Sunday, May 27, 2018

Social Security Is a Welfare, Not a Pension, Plan

I'm going to be 64 this week, so I've been thinking about Social Security, a program I've actively opposed since the 1970s but one in which I have been compelled to participate.

Social Security is a welfare and not an insurance plan.  Its advocates claim that it is both, but that is impossible. Insurance is actuarially fair: It spreads the risk of loss fairly across a population. In contrast, welfare plans are redistributive: They compel some to give up wealth to subsidize others.

There are legitimate reasons to support welfare and charity, and there are legitimate reasons to reject political lying. In order to convince Americans to accept Social Security, the Democrats pretended that it is a fair insurance plan. To do so, they created a deception that the taxes into Social Security, FICA, are insurance premiums even though there is no legal connection between FICA and Social Security benefits.

They also created a deception that there is a Social Security fund that is equivalent to a pension fund and that FICA taxes build someone's fund, which is returned in retirement. There is a fund, but it is more in the nature of a cash box than a pension fund. Social Security has always been primarily a pay-as-you-go system. A relatively large excess accumulated because of the temporary Boomer population bubble, but that would have dissipated had the politicians not (legally) looted the fund.

Democratic Party politicians gave voters the impression that FICA is a contribution to an insurance plan and not a regressive income tax.  Many voters also believe that their Social Security benefits equate to their contributions.

Social Security benefits do not equate to contributions. The use of wage bands allocates higher benefits per dollar to lower-wage participants. Disability benefits are more heavily distributed to actuarially identifiable groups, but there is no charge to those groups.

Anyone who does not benefit from salary bands or disability benefits is unlikely to participate in Social Security. Hence, the Democrats had to make the plan authoritarian and compulsory. The authoritarianism and compulsion seal Social Security's status as a welfare rather than an insurance plan.

Insurance is an economically fair method of managing risk, and risk-averse consumers need no compulsion to purchase it. Social security is not economically fair; it is equivalent to any other form of welfare. Hence, there is limited economic motivation, save altruism, for net contributors to participate.