This article was written by a friend of my mine, Nick Newell.

Social Security is a contractual old-age insurance plan, where you and your employer pay a premium, earmarked for an exclusive trust fund, to earn benefits as a matter of right proportional to premiums contributed that will be paid out when you retire at 65 or over, or when you die.

Most government officials and even most citizens would have no objections to this previous sentence. In fact, they may say it is a succinct summary of the Social Security (SS) program. The problem, of course, is that SS is none of these things. It is publicly proposed as such by government officials, but the reality is antithetical and disingenuous. My intention is a cathartic extirpation of these myths from the public realm.

“Social Security is a contract, and your benefits are a right!”

Contract, an agreement enforceable by law, is the proper definition. The problem is that Section 1104 of the SS Act reads as follows: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Woops. What contract? It must be right next to the social contract you signed. There is little need to show that with no contract, there can hardly be a right. Maybe someone should take the government to court over this. Well, someone did.

Section 1104 was upheld by the Supreme Court in the 1960’s Flemming v. Nestor, a case where Ephram Nestor was deported and denied his SS benefits. Claiming he had a contract and a right to his benefits, he sued, citing the Takings Clause of the 5th Amendment. Unfortunately for him, the court ruled that no contract existed due to Section 1104, and neither did property rights, and therefore he had no legal claim to benefits, even though he paid the “premiums”.

“Social Security is an insurance plan!”

Insurance, an arrangement by which a company or government agency provides a guarantee of compensation for specified loss in return for payment of a premium. Well, 0 for 2. We already know that there is no contract and therefore no guarantee of compensation. But can we at least call it insurance?

Insurance is a means of coping with risk, using principles of risk pooling and risk transfer (1) and buying claims on the insurer (2), a benefit formula known as individual equity. The problem is that none of these principles exist in SS. This would imply that your premium is determined by your individual risk, and your premium has purchased an enforceable claim. But SS is administered by social adequacy, where those who need it most receive the most, regardless of what was paid in. Its primary goal is maintain a minimum income to those with the greatest needs. This process is carried out by means testing which determines who has the social need for benefits. If you have no social need for benefits, you receive less than contributed or even nothing at all. This subsequently means that your loss will be someone else’s gain; it’s a zero sum game.

“Your money is held in a trust fund, with your name on it, and it’s being robbed!”

A trust is an arrangement of holding property; the court has recognized no property so SS cannot be a trust. But doesn’t it at least act like a trust aside from this? Not even close.

The truth is, all “premiums” collected under the SS Act by law must be put into the general fund, not a “trust fund”. In its place is put an interest-bearing security exclusively payable to the OASDI (Old-Age, Survivor, and Disability Insurance) fund for the purposes of paying out benefits for OASDI. In other words, taxes are collected, put into the general fund, and eventually paid back from the general fund with interest via an OASDI security. The government, in essence, writes a promissory note to itself. But the only way for government can pay interest on these notes is through taxes. The reason for this was to allow the SS Act to pass the constitutional test of the Supreme Court.

Supposedly, government can only levy taxes to raise revenue. In order for a tax to be constitutional, the revenues cannot be earmarked for a specific purpose. Placing “premiums” collected into the general fund was an operational circumvention, and enough for the Supreme Court to declare the SS Act constitutional (Helvering v. Davis). The effect of this? Your premiums are in reality put into the general fund, and spent by Congress, by law. No one is robbing them. There are securities payable to the OASDI fund, but because you have no contract to receive benefits, your name isn’t on anything. Who receives benefits is determined (again Section 1104) by Congress, who can choose whether or not your name is on the list, and social adequacy. Benefits are first paid from maturing OASDI securities, whose interest is paid by government (read “taxpayers”); any shortfalls are paid out by increasing current revenues.

“Premiums paid are proportional to benefits received”

From the previous point, what this means is that your premiums, as determined by the court, are in fact taxes, with no connection between premiums paid and benefits received because taxes levied cannot be earmarked for specific purposes. Because there is no connection and Congress continually expands OASDI coverage, the entire program is in fact a compulsory state-run ponzi scheme, where current beneficiaries are paid out by current contributors. In other words, your premiums are not determined by your benefits, but rather by the benefits of current recipients. In turn, your benefits will be paid out by younger contributors.

Anyone telling you that your contributed “premiums” are proportional to your benefits is simply lying to you. It is impossible to believe this myth with the social adequacy formula, means testing, and Congress’ ability to amend, alter or repeal any section of the SS Act. Congress has over the years expanded OASDI coverage, causing the older generations to receive benefits greater than what was paid in. This was done at the expense of younger generations that have seen their “premiums” for the program increase. It is a “coerced intergenerational income transfer, whereby each generation is supported by the following generation, which, in turn, anticipates like support from the generation following” (3).

Because the older generations have believed this myth, they have a stronger vested interest in the viability of the program due to their proximity to receiving their “earned” benefits; they control a much larger political bloc than the younger generation. This is precisely why any solvency changes to the program are generally never by decreasing benefits but rather by increasing “premiums” of the younger generations.

Don’t believe it? In 1950, the maximum annual taxable income was $3,000 at a maximum rate of 1.5%. By 1999, it had increased to $72,600 at a maximum rate of 6.2% (4). For perspective, $3,000 in 1950 was worth $20,738 in 1999. The amount of taxable income has far outpaced increases in inflation, in addition to increases in the rate at which you are being taxed. These perpetual increases in “premiums” are to remunerate the expansions of the program over the years.

“Social Security is a good deal for everyone!”

None of SS’s aspects imply a good deal for everyone. Everything the government has it must take from the people. In order to pay out benefits, it must take from the taxpayers. The effect of the SS Act is a shifting of wealth from younger, richer taxpayers to older, poorer recipients. This has been the combined effect of social adequacy and political clout of the older generations.

Even looking at it from an individual basis:

1. You must contribute to SS – There are no other opportunities for you to invest this money. This is opportunity cost. You cannot determine what your investment will be nor its potential return.

2. You cannot earn interest on your “investment” – Although OASDI interest-bearing securities are held, it is the taxpayers that must pay the interest. Interest earned is interest paid by another taxpayer.

3. You continually must pay more – 2014 alone, the maximum amount of taxable earnings increased from $113,7000 to $117,000. This continues the trend of increasing “premiums” far outpacing inflation. $113,000 in 2013 is worth $116,089 in 2014. The share of your purchasing power contributed to SS still steadily increases.

4. You may not receive anything – Congress can determine you have no social need for benefits. Even if you do receive benefits, some of them may be included as taxable income.

In Conclusion:

The myths posited by public officials since the inception of the SS Act in 1935 are in fact myths. The opening sentence is something government officials would promote in the public realm, and certainly that opinion wouldn’t change depending on the audience. The following is an excerpt from the government’s brief during the 1960 Flemming v. Nestor case, and much more accurate summary of what the program really is:

“The SI (Old-Age and Survivors Insurance) program is in no sense a federally-administered “insurance program” under which each worker pays premiums over the years and acquires at retirement an indefeasible right to receive for life a fixed monthly benefit, irrespective of the conditions which Congress has chosen to impose from time to time”

This is of course a direct antithetical statement of the public myths, and a stunning admission of the SS’s true nature. The reality of the program in the government’s own words before the court is so far removed from the public myths. Keep this sentence in mind rather than the public myths next time someone talks to you about Social Security.

If interested in further reading on the subject, John Attarian has an excellent essay and full-length book pertaining to Social Security, both listed as references to this article.

For more by Nick Newell see his satirical Facebook page: The Globalist Party of America

References

1. Attarian, John. The Roots of the Social Security Myth. Auburn, Ala.: Ludwig Von Mises Institute, 2001. 29. Print.

2. Attarian, John. The Roots of the Social Security Myth. Auburn, Ala.: Ludwig Von Mises Institute, 2001. 31. Print.

3. Attarian, John. The Roots of the Social Security Myth. Auburn, Ala.: Ludwig Von Mises Institute, 2001. 40. Print.

4. Attarian, John. Social Security: False Consciousness and Crisis. New Brunswick, NJ: Transaction, 2002. 26. Print.

5. Attarian, John. The Roots of the Social Security Myth. Auburn, Ala.: Ludwig Von Mises Institute, 2001. 34. Print.