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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)


Chapter 18
The Social Security Swindle

Senator Daniel P. Moynihan (D-NY) has performed a signal service for all Americans by calling into question, for the first time since the early 1980s, the soundness of the nation's beloved Social Security System. A decade ago, the public was beginning to learn of the imminent bankruptcy of Social Security, only to be sent back into their half-century slumber in 1983 by the bipartisan Greenspan commission, which "saved" Social Security by installing a whopping and ever-rising set of increases in the Social Security tax. Any government program, of course, can be bailed out by levying more taxes to pay the tab.

Since the beginning of the Reagan administration, the much heralded "cuts" in the officially dubbed "income-tax" segment of our payroll taxes have been more than offset by the rise in the "Social-Security" portion. But since the public has been conditioned into thinking that the Social Security tax is somehow not a tax, the Reagan-Bush administrations have been able to get away with their pose as heroic champions of tax cuts and resisters against the tax-raising inclinations of the evil Democrats.

For the Social Security System is the biggest single racket in the entire panoply of welfare-state measures that have been fastened upon us by the New Deal and its successors. The American public has been conned into thinking that the Social Security tax is not a tax at all, but a benevolent national "insurance" scheme into which everyone pays premiums from the beginning of their working lives, finally "collecting" benefits when they get to be 65. The system is held to be analogous to a private insurance firm, which collects premiums over the years, invests them in productive ways that yield interest, and then later pays old-age annuities to the lucky beneficiaries.

So much for the facade. The reality, however, is the exact opposite. The federal government taxes the youth and adult working population, takes the money, and spends it on the boondoggles that make up the annual federal budget. Then, when the long-taxed person gets to be 65, the government taxes someone else--that is, the still-working population, to pay the so-called benefits.

Be assured, the executives of any private insurance company that tried this stunt would be spending the rest of their lives in much-merited retirement in the local hoosegow. The whole system is a vast Ponzi scheme, with the difference that Ponzi's notorious swindle at least rested solely on his ability to con his victims, whereas the government swindlers, of course, rely also on a vast apparatus of tax-coercion.

But this covers only one dimension of the Social Security racket. The "benefits," of course, are puny compared to a genuine private annuity, which makes productive investments. The purchasers of a private annuity receive, at the age, say of 65, a principal sum which they can obtain and which can also earn them further interest. The person on Social Security gets only the annual benefits, void of any capital sum. How could he, when the Social Security "fund" doesn't exist?

The notion that a fund really exists rests on a "creative" accounting fiction; yes, the fund does exist on paper, but the Social Security System actually grabs the money as it comes in and purchases bonds from the Treasury, which spends the money on its usual boondoggles.

But that's not all. The Social Security System is a "welfare" program that levies high and continually increasing taxes (a) only on wages, and on no other investment or interest income; and (b) is steeply regressive, hitting lower wage earners far more heavily than people in the upper brackets. Thus, income earners up to $51,300 per year are forced to pay, at this moment, 7.65% of their income to Social Security; but there the tax stops, so that, for example a person who earns $200,000 a year pays the same absolute amount ($3,924), which works out as only 2% of income. That's a welfare state!?

Over the years, the government has vastly increased the tax bite in two ways: by increasing the percentage, and by raising the maximum income level at which the tax ceases. As a result, since the start of the Reagan administration, the rate has gone up from 5.80% to 7.65%, and the maximum tax from $1,502 to $3,924 per year. And that's only the beginning.

The final aspect of the swindle was contributed by Reagan-Greenspan & Co. in 1983. Observing the high and mounting federal deficits, our bipartisan rulers decided to raise taxes and pile up a huge "surplus" in the non-existent Social Security fund, thereby "lowering" the embarrassing deficit on paper, while con tinuing the same stratospheric deficit in reality. Thus, the projected federal deficit for fiscal 1990 is $206 billion; but the estimated $65 billion "surplus" in the Social Security account officially reduces the deficit to $141 billion, thereby appeasing the ghosts of Gramm-Rudman. But of course there is no surplus; the $65 billion are promptly spent on Treasury bonds, and the Treasury adds that to the stream of general expenditures on $20,000 coffeemakers, bailouts for S&L crooks, and the rest of its worthy causes.

But Senator Moynihan, one of the authors of the current swindle as part of the Greenspan Commission, has blown at least part of the lid off the scam. At which point, the Republicans happily took up the traditional Democratic count that their opposition has set out, cruelly and heartlessly, to throw the nation's much revered elderly into the gutter.

Senator Moynihan's proposal for a small roll-back of the Social Security tax to 6.5 5% at least opens the entire matter for public debate. Moynihan's motives have been called into question, but after we recover from our shock at a politician possibly acting for political motives, we must realize that we owe him a considerable debt. The problem is that, while many writers and journalists understand the truth and tell it in print, they generally do so in subdued and decorous tones, drenching the reader in reams of statistics.

The public will never be roused to rise up and get rid of this monstrous system until they are told the truth in no uncertain terms: in other words, until a swindle is called a swindle.

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