http://www.mises.org/fullstory.asp?control=949
No More Euphemisms
by Charles E. Rounds, Jr.
[Posted
On the issue of Social
Security reform, it’s time for both the left and right to get their acts
together. They need to understand that the legal status of Social Security, and
whether or not workers have legal rights to their accrued Social Security
benefits, was settled by the U.S. Supreme Court years ago. It has long ceased to
be a point-counterpoint thing.
Economists need to get the legal
terminology, not just the numbers, right. And we all need to take what
advocates on both sides of the privatization issue say about the current system
with a healthy dose of skepticism.
First, what Social Security is not. Social Security is not an insurance program. A Social
Security "account" bears no legal resemblance whatsoever to a bank
checking or saving account. Social Security bestows no contractual rights or
any other type of property right on workers.
In other words, Social Security as it is
currently structured has nothing to do with legally enforceable promises or
guarantees. There is no "trust fund" as that term is commonly
understood, no funded segregated accounts, no IOUs or bonds stored in some
lockbox, or anywhere else for that matter. Social Security is neither solvent
nor bankrupt.
In Flemming v. Nestor, 363 U.S. 603
(1960), the U.S. Supreme Court set the record straight. Social Security is
actually nothing more than an umbrella term for two schemes that are legally
unrelated: a taxation scheme and a welfare scheme.
Workers and their families have no legal
claim, grounded in the Fifth Amendment or elsewhere, on the FICA tax payments
that they make into the U.S. Treasury, or that are
made on their behalf. Those funds are gone, commingled with the general assets
of the
Nestor stood on the shoulders of a
previous case, Helvering
v. Davis, 301 U.S. 619 (1937). In
Thus, it is
inappropriate either for the left to call Social Security "solvent"
or for the right to call it "bankrupt." A welfare program funded by
general tax revenues cannot go bankrupt because its sponsor is a governmental
entity with the power to tax and print money, not to mention reduce or
eliminate altogether future benefits. The terms "solvency" and
"bankruptcy" are appropriately applied to human beings, corporations,
trusts, and the like. But not to Social Security.
Social Security is not an entity.
Both the left and the right speak of
Social Security "IOUs" or "bonds" held in the U.S.
Treasury. On the left, Paul Krugman sees no legal difference
between government bonds held by the governmental issuer and government bonds
held by individuals. On the right, William Safire writes that "[t]he only
thing in the 'lockbox' is government paper, which is a promise to pay from the
Treasury in the future."
It is respectfully suggested that neither
has the law right. A government "bond" owned by the issuing
government is neither a bond nor a promise. One cannot be indebted to oneself.
One cannot enter into a contract with oneself. Writing out an IOU to oneself is
a legal nonevent. It creates no property rights. On the other hand, a
government bond held by an individual is a contractual right, and a contractual
right of this type is property.
Both the left and the right persist in
speaking of a Social Security trust fund. The Boston Globe did it last week.
The President's Commission did it in its interim report. There is no trust
fund, because there is no segregation of assets. Again, that was settled by the
U.S. Supreme Court years ago.
And then there are these
"promises" or "guarantees" being made to seniors. Whatever
they are, they are not legally enforceable. One would need a constitutional
amendment for that. One Congress cannot bind future Congresses when it comes to
continuing a welfare program, which is what Social Security is. Again, this is
settled law.
Finally, each camp trots out the Enron
debacle in support of its position. "Imagine the fix we would all be in,
were Enron held in privatized social security accounts," gloats the left.The right responds that Social Security as it is
currently structured is already "En-roned."
Like Enron, Social Security employs weird accounting practices to mask its
liabilities.
Again, both camps have it wrong. No
privatization proposal contemplates investing in only one issuer, let alone
employer stock. Ultraregulated commingled funds would
be the medium for investing in equities. On the other hand, Social
Security as it is currently structured is not "En-roned,"
because it is not an entity.
What is going on here? Why all this
doublespeak? In part it has to do with an innocent ignorance of the Davis and Nestor
holdings. But some of it can be chalked up to rank calculation. It has long
been the practice of politicians to deliberately sow seeds of semantic confusion
about Social Security.
In a congressional hearing in 1939, for
example, Senator Vandenberg asked the Social Security Board chairman why there
was a so-called Social Security trust fund. "Well, to allay the
unwarranted fears of some people who thought Uncle Sam was embezzling the
money," came the reply.
To set the record straight, there was and
is no "trust fund," and there was and is no embezzling going on. FICA
tax payments belong to the
Today, not much has changed. Politicians
are still engaging in Social Security doublespeak. As far as the left is
concerned, the status quo is just fine: Privatization might reduce the flow of
tax revenues into the coffers of the state and most certainly the dependency of
seniors on the state. What better way to combat privatization initiatives than
with private-sector language. That is why Edward Kennedy refers to Social
Security as "social insurance" and Al Gore goes on about his "lockbox."
This can leave a confused public with the false impression that Social Security
is already quasi-privatized. One could be forgiven for concluding that there is
nothing that needs fixing.
The right also is complicit in this
conspiracy to obfuscate about Social Security. It dances around the word
"welfare" because it does not want to insult the folks down at the
senior citizens' center. It talks of "promises" and
"guarantees" because it does not want to scare them any more than
they are already. A frightened senior is likely to veer to the left.
Finally, the right misapplies the term
"bankruptcy" for tactical reasons. If the public can be persuaded
that Social Security is in a financial bind of some sort, then it may be
persuaded that privatization is a way out of that bind. Scare the public enough
to get it to think favorably about privatization, but not enough to drive it
into the arms of the left. The problem is that Social Security is not
"bankrupt," as the left is sure to remind everyone.
It is suggested that the right can be
both more effective and truer to its principles of less government and more
private ownership simply by telling the public the truth about Social Security.
It should come right out and say that it is settled law that a Social Security
recipient is a welfare recipient, and that in this day and age, the dole may
not be the best way to achieve retirement security. Then it should invite the
public to consider the advantages of something else entirely.
Charles E. Rounds, Jr., is a Professor of
Law at