The Many Misconceptions About Social Security

"I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents." - James Madison, Father of the Constitution, writing in 1794 regarding his intention that the federal government could only expend money for purposes specifically enumerated in the Constitution.

 

It is neither the purpose nor a right of Congress to "attend to what generosity & humanity require, but to what the Constitution & their duty require." – Virginia Congressman William Branch Giles condemning a spending measure in 1796.  Giles also served as VA governor & VA senator for 11 years.

 

"We have the right as individuals, to give away as much of our own money as we please in charity; but as members of Congress we have no right to appropriate a dollar of the public money." - Congressman Davy Crockett speaking on the house floor in 1827

 

"I cannot find any authority in the Constitution for public charity."  To approve the measure "would be contrary to the letter & the spirit of the Constitution & subversive to the whole theory upon which the Union of these States is founded." – President Franklin Pierce vetoing a popular measure in 1854.

 

"I can find no warrant for such an appropriation in the Constitution, & I do not believe that the power & duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit."  President Grover Cleveland vetoing a bill for relief charity – one of many vetoes during his two terms in office regarding bills that violated the Spending Claus of the Constitution in his opinion.

 

"If Congress can do whatever in their discretion can be done by money, & will promote the General Welfare, the Government is no longer a limited one, possessing enumerated powers, but an indefinite one, subject to particular exceptions." – James Madison

 

"Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated." - Thomas Jefferson's letter to Albert Gallatin, Secretary of the Treasury 1801 to 1814.

 

"The powers delegated by the proposed Constitution to the federal government are few & defined . . . to be exercised principally on external objects, as war, peace, negotiation, & foreign commerce."  The Federalist No. 45: Madison

 

"Ours is the job of interpreting the Constitution.  And that document isn't some inkblot on which litigants may project their hopes & dreams for a new & perfected tort law, but a carefully drafted text judges are charged with applying according to its original meaning.  If a party wishes to claim a constitutional right, it is incumbent on him to tell us where it lies, not assume or stipulate with the other side that it must be in there someplace."  Neil Gorsuch, newest Associate Justice of the Supreme Court (to be sworn in on Monday) writing in a concurring opinion in a 2016 case.

 

Today over half of the $4.147 trillion federal budget request for FY 2017 is spent on "objects of benevolence" – Social Security, Medicare, Medicaid, & over another 120 anti-poverty & welfare programs identified by the Cato Institute.  This post focuses on the many misconceptions about Social Security including its unconstitutional origin, growth, & funding – it will show how our country went from the mindset intended by our Founders (& also expressed by our newest Supreme Court Justice) as stated above to one of government dependence that is ruining our heritage of liberty & prosperity.

 

click on graphic to enlarge

 

The above poster was presented by the federal government in the 1930s to entice people who had been in & out of work for five years or longer (due to intervention & interference by the federal government with the free enterprise system) to sign up for Social Security benefits.

 

Everyone, whether employed or underemployed, who worked or had worked for salary or wages, except for agriculture, domestic service, or government work was eligible.  Applications for Social Security accounts were available from employers or from the post office making it about as easy as it is today to register to vote @ the DMV.  You could hand the completed application to your employer, labor union, or letter carrier – or deliver it to the local post office or mail it in a sealed envelop to the local Post Master with no postage required.

 

The Social Security Act was signed into law by FDR on August 14, 1935.  The Act followed the German old-age social insurance program designed in 1889 by German Chancellor Otto von Bismarck.

 

Seemed like quite a good deal, actually New Deal, to receive a monthly check for life starting @ age 65 -  except that life expectancy @ birth in 1930 was 58 for men & 62 for women so by this measure the program was a winner for government collecting taxes & not paying benefits.  Even by the more appropriate measure, that stripped out the high infant mortality rate of 1930, life expectancy after attainment of adulthood statistics showed that 54% of men survived from 21 to 65 & 61% of women survived from 21 to 65 so even this measure gave the government assurance that the program was viable.  They did not see what was coming.

 

You see in 1940 there were 222,488 Social Security beneficiaries; but in December 2015 Social Security beneficiaries totaled 40 million retired workers, 2.3 million spouses & children of retired workers, 6.1 million surviving children & spouses of deceased workers, & 10.8 million disabled workers & their eligible dependents.  Source – Center On Budget & Policy Priorities

 

The original Social Security Act not only paid retirement benefits to the primary worker but included the first national unemployment compensation program, aid to states for various health & welfare programs, & the Aid to Dependent Children Program.  By 1939 the law added Social Security survivor benefits & benefits for the retiree's spouse & children.  In 1956 disability benefits were added. 

 

Payroll taxes for Social Security began in January 1937.  From 1937 through 1939 lump sum payments were made to beneficiaries – the first such beneficiary was Ernest Ackerman who retired after paying one nickel into the system.  Mr. Ackerman received a lump sum payment of 17 cents.  Starting in January 1940 monthly payments began with Ida May Fuller being the first beneficiary.  Ida May had paid $24.75 into the system over the three year interim & received $22.54 in her first monthly check – her lifetime total benefit was nearly $23,000.

 

In 1940 there were 159.4 workers paying taxes into the Social Security system for every beneficiary collecting.  Since 2009 the ratio has been less than 3 to 1.

 

The Act lays two different types of taxes – an income tax on employees & an equal excise tax on employers, both measured by wages paid during the calendar year.  The proceeds of both taxes are paid into the general treasury & are not earmarked in any way so that the current Social Security Trust Fund is merely an accounting of money taken from over payments to the Social Security system over the years that has to be repaid one day.

 

With regard to the Social Security Trust Fund - the annual notice Social Security mails to people who have not set up a Social Security account warns prospective beneficiaries (from page two of sample statement on the Social Security website) – "Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2034, the payroll taxes collected will be enough to pay only about 79 percent of scheduled benefits."  I have never met one person @ my FairTax seminars or anyone who has participated in radio programs I have been on that was aware of this warning.

 

With regard to the excise tax that employers provide in matching the income taxes paid by employees (payroll taxes) concerning Social Security it is equally important to realize that this "matching share" is taken out of funds the employers dedicate to the total compensation of hiring the employee.  As such the employer pays nothing – the worker is the source of the funds of both taxes.  The employer's "matching share" is really part of the employee's total compensation that must be earned through the employee's productivity.  If the employer doesn't receive value commensurate with the total compensation of the employee the job will be eliminated.

 

I will always cherish the memory of the morning that Professor Williams returned my call to explain this point to me so that I would never forget it.

 

The above "matching share" point is illustrated in the Supreme Court case of 1937, Helvering v. Davis in which George P. Davis was not prepared to pay the employer's share of Social Security tax arguing that this tax robbed him of part of his equity in the Edison Electric Illuminating Company.  Davis lost the case & companies have paid the "matching share" out of employee's productivity since the start of the Social Security program – but the great majority of employees have always thought the employers paid this tax without ever wondering where the money came from.

 

Once someone qualifies for Social Security retirement benefits under current rules the formula for determining the amount of retirement benefits @ full retirement age is based on a percentage of one's averaged indexed monthly earnings - 90% of the first $885, plus 32% of amounts over $885 to $5,336, plus 15% of amounts over $5,336.

 

You can readily see that the benefit formula is designed to provide lower wage workers with a greater percentage of their past earnings than higher wage earners receive.  The formula is steeply graduated in favor of lower wage workers so that they receive 90% of their retirement income while Social Security benefits fall off fast from that level for higher paid workers.

 

At the beginning of 2016 the average monthly retirement benefit was $1,341 & the maximum retirement benefit was $2,639 for a worker who retired @ age 66 – both  amounts are determined by the above formula.  Do your own examples & arithmetic – for instance a worker who paid the maximum Social Security tax during his working life & retired @ age 66 in 2016 would have paid just under four times more into the system than a person who paid the average Social Security tax over his working life & also retired in 2016 @ age 66.  The higher wage worker would receive only twice the benefit of the average wage worker after paying almost four times as much tax.  The ratio is more pronounced when comparing the benefits & taxes paid of high earners to low earners.

 

A review of the above formula shows that the way the Social Security Administration determines retirement benefits makes Social Security an income redistribution & welfare transfer system instead of a system where you receive benefits that pay your contributions back commensurate with what you put in over the years.

 

To illustrate just how dependent many Americans are on Social Security please consider that two thirds of our seniors depend on Social Security as the main source of their income & for one in five it is the only source of income.  Without Social Security half of all seniors would be living in poverty so naturally seniors love Social Security – but they don't know or don't want to know that it is a welfare transfer system.  It is easier to falsely believe that they paid something in & are getting back what they deserve. 

 

So how is any of this constitutional?

 

In 1937 FDR had the Congress under his thumb but not so much the Supreme Court.  As such FDR threatened to have Congress enlarge the high court by six justices of which he would appoint liberal justices who would approve everything he proposed.  The Supremes got the message & starting in March of 1937 began to find FDR's New Deal programs constitutional – shamelessly reversing decisions they had found unconstitutional just a short time before.  So much for impartial court decisions & the rule of law.

 

In finding the Social Security Act constitutional in May of 1937 the Supreme Court relied on Congress's taxing power to provide for the general Welfare of the United States – they found that Congress could authorize taxes to pay for a retirement/insurance program that had already expanded into many other areas as described above. 

 

This type of decision makes liberal justices like Ruth Bader Ginsburg think that the country was founded in 1937 instead of 1776.

 

Founders such as Jefferson, Hamilton, Madison, & Monroe were specifically documented as regarding the words "general Welfare of the United States" as a limiting condition on government spending not one where anything goes to approve any government dependent welfare program.  For instance, during his two terms in office President James Monroe (my favorite president) regularly vetoed spending bills because they did not provide for the entire nation's welfare – like defense spending would. 

 

In this same regard the Tenth Amendment Center explains that the words "United States" did not refer to a geographic territory or a single nation in the founding documents – the words referred to a compact or union between the several states so that the "general Welfare of the United States" dealt with this compact.  Thus, the words "United States" specifically refers to the several states in their united or collective capacity (i.e., the States united). 

 

FDR, the Congress, & the Supreme Court all "used a provision of the Constitution that applied to the States, in their united capacity, & unconstitutionally applied it to the people"¹ to tax & appropriate money for a welfare program that along with Medicare & Medicaid has become the cornerstone of the American welfare state – ObamaCare being the latest expansion thereof, derived into law by much the same type of terrible legal reasoning described hereinbefore.

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¹ The Tenth Amendment Center