Social Security is a Fiscal Cliff that no One Wants to Discuss

The idea of creating a supplemental retirement system called “social security” sounded like a good idea when president Franklin Delano Roosevelt signed the Social Security Act into law August 14, 1935. With the Great Depression a recent memory, selling security to the American people was easy. Each month, the federal government would take a small percentage of money from an employee’s paycheck. The employee’s employer would also be required to “contribute” (under duress) an equal percentage. At retirement, any person who paid into the system would get a monthly check from the Social Security Administration.

Payments of monthly benefits began in January 1940, just five years after the program was implemented. On January 31, 1940, the first monthly check was issued to a retired legal secretary, Ida May Fuller, of Ludlow, Vermont. She received a check for $22.54 (Hardy, xxiii). Fuller continued to receive benefits until she died in January 1975 at the age of 100. During her 35 years as a beneficiary, she received more than $22,000. For Fuller, Social Security turned out to be a great investment since her total “contribution” to the program was only $22.00.

How did the Social Security Act pass constitutional muster given the “reserve clause” of the Tenth Amendment? Powers not specifically granted to the federal government are reserved for the States or the people. The SSA was a expansion of federal powers outside the granted powers of the Constitution. The Constitution did not specifically mention the operation of a social insurance system as a power granted to the federal government. Justification for a federal social insurance program was seen in the “general welfare” clause of the Constitution. Since the program was designed for the public good, therefore, it was considered constitutional. The argument is weak. Under such a broad definition of “general welfare,” almost anything could be justified. James Madison, the primary architect of the Constitution, contended that “general welfare” was defined in the body of the Constitution. This meant that the federal government could only expend money for purposes specifically enumerated in the Constitution.

Article I, section 8 defines the limits of “the general welfare” with a list of 17 items, none of which includes the institution of a national retirement program implemented and enforced by the federal government.

Miss Fuller’s windfall is Social Security’s inherent problem. In 1935, the highest amount an employee had to pay was one percent of $3,000. The employer’s portion was also one percent of the first $3000 of wages for a total of $60 per year. Today, an employee and employer each pay 6.2 percent of Social Security taxes up to around $110,000. That’s more than $12,000 per year. Even with the increase in rates and the elevation of the top rate, Social Security keeps having fiscal problems. The problem was given a quick fix in the early 1980s. In order to raise revenue for future recipients, Congress revised the law and brought more people into the system.

How did such good intentions go astray? When Social Security was first implemented, it functioned as a compulsory savings program. What you paid in, you got out plus interest. But in 1939, Congress “began to abandon the fully-funded method of financing it had adopted in 1935 and embraced the concept of pay-as-you-go financing” that would use “current taxes to pay current benefits.” ((Peter J. Ferrara, Social Security: The Inherent Contradiction (San Francisco: Cato Institute, 1980), 28.))

Put simply, the money that is currently paid into the Social Security System pays for current beneficiaries. There is no trust fund, or as Al Gore stated repeatedly in his debate with George W. Bush in the 2000 election, a “lock box,” simply deferred IOUs to be paid for by revenue collected by younger workers. In 1950, there were sixteen people paying into the system for every one person receiving retirement benefits. We’re getting to the point where soon there will only be two people paying in for every one person drawing a check.

What will happen when the people who are not saving for retirement finally retire and hope to live off of Social Security? Will younger workers rebel at having to pay 20 percent or more of their income to fund the bankrupt system.

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