Economics With A Face

One aspect of this program was that during its initial years, by law, 10% of their wages were automatically withheld by U.S. employers. This money was to be set aside for savings in old age. It is with regards to this last point that a current controversy has erupted. No bracero has ever seen a dime of this money.

The leader of the group in Aguascalientes made it clear that he blamed the Mexican government. “The money was sent years ago by the U.S.” he explained, “It’s our government that has eaten it up and kept it from us.” Reading up about the situation this appears to be the case. The money was deposited in a Wells Fargo Bank in San Francisco and then transferred to a government bank in Mexico City. While the details of what happened next are unclear, I don’t think there are many doubts that their money was not saved but instead spent by the Mexican government.

Today, not surprisingly, lawyers are suing everyone involved. For its part, the Mexican government has set up a fund to compensate the workers. But it is still trying to figure out whom to give the money to and is currently compiling a list of names. Meanwhile, similar demonstrations by braceros across the country have continued, some of which have sadly turned violent. No clear solution is in sight.

These braceros had every intention to believe that the money being withheld from their paychecks was being put aside and saved for a later date. They have found out the hard way that governments are not the best instruments to save for old age. With this in mind one can draw a few parallels with the U.S. Social Security system.

By law, U.S. employers also withhold wages from workers paychecks that many think is being saved in an account. The truth is that this money, much like the braceros withholdings, is not being saved but is spent by the government as soon as it is received. The main difference I see between the braceros and those who are currently paying into the U.S. Social Security system is that today’s workers have no excuse for being duped.

Economists, politicians, columnists, and many others have made clear for decades a simple fact: no Social Security payroll taxes have ever been saved. When today’s workers retire their benefits will not come from a bank account where the government has put away their money. Instead, all future benefits must come from future taxpayers.

Excess payroll tax revenue that is represented in the Trust Fund is money that has been spent as well. The government spends excess payroll tax receipts on aircraft carriers, national parks, or whatever else it needs and places a special issue treasury bond in the Trust Fund. Unfortunately, if these bonds were ever to come due their source of revenue is also future taxpayer’s dollars, so they do not help fund the system in any way.

It is for these reasons, along with demographic changes that mean fewer workers will be supporting each retiree, that the Congressional Budget Office now estimates that there are trillions of dollars of unfunded liabilities within the system. Something needs to be done.

Since the alarms have already been sounded on numerous fronts, I though I would take the opportunity to cite a few such forewarnings chosen specifically because people might find either their sources or their timing surprising. Currently the debate over Social Security reform has cooled considerably, but there is no doubt that it will at some point be back on the table. When that time comes, the more people that are informed about the unsound nature of the program the better. Hopefully, this small collection of citations will help to accomplish that goal.

To start off with many believe that the complaints about the structure of the Social Security system are an advent of the current administration. But way back in the 1940’s, only years after Social Security was signed into law, economist Ludwig Von Mises in his magnum opus, Human Action, made the point that no savings were taking place within the system.

He wrote: "Paul in the year 1940 saves by paying one hundred dollars to the national social security institution. He receives in exchange a claim which is virtually an unconditional government IOU… The government's IOU is a check drawn upon the future taxpayer. In 1970 a certain Peter may have to fulfill the government's promise although he himself does not derive any benefit from the fact that Paul in 1940 saved one hundred dollars.... The statesmen of 1940 solve their problems by shifting them to the statesmen of 1970. On that date the statesmen of 1940 will be either dead or elder statesmen glorying in their wonderful achievement, social security."

One needs only to change the dates from 1940 and 1970 to 2000 and 2040, respectively, and the quote would be as valid today as it was in the 1940s.

More recently, economist Paul Krugman called Social Security what it is: a “Ponzi” scheme.

In 1996 in the Boston Review he correctly pointed out that Social Security had a “…Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).”

While Krugman is now a vocal critic of reforming Social Security, in 1996 his words rang true… and they still do.

Politicians too have frequently warned about the flaws in the program. In 1991 Harry Reid, now Senate minority leader, defended his vote to cut Social Security taxes by pointing out the fact that excess receipts from the system were not being saved but instead were being spent on other projects.

Specifically he said: "I think we have to stop spending social security monies on foreign aid and other wasteful programs and that in effect is what's being done…When we go to the vault to get that money it's going to have been used for other purposes."

I’d be interested in hearing what Senator Reid would say about his quote today.

And just a few years back, Bill Clinton’s proposed budget for fiscal year 2000 made a similar point.

It stated that the Social Security Trust Fund is “…available to finance future benefit payments and other trust fund expenditures--but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, make it easier for the government to pay benefits.”

Quotes like this show just how much of a role partisan politics is currently playing in the debate over reforming the system.

One of the favorite lines of those who oppose dealing with Social Security’s unfunded liabilities today is that “there is no crisis.” They are right. There is no crisis today… but one looms down the road.

We have been amply warned that the money withheld from our paychecks will not be financing our future retirement benefits. This money must come from the paychecks of our children and grandchildren. The fact is that if we don’t start putting our money in real assets and reform the system, our offspring will likely be saddled with an unfair burden. That, or senior citizens will have to take a large cuts in benefits. Neither option seems fair to me.

Braceros in Mexico I spoke with felt that the government is waiting until they all pass away so they will never have to pay up the money they are due. What a depressing state of affairs. While the fact that Social Security has promised to pay out trillions more in benefits than it will take in through taxes should act as a wake up call, a scene such as this should get us out of bed and working on the system’s problems today.

For in 2050, one of the last things I want to see is senior citizens in the U.S. spending their Sunday mornings trying to pressure bureaucrat politicians into paying them their promised benefits that have actually been spent decades ago. It was a sad sight to behold in Mexico, and no doubt a sadder one for anyone to go through personally. Let’s tackle this problem now to avoid any chance of such a situation.