An Argument For Social Security?

by Don Boudreaux on October 24, 2006

in Social Security

Today on Marketplace Morning Report, Jim Carrier (a free-lance writer) argued that Uncle Sam should increase the amounts taken from Americans’ paychecks for Social Security.

I disagree with much of what Mr. Carrier says.  But what struck me most forcibly — actually, what caused me to wonder if he wasn’t commenting with his tongue drilled deeply into his cheek — was this line:

But my total social security tax for four decades was only $63,000. I
didn’t even miss it. And in 16 of those years my income hit the
government ceiling. I wish they’d taken more.
But what if Social Security hadn’t existed? Would I have set aside hundreds of thousands to provide for myself? 

Not likely. I proved that 10 years ago when I cashed an annuity
and bought a sailboat. I sailed to Spain and had lots of fun. But as an
investment it was worse than Enron.

So this idea of privatizing, of letting me own my retirement, would have been another Katrina.

Now I have no wish to prevent the Mr. Carriers of the world from spending their money as they see fit.  Who am I to say that a private sailing expedition to Spain wasn’t just the thing that Mr. Carrier needed ten years ago?  But on what basis does Mr. Carrier rest his presumption that most Americans are as irresponsible as he is with his savings?  Indeed, can Mr. Carrier even be sure that he himself would have been so irresponsible if Uncle Sam not been at the ready to pick the pockets of others and to transfer part of this booty to Mr. Carrier in his golden years?

Mr. Carrier’s tongue, I believe, was not in his cheek.  He’s serious.

But why should the rest of us take advice about public policy from someone who is so personally irresponsible?

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Adam Malone October 24, 2006 at 2:39 pm

I wonder how Mr Carrier came up with his figure of $63,000. Did he use the 6.2% (social security) and 1.24% (medicare)to figure how much he paid or did he include the portion that his employer paid as well?

$63,000 seemed like a reasonable figure to him, I wonder how he would feel about $126,000.

Of course I also wonder how much of Mr. Carrier's retirement income will be derived from Social Security. If he was topping out the earning scale at $90,000 I find it hard to believe that he plans to derive all of his income from Social Security.

jeff October 24, 2006 at 2:46 pm

Of course his $63,000 (roughly $1500 per year for 41 years), parked in an IRA earning an average of 10% a year(quite doable even with the majority in an index fund) would have garnered him almost twice the amount the government will given him in retirement through Social Security. And his IRA money would have actually been invested in tangible goods and services, rather then a simple robbing of Peter to pay Paul (or in this case, robbing of Jeff to pay Jim).

Another benefit of an IRA is its ability to be used as a form of collateral. Had he been able to invest the money as above rather than have the government confiscate it from him, Mr. Carrier could have had his boat and his IRA and his annuity – Social Security has no such characteristic. Try negotiating a loan using your future S.S. benefits as collateral, the bank will laugh you out the door.

Reform it, reform it now….

george October 24, 2006 at 3:08 pm

I have a question: For this present generation, Soc. Sec. returns are affected by the excess taxes that were taken to account for baby boomer retirement. This money was supposedly invested in government debt. When the effective return is calculated, the "investment return" of the debt is factored in… except that we were taxed, again, to pay off the debt to the Soc. Sec. recipients (ourselves). Is this effective double taxation computed as additional taxation, or is it computed as if we had a "return" on our investment in government debt? If it is computed (correctly) as additional taxation, what is the effective return on our SS taxes?

no one October 24, 2006 at 3:24 pm

If the US had had a forced savings plan like Singapore's he would have still had a nice retirement sum and we wouldn't have the looming problems with our pay as you go SS system.

So even leaving out the important issues of freedom, an actuarially sound forced savings/retirement plan would take care of all the people who needed to save but couldn't trust themselves to do so.

Xmas October 24, 2006 at 3:33 pm

Shhh…george. Stop telling people that the "interest" earned on Social Security bonds is simply a promise to tax US citizens to cover the interest-earned.

Actually, could our government simply print more money to cover the "interest" on Social Security bonds?

George October 24, 2006 at 4:42 pm

My question is not rhetorical. A correct understanding of the real return on our SS "contributions" creates a perspective. Then compare it to the "too risky" return of between 9% and 11% that equity markets have averaged for the last 80 years.

OK Xmas, what would be worse to the economy: the double taxation of SS or the effects of printing all that currency instead? This kind of situation we're in is not very much shy of economic lunacy.

Jeff October 24, 2006 at 8:29 pm

What justifies me having to foot the bill for his irresponsibility? How was this ponzi scheme duped onto the american people? I don't understand.

MesaEconoGuy October 24, 2006 at 9:35 pm

Problem 1: Jim Carrier is “an author and a former newspaper editor.” He is therefore unqualified to discuss economics.

Problem 2: He writes “The one thing I could count on was that Social Security check. At 62, I could [sic] $1,400 a month in perpetuity, $17,000 a year.” It’s actually $16,800 per year, before taxes. He’s not very good at math, either.

Problem 3: Jim is a [modern] liberal, who substituted government for personal responsibility:
“But what if Social Security hadn't existed? Would I have set aside hundreds of thousands to provide for myself?
Not likely. I proved that 10 years ago when I cashed an annuity and bought a sailboat. I sailed to Spain and had lots of fun. But as an investment it was worse than Enron.”

That automatically eliminates any obligation my generation has [the same as his daughter] to him, though that is how Socialist Security functions – it’s a demographic Ponzi scheme:

People like this clueless newspaper hump are the exact reason why we need to eliminate Socialist Security altogether. And I do wish that this Jim Carrier financial harm – if I could, I would sue him for stealing my money, and my kid’s money.

joan October 24, 2006 at 9:38 pm

The reason many if not most people like social security is the fear of running out of money when you are too old to work(80+). Any one who remembers the 70's wants an inflation adjusted annuity. The alternatives proposed to social security maximizes expected income but increases the risk. If you want to gain public support for replacing social security with a private program the plan should be aimed at minimizing the risk. Maybe the government could issue part of its debt as inflation adjusted annuities, like they now offer inflation adjusted bonds, that can be purchased in IRA's. Since the government repays debt from tax revenues inflation adjustment is risk free for government but risky for financial institutions.

Ryan Fuller October 24, 2006 at 10:23 pm

"Since the government repays debt from tax revenues inflation adjustment is risk free for government but risky for financial institutions."

The risk is pushed onto the taxpayer. If we see a period of inflation, not only will they lose purchasing power, they'll be taxed on what's left in order to cover the inflation adjusted promises of the government. The sword of Damocles gets twice as heavy and the thread by which it is suspended gets half as thick.

mcwop October 25, 2006 at 12:04 am

Social security is great! I would not change a thing. Every time someone proposes payroll tax increases, and/or benefits cuts, and/or increasing the retirement age I simply respond: "Why change a thing? The system is fantastic!" When people complain that old people need this or that, I respond: "Why? We have social security and medicare." Leave the system as is, it could become much worse.

Karen October 25, 2006 at 8:30 am

Regardless of how laughably unreflective he seems now, it'll be a sad thing to see when Carrier realizes that the people running government are no different in their irresponsible treatment of the future than he is.

Somehow, we expect that those in charge are "exceptional" people with fewer cognitive handicaps than we have.

Adam Malone October 25, 2006 at 9:47 am


For extra emphasis you should check out Gordon Tullock's Government Failure. A book which I am positive our resident Economists from GMU would support.

Pay special attention to Tullock's discusion of Bifurcation.

Randy October 25, 2006 at 10:25 am

That's a good point Karen. It seems to me that we would be better off to elect persons with the humility to understand that they hold office to perform a necessary function, not to change the world.

Noah Yetter October 25, 2006 at 10:37 am

"Any one who remembers the 70's wants an inflation adjusted annuity."

Of course since government is the cause of inflation….
Yet another example of trying to use the state to solve a problem that it itself creates.

Xmas October 25, 2006 at 10:57 am


I had my tongue firmly in my cheek with the first part of my comment there.

Though, my question is a bit more serious. With the Federal Treasury being quasi-independent in our system of government, is it even possible for the Federal government to demand more cash be printed up to cover the interest earned on those special Social Security bonds?

If it came down to it, I'm sure the government could simply default on those special bonds, or write them off through an act of Congress, or simply roll them over into another set of special bonds. I'm not sure who would even have standing to try and collect on those bonds.

Ernst October 25, 2006 at 2:01 pm

Social Security in Chile works this way: The company deducts from your salary a specific percentage which varies with different amounts of monthly incomes and has a ceiling. The percentage and the ceilings are set by law.

These monthly deductions are yours to invest in private pension funds. These pension funds are highly regulated by law. You can choose which pension fund to put your money in depending on monthly and YTD returns that each pension fund is required by law to publish once a month.

You don't get your money. The company deposits it directly in the pension fund you choose. The pension fund creates an account in your name.

Every pension fund has four different portfolio strategies mandated by law. Portfolio A is the riskiest consisting of almost 100% shares. And is the most volatile. While portfolio D is the most conservative consisting mainly of fixed income (Gov Bonds, AAA companies bonds, etc.) You choose the portfolio you want. You can also switch between different pension funds and/or portfolios giving one month notice, and the wealth you had accumulated in your first pension fund is wholly transferred to the new fund you choose. This migration is not taxed in any way nor are there fees to pay.

When you reach 55 years of age you are forced by law to deposit the future deductibles in your salary in any pension fund but only in portfolios C and D, which are the safest, until you retire.

The Governmet has no social security liabilities since the money in the pension funds has been invested by private persons and not by the government.

When you retire you decide what to do with your nest egg. You may choose a big monthly payment, or a smaller monthly payment but with a sizable payment up front, etc.

There are other government regulations that will guarantee you an income of at least half a minimum wage after you retire if, for example, you are an independent professional (doctor, lawyer, etc) that has not contributed anything to a pension fund during your lifetime since, not working for a company, you never deducted a portion of your income to invest in a pension fund, or you have been out of work for a long time and when you worked you received a miserable salary, etc.

I think it's a good system and maybe the US could try to implement something similar and do away with pension fund liabilities.

Healthcare operates in a very similar way, with your salary deductibles and your choice
of any private heathcare facility.

I hope someone can propose these views to their Representatives or Senators, since the coming Medicare and Medicaid liabilities will fly through the roof and, probably, your taxes will have to increase to finance these liabilities. Good luck,


Mike October 25, 2006 at 4:26 pm

I don't believe he understands that that social security money was actually spent on a sailboat for Dick Cheney, and there's only an IOU in the vault at the SSA. Don't worry, my 10 year old daughter will pay the debt, and so will your kids.

quadrupole October 25, 2006 at 5:12 pm

The thing I find really disturbing about this article is that it reflects the attempt to try to force the responsible to pay for the irresponsible. I saw this a lot growing up. When I was a child I could not understand why my family could not afford to travel to Florida every spring break or vacation in Florida for two weeks every summer. My parents made about what my peers parents made, and they took such vacations every year…

I now realize the reason why is that my parents were saving for their retirement. They took responsible measures to insure they could afford to retire comfortably. My friends parents were in debt to their eyeballs to support their lifestyle. I remember this everytime I look at my social security deductions from my paycheck… I am paying for all of the summer vacations I never got to go on…

In the future I will be able to add to my list that I am paying for all the journalists sailing trips to Spain I also did not get to enjoy…

Noumenon October 26, 2006 at 8:55 am

But on what basis does Mr. Carrier rest his presumption that most Americans are as irresponsible as he is with his savings?

You don't know many Americans, do you?

Reach Upward October 26, 2006 at 10:28 am

I'm sorry that Mr. Carrier thinks he is so stupid that he needs the federal government to take care of him.

When I was a kid, I thought that people in the Soviet Union were chomping at the bit for freedom. Imagine my surprise when the evil empire fell in the early 90s. While many did want freedom, there were also many that were scared to death because they no longer had the government to wipe their noses.

Although Mr. Carrier didn't mind a bit of tyrrany (and certainly wants current workers to enjoy the same tyrrany so that the government can take care of him), his government-knows-best model does not create freedom or responsibility. Instead it creates willing slaves that are happy to have the master take care of them. October 26, 2006 at 9:13 pm

Regardless of all the previous comments regarding social security, it is, and always has been unconstitutional. What is wrong with personal responsibility. any president, congressman or senator that supports social security is violating their oath of office.

Wild Pegasus October 27, 2006 at 2:27 am

If they passed an amendment tomorrow saying, "Social Security is okay," would that make it so?

- Josh

Bill S October 29, 2006 at 12:51 am

Josh, if they passed an amendment saying Social Security is ok – it would NOT make it so, but it would make it Constitutional. Income taxes are not 'ok', but they're Constitutional

gary lammert October 29, 2006 at 8:33 am

With the current state of global macroeconomic saturation, housing overproduction, and dysequilibia of international wages, US SS will ultimately be defined as what it really is: a federal ponzi scheme whose bankrupcy will occur much sooner than the GAO originally anticipated. If SS payroll taxes were invested directly in production industry or services that could produce self sustaining non-tax dependent income in future, it would have greater validity as a viable retirement vehicle. With the US current demographics, predictable nonlinear vissitudes of the investment market, and an acuarial model dependent on a 2-2.5 percent GDP growth model, US SS is in the middle of a frozen pond with springtime melting ice.

Lee Jamison October 10, 2008 at 7:18 pm

Actually, Dr. Boudreaux, Mr. Carrier's implied assertion that all Americans are as foolish with their money as he has been is proven by the fact they think Social Security will provide for them in their old age.

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