Social Security is not a savings plan

On Friday, I posted a link to a Washington Post piece listing government handouts for wealthy people. What I did not not say then was that the list contains an error. Item number 8, the "Social Security earnings limit," features the sentence "Technically, of course, Social Security is a savings plan, not a tax." The sentence itself is not central to the argument and could easily be cut. But it is completely false.

Social Security is funded from revenues collected under the Federal Insurance Contribution Act (FICA). These must be paid by an employer and an employee each time the latter is paid. Hence it is commonly referred to as the "payroll tax." It is not in any way a savings plan. Individual citizens have no Social Security account that they can access at retirement. Instead, they pay taxes that are specifically earmarked for the Social Security program. These taxes go to fund the program's ongoing expenses, including paying benefits to current retirees. A government-backed savings plan (forced or otherwise) might be a very good idea, but Social Security is not it. Social Security is a redistribution scheme: a wealth transfer from the young to the old.

There are two reasons why this more than a quibble. The first is historical: in designing Social Security, Franklin Roosevelt insisted on the payroll tax so that later generations of (conservative) politicians couldn't cut the program. "We put those payroll contributions there," he is reported to have said, "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." Roosevelt essentially wanted people to believe it was a savings program, even though it is not.

The second is political. Social Security is among the most popular government programs. Yet it is an entitlement, and Americans generally do not like entitlements. The reason for this seeming contradiction is that many, if not most, Americans incorrectly believe, under Rooseveltian logic, that they have earned their Social Security. Yet the vast majority of Americans will receive far more in benefits than they paid out in taxes. Rather than have people support Social Security because they misunderstand its essential nature, I'd prefer them to re-evaluate their hostility to the notion of wealth redistribution. But if esteemed journalistic institutions like the Washington Post perpetuate misleading understandings of the program, this change is unlikely to occur.

At the same time as I posted the original link, I wrote to Emily Badger, one of the writers of the original piece. I thought that she might just remove the offending sentence and be done with it. But she has not replied to me after five days, and the sentence remains. I'll keep you posted.