, Social Security taxes create no wealth. They are spent when they get to Washington, just like other taxes. Paper transactions create the illusion of a Social Security "fund," but there is no corresponding real wealth created --- no factories, farms or railroads.
The basic principle of Social Security is the same as that behind illegal pyramid schemes run by con men. The first people to put their money into pyramid schemes get repaid handsomely from the money received from others who join later. That is what attracts still more suckers and enables the con men to rip them off.
Since the first people to join the Social Security system were from the relatively small generation of the 1930s, their later retirement benefits were easily paid with the money received from the much larger baby boom generation. So long as the pyramid keeps expanding, things are great, but eventually the pyramid stops expanding and those who joined last get left holding the bag.
That is why pyramid schemes are illegal and that is why Social Security is now in trouble. It is not because of some demographic fluke. It was a demographic fluke that kept it from collapsing before now.
It was the deceptions and irresponsibility of politicians that got us into this mess. If you think the way to get out of it is to let politicians continue to guide Social Security in the future, then you have missed the point completely.
Investing the public's retirement money in the creation of real wealth is an essential part of any permanent fix. But, if that means letting politicians throw their weight around in the stock market, then this is truly putting the fox in charge of the hen house.
There are all sorts of sound financial institutions through which ordinary Americans
can put their retirement money into the creation of real wealth, without having to pick
individual stocks themselves. The time is long overdue to let them do it. The whole
history of Social Security shows how important it is to keep politicians' hands off that