The Social Injustice of Social Security
In the United States, Social Security’s old-age insurance program is nearing a fiscal tipping point. Policymakers should take the opportunity to craft a system that pursues justice rather than political expediency.
The Social Security Administration (SSA) was created, along with a host of other agencies, during the Second New Deal, the wave of legislation enacted during Franklin Roosevelt’s second full year of presidential administration, 1935. Social Security encompasses an array of programs, including disability benefits, survivor benefits, and unemployment insurance. But for the purpose of this article, I will employ the term as it is often colloquially used, to refer to the old-age insurance (OAI) facet of the SSA—that is, the benefits paid to the elderly.
The stated purpose of Social Security was to address old-age poverty. There was in fact widespread poverty among the elderly in the early 1900s, and the Great Depression exacerbated the problem. It was an era when supporting a (usually large) family on a working-class wage was challenging enough, and saving for retirement was often impossible. Most working-class jobs, moreover, were physically demanding, so that continuing to labor into one’s late sixties or seventies was usually impracticable. For these and other reasons, the elderly as an age cohort were disproportionately poor.
Even so, the specific design of Social Security was, from the beginning, susceptible to criticism. As Roosevelt himself admitted in a widely quoted exchange, the mechanism for funding was designed more for political traction than economic sustainability. In response to advisors who pointed out the system’s long-term economic flaws, he said,
I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.
A consummate politician, Roosevelt was right. Social Security remains popular and politicians fear touching it. Yet, its defects were not lost on contemporary critics who were paying attention. The libertarian journalist Isabel Paterson was incredulous at the virtually fraudulent nature of the discrepancy between the program’s political persona and its actual financial mechanism. “The act was passed on the pretext that the tax money thus collected should be repaid to the workers from whose wages it is deducted, in the form of old-age pensions,” she wrote in 1938. “Then the government spends that tax money for ‘current expenses.’ . . . In exchange, the government simply puts its I.O.U. in the cashbox.”
In other words, Social Security was designed to appear to be a kind of retirement savings account. Citizens would pay a portion of their earnings to the government over the course of their working lives, the government would keep those dollars safe over the decades, and then it would pay those savings out, returning to the retirees their hard-earned savings.
But in truth, Social Security involves no “saving” at all. The money collected by the government via payroll taxes would be used to pay for current beneficiaries. Current workers (future beneficiaries) had to hope and pray that when the time came, there would be enough taxes collected from enough still-working people to pay for the benefits needed. In other words, it is a welfare program, but one that encompasses the vast majority of Americans. Or, as some critics have pejoratively but not entirely inaccurately described it, it is an enormous Ponzi scheme, whose solvency depends on new ranks of payers providing the income for previous payers.
Recipients of Social Security began receiving checks in 1940, having paid virtually nothing into the program. The first monthly beneficiary, Ida May Fuller, is admittedly an extreme case but nonetheless illustrative of the program’s inequities. Fuller had paid about $25 in taxes into the fund before she retired, but she collected benefits for thirty-five years until her death at the age of 100, for a total of almost $23,000. Since its inception, the vast majority of Social Security recipients have received more than they paid—though that calculus has changed in recent years as a result of changes enacted in 1983. Such an arrangement can only last so long.
The Looming Crisis
The 2024 report of the Social Security trustees was released in May. Its matter-of-fact summary predicts a watershed in nine years:
The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033. . . . At that time, the fund’s reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits.
Beginning in 2033, that is, there will have to be tax increases, benefit reductions, or some combination of both.
While the trustees’ report is essentially accurate, this way of conceiving the financial status of Social Security actually understates the problem. The report includes so-called “reserves” in its calculation—that is, money that was paid into the system in years past. But this is an accounting convention; in truth, that money has already been used to fund government expenditures. Social Security is already paying out more than it is bringing in; that is, it is a net drain on the federal budget. That threshold was crossed in 2018; in 2023, the program spent $119 billion more than it received.
Meanwhile, billions of dollars in benefits are going to a group of Americans who, as Andrew Biggs laid out in The Hill earlier this year, need them least.
Among households aged 65 in 2022, just 4 percent described their financial situation as “finding it hard to get by,” with another 13 percent “just getting by.” Eighty-two percent said they were “doing okay” or “living comfortably,” up from 62 percent when the survey began in 2013. Moreover, seniors report much higher financial security than younger Americans.
The U.S. Census Bureau . . . in a 2023 analysis using IRS data found just 6.4 percent of U.S. seniors with income below the federal poverty threshold. In reality, Census Bureau researchers have found dramatic reductions in elderly poverty even since 1990, with the share of seniors with sub-poverty level incomes falling from 9.7 percent in 1990 to just 6.4 percent in 2018.
The OECD finds that the typical U.S. senior has the second-highest disposable income in the world, trailing just the tax-haven city-state of Luxembourg. Our median senior’s income is 50 percent higher than Denmark, 29 percent above Germany and double that of Japan.
If the purpose of Social Security is to prevent poverty, it is rather poorly targeted. In the context of massive federal budget deficits, the U.S. is now borrowing money to fund generous checks for wealthy retirees. It is hard to see how this can be justified on the basis of any concept of social justice, however liberally or conservatively defined.
Social Security as it is constructed also exerts a dubious influence on the person, the family, and civil society. As Northwestern University law professor John McGinnis observes in a recent article, “The New Deal’s introduction of Social Security marked the beginning” of a “fiscal transformation” in the federal budget, a “shift from providing public goods to distributing transfers.” As McGinnis notes, this “aggrandizement of state responsibilities discourages even fully capable citizens from managing their own affairs, leading to a decrease in the liberty and sense of duty at the heart of human flourishing.”
The pernicious influence of government dependence is widely recognized; Social Security in effect extends such dependence deep into the middle class. “The provision of benefits without means-testing gained support from the traditional respect for the old,” McGinnis writes, “even as it eroded traditional virtues such as frugality and personal responsibility.” The long-term effect was corrosive, encouraging each generation to squeeze as much benefit as possible from an unsustainable system, leaving the fallout for subsequent generations to deal with.
The turn from family and community to government as the primary provider of security in old age also overturned the traditional incentive structure of family formation. Oskari Juurikkala made the case in a 2007 treatment of old-age insurance across developed nations. “The argument that fertility decline is largely linked to the growth of public pension systems is not easily accepted in the affluent world,” he admitted. “Surely, it is assumed, the decision to have children has nothing to do with old-age security. However, while that much may be true, it is true only because there are extensive and compulsory pension schemes providing old-age security. That precisely is the point: Public pensions have destroyed the link between children and old-age security.” His argument is that government old-age insurance programs have disrupted the intergenerational solidarity that flows naturally from the interdependence of children and parents. As James Capretta has noted, the point seems to be borne out in studies that show an inverse relationship between fertility rates and the size of social insurance programs. “Thus, U.S. Social Security, like government pension plans the world over, is built on a fundamental and poorly understood contradiction: it reduces the economic incentive within a family to invest in children even as it remains ever-dependent on a new generation of productive workers to keep the program afloat.”
Prospects for Reform
Reform of popular entitlement programs is always an uphill climb. In the time since George W. Bush broached the idea of more sweeping reform, Social Security has been considered the “third rail” of American politics—too dangerous to touch. At no time is this more evident than now: even as inevitable insolvency looms, the leading political figures in both parties are adamant about preserving the status quo.
McGinnis describes one major hurdle to reform: demographics. “It should not be surprising that the largest transfers in American democracy still go to a group defined by their age,” he writes. “The elderly vote more than any other group: in 2020, 71 percent of voters over 75 participated against slightly more than half of the youngest voters.”
But the reckoning is coming, no matter how much we try to wish it away by pie-in-the-sky forecasts of solving Social Security’s shortfalls through soaring productivity gains, tax-the-rich schemes, or any other alleged panacea. Some change will be necessary, and when this becomes clear to enough people, reform will become politically feasible. Those concerned with nudging the system toward justice should then follow two principles:
First, make sure that the program benefits those who are most in need. Needless injury to the middle and upper classes should be avoided of course, but if there is to be economic pain—as there must be when the chickens of a faulty, century-long policy come home to roost—then it should be laid more heavily on those who have more resources to bear it.
Second, minimize negative consequences for families and civil society. When crafting taxes and benefits, do not create perverse incentives by, for example, discouraging work (for either younger or older people), penalizing marriage or childbearing, discouraging job creation, or replacing the charitable activities of the civil sector (churches, communities, voluntary associations).
A reform that might improve Social Security’s finances and avoid harming those in need is means-testing (adjusting benefits according to financial need), though there is danger that some means-testing methods would violate the second principle, for example by discouraging effort toward more productive work and higher income. Astute policy analysts such as Andrew Biggs have taken these concerns into account and proposed ways forward.
Unraveling a program that is deeply embedded in our politics and culture won’t be easy, but that doesn’t mean it shouldn’t be attempted. The goal of relieving old-age financial hardship was a worthy one, but the policy measure enacted was a defective means to achieve it. The insolvency of Social Security may provide the emergency necessary to bring about change, if only we do not let the crisis go to waste.
Image by gunnar3000 and licensed via Adobe Stock.