Could Social Security have worked?

Miscellaneous History
1

My grandpa is 78, he was born during the depression. As a result, he has somewhat of a bias for the New Deal policies and for the actions of Roosevelt. This bias has waned in recent years as he has heard from me and from others that the New Deal policies were more harmful than helpful.

My grandpa contends that if Social Security had been managed correctly (supposedly as it was originally intended), then the Fund and the Interest Earned since then would have been sustainable. I have yet been unable to counter this argument, particularly because I have no way of testing that scenario. I point out that the premise is false, that Social Security could never have been managed correctly, because ultimately you are trusting politicians to manage money they can’t spend. He agrees, and argues that some kind of oversight process could exist where the balance sheets are published every quarter. I point out that’s precisely how it might work in a free market, where you voluntarily opt into the program.

So, could Social Security have worked if it hadn’t been plundered? Obviously there are moral implications of the coercive nature of the program, but ignoring that, would it have worked? How would the “artificial” savings have impacted interest rates? What about defaults?

On the coercive nature of Social Security, I point out that it is immoral (and unconstitutional) to take from our earnings to give to others. I point out that this principle promotes the notion that someone else owns your earnings, and merely permits you to keep a percentage of it. I use this same argument when dealing with the income tax. My intent is to show that society would have been better off without the program’s institution.

My grandpa, while acknowledging the failure of government, believes that this safety net is necessary, because “most people” aren’t going to save enough for their retirement. My grandpa’s case is special: he had saved for his retirement, close to $100K. Half of it was lost during his divorce, and the remainer was wiped out because of medical costs. His social security benefit could not be touched, and as a result it is the only thing he has to live on. In our discussions I point out that I don’t favor abandoning SS overnight, but rather a transition, because millions of people are dependent on it.

Could the free market address the problem of a secured retirement account that can’t be garnished or touched by anyone? Would people save for their retirement? What did people do before Social Security? Was retirement only an option for the wealthiest of citizens, or was it not even something desired? What was the savings rate?

2

No because people would’ve had what was taken out of their paycheck. Also, the Federal Reserve/inflation/fiat money is what makes SS a necessity. If there were no lender of last resort, and thus no banking cartel, the average joe could loan out his savings and make big money off of that.

3

People won’t do X. Therefore, people must be forced to do X. Nothing new.

4

Not even that. More like Person 1 won’t do X. Therefore, Person 2, who will do X for himself/herself, must be forced to do X for Person 1.

Social security would work fine for people if it were privatized, eliminating the free rider problem. That is, if you want to risk your life savings.

5

I’m talking about the pension aspect specifically and the ideal fantasy rather than the real practice.

6

Yes. Anything can “work”, it just can’t be rationaly calculated by the government. I could win the lottery twice in a row, there is just no real rational way for me to pick the numbers.

7

Yes, although that’s an if that I’m not sure is realizable. And, more important, there are better alternatives available.

The problem is that the funding has been plundered and that requires explanation. The State is, fundamentally, an institution organized by poor incentives with little market discipline. The State, additionally, generates social inefficiency; for instance, good laws are public goods, hence they are underproduced (contrariwise, bad laws are private goods, hence special interests lobby for them).

The State will, much more often than not, misallocate any capital it receives–even funds that were specifically marked for certain ends.

8

When the Bismarck cabinet set up the original form of Social Security (or “Inter-Generational Solidarity”, as the French call it) it was already doomed to generate enormous problems. Bismarck himself had his doubts but was eventually won over by the idea of countering the meteoric rise of Socialist movements with their same medicine. It has often been argued that Social Security starts to become a serious burden to society and the economy once you fall below a certain number of taxpayers for each person drawing his/her SS cheque: various numbers have been suggested and I won’t discuss them. Suffice to say even the most optimist analysts reckon most of the West has passed breaking point about a decade ago and the situation is getting worse not by the year but by the day.

Part of the problem is the change in demographics: people in the West live longer and have less children. Since this is is a trend which started immediately after WWII there was plenty of time to come up with alternatives at a time when the system was still sustainable and retired persons’ unions still didn’t wield as much power as today. Mostly due to ferocious resistance by the voters themselves and (at least in Europe) downright fear of Communist and Socialist parties nothing was done. The only thing that could be done (and just in a few countries) was a slight increase of age requirements. Despite being hailed as “a success” such measures sound like trying to put out a house on fire with a bucket of water: too little, too late.

Another part of the problem is how much SS duties weigh on labor cost: this is something that should not be overlooked. I know SS is just part of how much a worker costs his employee (though in some European States this has become the source of much concern) but when piled up with other duties (for example workplace “safety” measures as implemented by the Maastricht Treaty in the EU) can outweigh the benefits of extremely high worker productivity. Pass a certain limit and people will move their factories to China and their R&D divisions to India just because the game ain’t worth it anymore. It doesn’t take a genius to understand that once wealth-producing activities start to move out you are in deep troubles: less taxes paid so less money to go into building cathedrals in the desert and paying SS benefits.

But that’s enough.

Let’s address your final answer. Yes, the free market could do it. In fact it did so in the past: in The Netherlands you could “purchase” a pension from a bank or a money lender. You gave them the money (either in a single installment or through periodic payments) and starting from a certain date they were bound by law (and their own reputation as reliable business partners) to give you a prearranged monthly or yearly sum. Once the money was given to the bank or the moneylender it was “safe”, as to speak: your monthly payments would be forthcoming no matter what. If, say, the money lender died his heirs were bound by law to continue payments, even if they had took up a different profession. And of course it was all non-compulsory. This form of “insurance” was much used by merchants and professional entertainers (the most famous customer was Daniel Cajanus, the “Finnish Giant”), in short people facing a lot of uncertainty who leanred the hard way to plan for the future.

9

Just to expand, there was private insurance even for the ‘common people’, the ‘fraternal’ or friendly societies, that took care of their members. A local country society had usually few members, reaching tens or at most hundreds of individuals (in some cases also covering the families of those insured). Until the 1820s, most friendly societies were local. Due to their vulnerability to adverse conditions and actuarial risks, they organized into “affiliated orders” which grew rapidly. Most English miners have been members to a friendly society, and a similar system worked in Prussia - which actually served as a model for Bismarck’s system of compulsory insurance. They existed well into 20th century until they were displaced and absorbed by state-susidized insurers. (See this for more.)

10

I would say no, ss has always been bound to fail. Factors such as demographics could prolong or shorten its existance as described above, but SS is nothing more than a ponzi scheme. Eventually you will run out of suckers.

I also dont think that the “trust fund” has been plundered. The money was invested, just like the money in any other trust fund, only SS is invest 100% in the US government by purchasing treasury bonds, which has been seen as the safest investment on the planet for the past 75 years.

Its failue is not mismanagement… it is because the model on which it is built is unsustainable and only benefits those who get in on the front end. Just like any other ponzi scheme.

11

Social Security could probably have been made to work if people were given extra benefits for having more kids and fewer benefits for having few or no kids. Social Security requires a continual high birth rate, otherwise it eventually impoverishes the younger generations. The reason why there is a Social Security crisis is because the Baby Boomers had kids at around replacement rate, a trend that has been continued by later generations. Ironically, since feminists and environmentalists (I have actually heard environmentalists say that the way to “fix overpopulation” is to promote “women’s rights” in “developing” countries) desire low birth rates, that makes the left’s support for Social Security incompatible with its support for feminism and environmentalism.

The Social Security program certainly would be in better shape had the government not spent the money already, but that would have only delayed the eventual crisis. The only way to prevent a crisis is to keep the birth rate high.

To clarify, I certainly don’t advocate Social Security, although I think from a pragmatic perspective, we will probably have to abolish it gradually. Yes, it could be made to work, but I don’t want to be part of Social Security, even if it worked.

In a libertarian society, people would not have their savings wiped out due to divorce because nobody would be required to give out handouts to their ex. They would also get to keep the money that they lose in taxes, so they should have more money to save (although many people will waste their money).

I’m not especially familiar with what happened prior to Social Security, but I think there were a number of different things people did. Some people did not want to retire and continued working as long as possible. Others saved money so that they could retire. Many elderly people were supported by their kids (there are many stories about 3 generations of a family living together in 19th century America).