Social Security Is Middle-Class Welfare

Retirees think of Social Security as a contract, but it’s one that Congress has the right to alter, reflecting changing needs and economic conditions. Stephen Shore / Gallery Stock

In a recent column on the senior-citizen lobby, I noted that Social Security is often "middle-class welfare" that bleeds the country. This offended many readers. In an email, one snarled: "Social Security is not adding one penny to our national debt, you idiot." Others were more dignified: "Let's refrain from insulting individuals who have worked all their lives … by insinuating that [their] earned benefits are welfare." Some argued that Social Security, with a $2.6 trillion trust fund, doesn't contribute to our budgetary problem at all.

Wrong. As a rule, I don't use one column to comment on another. But I'm making an exception because the issue is so important. Recall that Social Security, Medicare, and Medicaid, the main programs for the elderly, exceed 40 percent of federal spending. Exempting them from cuts—as polls indicate many Americans prefer—would ordain huge deficits, steep tax increases, or draconian reductions in other programs. That's a disastrous formula for the future.

We don't call Social Security "welfare" because it's a pejorative term and politicians don't want to offend. So they classify Social Security as something else, when it isn't. Here's how I define a welfare program: first, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits; and second, Congress can constantly alter benefits, reflecting changing needs, economic conditions, and politics. Social Security qualifies on both counts.

Let's start with its $2.6 trillion trust fund. Doesn't that prove that people's payroll taxes were saved to pay for future benefits, disconnecting them from our larger budget problems? Well, no. Since the 1940s, Social Security has been a pay-as-you-go program. Most benefits are paid by payroll taxes on today's workers; in 2010, those taxes covered 91 percent of benefits. The trust fund's $2.6 trillion would provide only 3.5 years of benefits, which totaled $700 billion in 2010. The trust fund serves mainly to funnel taxes to recipients, and today's big surplus is an accident, as Charles Blahous shows in Social Security: The Unfinished Work. In 1983, when the trust fund was nearly exhausted, a presidential commission proposed fixes but underestimated their effects. The large surplus "just developed. It wasn't planned," the commission's executive director said later. Even so, the surplus will disappear as the number of retirees rises.

Similarly, Congress has repeatedly altered benefits. From 1950 to 1972, it increased them nine times, including a doubling in the early 1950s. In 1972, benefits were indexed to inflation. People didn't complain when benefits rose, but possible cuts now trigger howls that a "contract" is being broken. Not so, according to the U.S. Supreme Court. In a 1960 decision (Flemming v. Nestor), the court expressly rejected the argument that people have a contractual right to Social Security, citing the 1935 Social Security Act ("The right to alter, amend, or repeal any provision of this Act is hereby reserved to Congress"). Congress can change the program whenever it wants.

Contrary to the Obama administration, Social Security affects our larger budget problem. Annual benefits already exceed payroll taxes. The gap will grow. The trust fund holds Treasury bonds; when these are redeemed, the needed cash can be raised only by borrowing, taxing, or cutting other programs. The connection between Social Security and the rest of the budget is brutally direct. As important, how we treat Social Security will affect how we treat Medicare.

In an interview with The Wall Street Journal, House Speaker John Boehner indicated last week that Republicans may challenge popular attitudes on entitlements; President Obama should do likewise. It is because these programs are middle-class welfare that cuts can be made without inflicting widespread hardship. All the elderly aren't poor. In 2008, a quarter of households headed by people 65 and over had incomes exceeding $75,000. No doubt people would feel misused. They paid their taxes, why can't they get all their promised benefits? Because people have been misled, they're legitimately disillusioned. But the alternative of imposing all the burdens on younger taxpayers and other government programs is much worse. Shared sacrifice is a meaningless concept if it excludes older Americans.