The Lie That's Bankrupting the Country

I still continue to get heat from a few readers for referring to Social Security as a middle class "entitlement"--a word that implies Social Security is a welfare program, a handout, the dole. Many people are still apparently impressed with the notion that Social Security is some kind of retirement pension plan in which you are paid back out of funds that have been saved on your behalf.

This is a perspective that hopelessly distorts the debate over entitlement reform. As the middle class entitlements yawn wide open to swallow the entire federal budget, it is not an exaggeration to say that this distortion is bankrupting the republic.

Oddly, I've seen a similar complaint the other side, from a defender of the welfare state. Ezra Klein points out that much of the welfare state is hidden so that people don't even realize they are living off of government handouts. While I think that many people would recoil from living off of welfare if they knew they were doing it, his logic is the opposite: that people would love the welfare state if only they realized just how dependent they are on it. More on that argument below.

But the basic phenomenon he's referring to is real. He cites a study in which a political scientist "asked a scientifically selected sample of 1,400 Americans whether they had ever used a government social program. Only 43 percent copped to having done so. Then she read off 21 social programs, such as Medicare and the home-mortgage interest deduction, and asked the same question again: Have you ever used a government social program? This time, 96 percent said yes, in fact, they had." This study is partly misleading because it includes tax credits like the mortgage interest deduction as a "government program"; being allowed to keep some of the money you earned is very different from getting a handout. Yet it is accurate about attitudes toward Social Security: "Among Social Security beneficiaries, 44 percent thought themselves unsullied by the touch of government, and among Medicare beneficiaries, 39 percent said the same."

Klein concludes, "That's the thing about submerging a large part of your welfare state. Sink it deep enough, and it becomes almost impossible to dredge up."

But this is something of an evasion, because submerging the welfare state is the whole point. This deception was designed into the system from the very beginning and is, in fact, crucial to maintaining it.

A sharper-eyed observer of the economics of the welfare state understands this. Washington Post economics columnist Robert Samuelson has made something of a crusade out of getting people to acknowledge the basic truth about the nature of these programs and their grim economic future. Samuelson's latest broadside gets to the heart of the psychology of the hidden middle class welfare state.

"Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they 'earned"'these benefits. To reduce them would be to take something that is rightfully theirs....

"What we have is a vast welfare program grafted onto the rhetoric and psychology of a contributory pension. The result is entitlement....

"By all rights, we should ask: Who among the elderly need benefits? How much? At what age? If Social Security and Medicare were considered 'welfare'--something the nation does for its collective good--these questions would be easier. We would tailor programs to meet national needs. But entitlements are viewed as a higher-order moral claim, owed individuals based on past performance. So a huge part of government spending moves off-limits to intelligent discussion."

Samuelson is still a conventional liberal who thinks that welfare is "something the nation does for its collective good." But he recognizes the weakness of such a moral claim and realizes that it would be a lot easier to cut Social Security, replace it, even eliminate it, if it were honestly described as welfare.

Which is precisely why the left refuses to describe it as welfare. Samuelson defends the originator of Social Security by pointing out that FDR opposed the current Ponzi-scheme style of financing it, in which taxes paid by workers are paid out immediately to cover promises made to retirees. But FDR deserves blame for the initial, fundamental deception that masked the nature of the program: the decision to have it apply to everyone, and not just to the poor.

FDR recognized that there is a stigma to "the dole." Welfare is naturally repugnant to those who pay for it. They resent being forced to work their whole lives and scrupulously make ends meet, so that they can fund the lifestyle of those who showed less thrift and industry. But welfare is also inherently repugnant to those who receive it, certainly among the American middle-class, which is justly proud of its ability to be independent and self-supporting.

So how do you sell a welfare program to the middle class? You make Social Security into a program that covers everyone, with the outward trappings and style of a pension program. You erase the stigma of being on the dole by tricking everyone into going on the dole.

Consider the cost of this deception. I was struck by this recently when I read Megan McArdle's New Year's admonition that most of us are not saving enough. She warns that "15% of each paycheck into the 401(k) is the bare minimum you can get away with, not some aspirational level you can maybe hope to hit someday," yet the average savings rate in America is 3.5%. What explains the gap between 3.5% and 15%? Well, that's roughly equivalent to the 12.4% of our incomes that we pay in Social Security taxes, isn't it? In effect, most people feel as if they are putting aside 15% of their income to provide for their retirement, not realizing that most of that is being spent immediately by the government and never put aside anywhere.

This is the infernal process by which Social Security takes the majority of the population, who are capable of being independent savers, diverts their savings into government consumption, and transforms them into welfare recipients. In the process, it crashes the nation's savings rate and deprives the economy of trillions of dollars of capital.

The purpose of this ruse is pretty openly stated by Social Security's defenders. One of them acknowledges that, as an upper-middle-class professional who is willing and able to keep working past retirement age, he will only get about 35 cents on the dollar from what he paid into Social Security. (He does not mention that those of us who are younger will get an even worse deal.) But then he concludes that we have to keep the system as it is because, "Eliminating checks for people with incomes that make them 'rich' transforms Social Security from an 'everyone pays, everyone collects' earned-benefit program into welfare. And we know what happens to welfare programs in the United States. (Slash!)"

Consider the appalling authoritarianism of this approach. He wants the public to pay for generous welfare for the poor, but he's afraid that he doesn't really have a morally convincing argument to get them to vote for such a program. So instead, he wants us to keep up a vast, trillion-dollar fraud to trick people into "doing the right thing" as he sees it.

What is more arrogant is the way he openly admits to the deception. It is OK to bluntly lay out the truth among the enlightened, educated, bien-pensant elites who read the editorial page of the Washington Post, where we can all get together and discuss how we're going to pull the wool over the eyes of the unenlightened masses.

But this arrogance will be their undoing. The fiscal disaster of the middle class entitlements means that we are going to have to consider basic reforms of the system, and the more we debate the structure of the system, the more they are going to have to admit the fraud at its heart. You can't convince the public to keep a ruse going by telling us what the ruse is and why you're perpetrating it.

This is all going to be exposed because Social Security makes no sense economically. Fiscally, it ensures that entitlements will expand to swallow the whole federal budget. Economically, it drains private capital into the cesspool of government consumption. So the system cannot be explained in economic terms. It can only be explained as a program whose goals are cultural and political. It is an attempt to draw everyone into the left's collectivist ideal: a society in which the state is big and all-powerful and the individual is small and dependent, looking to the state for support and guidance. Hence the purpose of the Social Security fraud. It takes the independent, self-supporting middle class and recruits them as political shock troops for the welfare state.

The way to defuse this fraud is not just means-testing of Social Security but a sharp, ruthless means-testing. If you're below a certain age, and you don't need Social Security to stay above the poverty line, then you just don't get anything. For years, we've been told that we need to keep Social Security so that old folks won't be forced to eat dog food (or the dog) and sleep on the streets. Well, let's take this argument literally and keep the program for that purpose--and only for that purpose. But cut off the middle class. End the illusion that Social Security is a pension program, and end the illusion that the average person is putting aside a significant portion of his income to support his retirement.

Let people know what the program really is and where they really stand. Turn Social Security into an honestly declared welfare program. If the American people decide they don't like such a program--well then, so be it. You don't get to maintain the system by lying to the American people.

Fiscal necessity is already forcing us to consider entitlement reform. The "third rail" is losing its jolt. But we need to go beyond "reform" to understand the basic evil and dishonesty of Social Security at its foundation. It is an experiment in collectivist social engineering, at the expense of bankrupting the federal budget, sacrificing economic growth, and corrupting political discussion. The sooner we end this fraud, the better.