Monday, March 21, 2016

Social Security is STILL Not Insurance -- And You Did Not "Pay Your Fair Share"

I have written about this before, but I can't resist commenting again, especially as I ran across the following comment on Townhall.com:
I get sick and tired of people like you that list Social Security and Medicare are entitlements. I worked and paid into those for over 45 years. The money isn't there because Congress diverted my money to pay for other things. I paid for this with my hard work. Big difference with actual entitlements. Take your entitlement claim and put it where the sun don't shine, and stick it there sideways.
Obviously, this is hardly an unusual opinion. Time and again, I have heard people spout similarly outraged opinions when they hear Social Security (or Medicare) as entitlements, or hear them described as welfare. Yet, whether or not it is a popular opinion, and whether or not it offends, the truth is, Social Security and Medicare are welfare every bit as much as any other program. The fact that you have to have paid in to receive makes it slightly different, but the truth is, it is in no way "insurance" and unless you die pretty young you are not simply taking out what you put in.

As I wrote in "Social Security is Not Insurance" (and "Misleading Terminology" and "A Timeline Part Three"), Social Security... well... is not insurance. It was sold as insurance, and structured to vaguely look like insurance, but, just as with modern medical insurance*, it is not real insurance, any more than the Earned Income Tax Credit is in any way related to tax refunds**. 

To start with, insurance requires that an event be unpredictable. If you know something will happen, then insurance does not work. If something is certain, you and the insurer both know precisely what the present value is***.  Thus, since we all know we retire at 62, or 65 or 67, and will get a payout equal to X if our contribution is Y, there is no uncertainty, and thus this is not insurance.

Nor is it an annuity. An annuity requires that the pay-in equal the net present value of the payout. Or, adjusts the payout to equal the value of the pay-in. Social security makes a nod in this direction by adjusting the payments to reflect contribution, but there is no economic relationship between the two. They are related by nothing but an arbitrary schedule of payments, there is no relationship to interest rates, rates of return or anything else. And they can be adjusted by statute after the fact, making it clear it is nothing but a government payout with a sliding scale of payments.

Nor is it any sort of investment. The money is not invested, it earns no interest. And you have no ownership in it. By law, the state could stop paying tomorrow. Or could pay you ten times as much. That means it is nothing but a government payment, or an entitlement. Your payment may be tied to what you paid in, but that does not make it an investment, annuity or insurance. And since most people get out VASTLY more than they ever paid in, it should be clear that describing it as welfare is not too far off the mark.

I know, people don't want to hear it, as they feel responsible when taking Social Security, since they "paid in" and would rankle at accepting welfare, but the truth is, the way Social Security is designed, it really is nothing but a welfare payment. Don't get angry at me, get angry at FDR and his successors. They were the ones who decided to make all retired people accept welfare. That we were too stupid to save for our retirement and had to be told what to do by our betters in government. 

I had nothing to do with it, I am simply pointing out the truth.


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** The EITC is nothing but disguised welfare. After all, if it were a "refund" then you would not be able to get more back than you paid in taxes all year long. Thus, though it is disguised as a refund, or "credit" and uses the tax system as a means of disguising its nature, it is little more than welfare, plain and simple.

*** If you know an event will happen on a given date and require a payment of a set amount, you can sue interest rates to calculate the amount you would need to invest to earn that return. Thus, there is no benefit paying for insurance as it would cost more than buying a bond or CD of the proper amount. And an insurer has no interest in you, as if he charges only as much as a CD or bond, he would be able to make no profit at all. Thus, without uncertainty insurance simply cannot exist.

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POSTSCRIPT

I did not mention it, but the same applies to "Unemployment Insurance" and similar schemes, though in those cases the government take pains to make sure payouts are usually far lower than what is paid in. Still, the amount of payout bears no logical relationship to pay-in except that mandated by a government table of figures.

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