The Immoral American ''Social Security'' System

When it was first passed, the maximum “contribution” an employee could make to the Social Security system was one percent on the first $3,000 of annual income (i.e., $30). Employers had to make a matching “contribution” of up to $30 per year as well.

The U.S. government, in testimony before the Supreme Court in 1937, had to admit that Social Security is simply a tax. “It does not constitute a plan for compulsory insurance within the accepted meaning of the term ‘insurance,’” the government said in Helvering v. Davis (1937). Indeed, . . . the government admitted that Social Security taxes were “true taxes, the purpose being simply to raise revenue. No compliance with any scheme or Federal regulation is involved. The proceeds are paid, unrestricted, into the Treasury as Internal Revenue collections, available for the general support of the government.” So the government told the Supreme Court what it had to hear: that Social Security was not an insurance program, but a tax. But it continues to tell the voters what they want to hear: that it’s an insurance program, not a tax.¹

In a famous (or infamous) case, Flemming v. Nestor (1960), the wife of a deported Communist had her Social Security payments cut off. But her husband had paid into the system for years. Wasn’t she entitled? No. Listen to the Supreme Court’s answer:

To engraft upon the Social Security system a concept of “accrued property rights” would deprive it of its flexibility and boldness in adjustment to ever-changing conditions, which it demands. . . .

The OASI [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. . . .

Sure, the politicians talk about it as though it were insurance; it’s even called insurance: “Old Age and Survivors Insurance.” It uses phrases like “contributions” and “trust funds.” . . . Justice Black . . . in his dissenting opinion to the ruling [said]:

People who pay premiums for insurance usually think they are paying for insurance, not for flexibility and boldness. I cannot believe that any private insurance company in America would be permitted to repudiate its matured contracts with its policyholders who have regularly paid all their premiums in reliance upon the good faith of the company. . . . ²

Millions of Americans . . . believe that the money they have paid into Social Security is safe and secure and just waiting for them to retire, because it’s put into a gigantic “trust fund.” The cruel truth of the situation is that there isn’t a real “trust fund” today, and there never has been.

What there used to be was a pile of unmarketable³ “special” Treasury bonds. As fast as the money would come into Social Security, it . . . was used to buy [these] government bonds. . . .⁴

Nowadays, compared to the promises of payment, there aren’t even that many Treasury bonds sitting in the Social Security system. There are so few people paying into the system (compared to those who are “owed”), that there is not enough money to pay those who are “owed.”

So what is the likely solution to this problem?

The following exchange . . . took place in 1976 between Senator William Proxmire and the then-Commissioner of the Social Security Administration, James Cardwell. . . .

PROXMIRE: “In my State, I figure there are 600,000 voters that receive social security. Can you imag-ine a Senator or Congressman under those circumstances saying, we are going to repudiate [i.e., refuse to pay] that high a proportion of the electorate? No.

“Furthermore, we have the capacity under the Constitution, the Congress does, to coin money, as well as to regulate the value thereof. And therefore, we have the power to provide that money. And we are going to do it. It may not be worth anything when the recipient gets it, but he is going to get his benefits paid.”

CARDWELL: “I tend to agree.”. . . ⁵

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¹Gary North, 12 Deadly Negatrends (Fort Worth, TX: American Bureau of Economic Research, 1985), pg. 32. Return to text.

² Ibid., pp. 31-32. Return to text.

³ Unmarketable: i.e., unsellable—by law! Return to text.

⁴ When the government needs to borrow money (which, as you should know, it needs to do a lot!), it gives the lender a bond: a promise to pay back sometime in the future—five, ten, 20 or 30 years from now—the money it has borrowed . . . plus, in the meantime, interest. How will it pay back this money? There are three (and only three) ways it can possibly do this: 1) by taxing citizens enough; 2) by borrowing more money; 3) by inflating (or debasing) the currency (i.e., simply printing more pieces of paper that claim to have a certain value even though they have none; in other words, the government is doing what would be called, if done by private citizens, counterfeiting). The U.S. federal government—and, indeed, most governments of the world for the past fifty years or more—has been using the last two methods almost exclusively.

I should also point out that there are some major differences between U.S. government bonds and those issued by corporations.

First, when the government borrows money, it does so for far different reasons than do corporations. Companies borrow money in order to increase their profitability. They use cash in order to purchase new equipment that will increase productivity or quality, or in order to hire more and better quality employees who can help them earn more money.

Businesses repay their loans out of profits—i.e., new wealth. The government is not in business. It does not create items of value that generate profits. It does not create wealth. Therefore, when it borrows money, it must repay loans not from new wealth, but from taxes on citizens’ wealth, from more borrowing, or from inflation (i.e., “counterfeiting”—if any private person did it).

Second, the government has been perpetrating a fraud that would land the owners in jail if any corporation tried such a thing. The government, in its statements of indebtedness, does not count the “special” Treasury bonds held by the Social Security Administration as part of its debt! In other words, the government counts the funds that come from the Social Security Administration as it said it would and did back in 1937: as if they were general tax income to the government! The government says it owes the Social Security obligations (that’s what a bond is: it is a debt instrument that says, “I owe you this money plus interest, and I intend to pay”), but the government doesn’t count the Social Security debt as debt! So, according to the Social Security Act, the government’s Social Security Administration has multi-trillions of dollars it owes to people who have paid into the system. And what does it own in order to pay this debt? Government bonds that the government doesn’t count on its books as debt! Put another way: the national debt is actually trillions of dollars larger than the government is willing to admit. . . . Return to text.

⁵ Ibid., p. 37.