The Effects of Social Security

Norman Yarvin
November 5, 2000
(last revised November 16, 2000)

Of all socialist programs, the one that has been the most widely adopted is Social Security. Government support for the elderly is in place in every first-world or second-world nation, and in many of the wealthier third-world ones. But despite this universal acceptance, and in a way because of it, the long-term effects of Social Security have never been determined, even vaguely. The main tactic of political observation is to compare between nations with different policies; but that tactic is of little use with Social Security, since all nations to which our own is comparable have something like Social Security, and since they almost all adopted it at roughly the same time we did. To further obscure the issue, the surrounding decades contained some of the most stirring events of human history: wars of unprecedented size, and the establishment of governments which exercised an unprecedented degree of totalitarian control over their subjects. The only case of first-world nations peacefully coexisting for a couple of decades, one with Social Security and one without, was the case of Germany, which had Social Security ever since Bismarck invented it in the 1880s, while the surrounding nations only adopted it later; and a single case is never enough to develop a complete theory from, although it can provide a modest check on a theory produced by other means.

Much more data is available if one is willing to compare the present age to the era before Social Security; but to develop a theory from that data alone, the effects of technological progress would have to be subtracted from it. Between the time Social Security was adopted in the US and the present date, the car was developed from its technological adolescence into a mature state, and antibiotics, televisions, jet engines, and computers went from gleams in the eyes of inventors to widely-used devices. Each of these things has had an enormous impact on the way people live; collectively, they and other techological developments have enabled a way of life that would appear almost magical to the average person of the pre-Social Security era. Even the people who understand technology best have only a rough idea of what society would look like today without it, or without parts of it. Thus the direct evidence alone, even analyzed with the best tools of statistics, is not enough to figure out what Social Security has been doing; the only available way to figure that out is to speculate about what people would be doing without it. Such speculations have a bad reputation, which is generally well-deserved, since they are very error-prone: as in a computer program or a mathematical theorem, a single weak link can render the whole chain of inferences worthless; and to make things worse, a political speculation cannot easily be run to test it like a computer program can, nor is there any fixed set of rules, as in mathematics, for checking whether each inference in the chain is correct. Still, by keeping the chain short, and by making its links only from reliable facts and basic principles of human nature, an approach to certainty may be made. In the case of Social Security, such a chain of inferences deeply implicates the program in the slow global decline of human standards today, and in the degeneration of Germany during the first half of the last century.

Old age brings with it deterioration of the body and often of the mind. The elderly are often utterly unable to work, and even more often have health so frail that working much would hurry them to an early grave. Without Social Security, working into older age probably would be done frequently, but is not something that anyone could rely on being able to do. There still would be a length of time, averaging something like ten or fifteen years, for which people would have to prepare some source of support.

With the length of a working life being about thirty-five or forty years, this would mean that people who wanted to live off savings in retirement would have to save, for every three years of their working lives, an amount of money that, after it earned interest, would be enough to support them for one year of retirement. Thus, if someone wanted the same amount to live on in retirement as he had, on average, while working, and his retirement savings earned only enough interest to compensate for inflation, he would have to save about a quarter of his income during his working years. But savings normally earn more interest than that, and retirement savings normally spend a long time earning interest. The average amount of time that each chunk of retirement savings would spend earning interest, in the average person's account, would likely be about fifteen or twenty years, since people usually save the most toward the ends of their working lives, as that is usually when they earn the most, and is usually a period where their expenses are relatively small, their children already having become independent. In twenty years, two percent annual interest, compounded, yields a total increase of 49%; four percent interest yields a 119% increase; six percent yields a 221% increase; eight percent yields a 366% increase. Thus someone who would have to save a quarter of his income if his savings earned no real interest would only have to save something like 17%, 11%, 8%, or 5% of his income if his savings earned real interest rates of two, four, six, or eight percent, respectively.

The interest rates (or rates of return of the stock market) that people would get from their retirement savings, if the majority of them saved large amounts of money, would tend to be lower than in recent history, since the prices of investments are governed by the law of supply and demand: when there is more competition among buyers of investments, their prices go up and thus their returns go down. But the resulting lower interest rates would make the economy grow more than it otherwise would, by making long-term projects more profitable. Such projects include things like building large factories, engaging in fundamental research, or getting a medical education, which aim to make money by increasing economic productivity (the value of output produced per person); when they succeed, as they often do when done for profit, it yields long-lasting economic growth. The resulting growth would make it possible for private retirement savings to pay rates of return greater than those delivered by Social Security, even if everyone in the country were using them. (This would have little in common with the short spurts of growth that have often been produced when central bankers have tried to trick their nations' economies into growing by lowering interest rates. Central bankers can only lower interest rates by creating new money, which has the side effect of producing inflation; they cannot channel existing money into the money markets, as would be done by millions of people throughout the nation if they skimped on luxuries in order to save money for retirement.) To some extent this growth would be shared with other nations, but mainly with nations that would be likely to remain friendly, since hostile nations may decide not to repay loans.

The main problem with private retirement savings would be risk. There are investments which offer very little more risk than Social Security does, such as federally guaranteed bank accounts, or short-term bonds from large, stable corporations, but those investments have always paid very low interest rates: after subtracting inflation, seldom more than five percent, and often negative. If those rates were lowered further by an end to Social Security, then people who used such minimal-risk investments for retirement savings might be lucky to get two percent in real terms; thus they would feel almost the entire burden of having to save enough to live on for a decade or so. That burden could only be significantly reduced by investing in things with significant risks.

Those risks could be reduced by diversification, but only to a limited degree. Diversification requires a pool of investments each of which has different risks from the others; and while many risks are specific to one particular company (such as the risk of bad management decisions), many others (such as technological obsolescence, changes in government regulations, and stock market fluctuations) affect a whole industry or a whole group of related industries, or even the whole economy. Risk is also largely a function of the investor's ability, and no investor can diversify that away, even by getting someone else to manage his investments, since choosing good investment managers requires the same sort of character and foresight as choosing good investments requires. Thus, when diversifying, the point is quickly reached at which the major risks are the ones that many investments have in common, and thus at which trying to diversify further would yield very little further reduction in risk.

In a nation without Social Security, the only way that most people could guard against the risks of savings would be to have children and raise them in such a way that, when grown, they could be relied on if necessary. Relying on children has risks too: the genetic throw of the dice that makes them, the chance of them falling victim to disease, accident, crime, or war, and the risk of making too many mistakes in raising them. But those risks are very different from the risks of savings, so making both types of preparation would greatly decrease the chance of ending up destitute. Dangers to the whole nation, such as global thermonuclear wars, great depressions, or totalitarian takeovers, can destroy both the savings of parents and the earnings of their children; but lesser dangers normally threaten only one of the two. Even the dangers of individual error would be greatly lessened by this variety of diversification, since the skills and character traits required for raising children well are rather different from those required for earning money and investing it well.

To support aged parents is a heavy burden; it means sending large amounts of money to them for year after year, or taking them in, providing food and lodging to them for the rest of their lives. To prepare children to be able to bear that burden requires a good deal of work, in instructing them in the ways of the world, gently but consistently steering them toward useful knowledge and profitable occupations, and keeping a sharp eye on their education. To prepare them to be willing to bear that burden, decades after leaving home, also is not easy; the only reliable way to do it is to raise them to be generally of good character, so that their reputations would seriously suffer if they were known to have neglected or mistreated their parents. Although these things take a lot of effort, that effort is of a different type from the effort of earning money to save for retirement; most people find that they are much more comfortable dividing their time between work and family duties than they would be if they spent the same total amount of time just making money.

From the perspective of economics, if people prepared to live off their children in old age, they would be supplying labor to the future; if they prepared to live off their savings, they would be supplying capital to the future. The profitability of each of these to any individual would depend partly on what the rest of the nation was doing; if they went too far in any direction, he would do best for himself by doing the opposite. When there is a great deal of capital and little labor, then interest rates are low, investors are putting money into any halfway-sensible project, people are hard to hire away from their current jobs, and wages are high: thus children earn more and savings earn less. When there is little capital and much labor, the situation is the reverse: unemployment is high, wages are low, investors can cherry-pick only the most profitable projects, and interest rates are high, which makes savings more profitable, and children less so. Few people could look the thirty or forty years into the future that would be required to make perfect use of this need for a balance between capital and labor. But a large, long-lasting imbalance could easily be noticed, taken advantage of, and thereby fixed; and the possibility of a future imbalance would further encourage people to hedge their bets by preparing both children and savings.

The absence of this need to prepare explains many of the most disturbing trends of our time. Those trends started quietly and imperceptibly; in 1935, when Social Security was passed into law, it was obvious that people would not have to save for retirement -- at least not as much; but the extent to which they could neglect their children, or not have children at all, was something that nobody knew.

The changes erupted into public view in the 1960s. In that decade, some people noticed that in addition to being free from the fear of unwanted pregnancies, due to contraceptives, and free from of the fear of venereal disease, due to antibiotics, they were also free from the need to form stable families. Tradition was the only thing that stood in the way of their complete sexual liberation; they adopted the language of revolution, and quickly overcame it. Flushed with victory, they went on to attack other institutions, with less success. The revolutionary language died out, but the revolution's first conquest remained, and has spread through much of the rest of the country. On average, people marry later than they used to, divorce more frequently, have fewer children, and spend less time and effort on them.

The spread of lower birth rates has not been uniform. In the cultural mainstream, it has been strongly correlated with intelligence and with education, with the more educated and more intelligent sectors of the population having fewer children. Those sectors have always been the quickest to discard obsolete traditions; the rest of the population has usually followed them, as it is doing in the present case. Today, birth rates above the level of self-renewal are almost exclusively found in groups of recent immigrants who have not yet lost their deep suspicion of the laws and customs of the rest of the country, and in groups of people who have managed to foster such a suspicion by an intolerant mindset, and often by living in geographical isolation in city ghettos or in the countryside. Thus people in the mainstream are faced today with the prospect of being outbred and overrun by the more narrowminded and intolerant parts of the population, or by immigrants from nations with high birth rates. Some of them have convinced themselves that this a good thing, calling the retreat of their own culture "multiculturalism" and the retreat of their own race "diversity", and encouraging both trends; but most have looked on in dismay, with a natural dislike of those trends, but without enough knowledge of their causes to feel confident trying to fix them.

Those trends have still, however, had a large effect on politics. If children were numerous, the anti-abortion movement's strong but vague slogans about "life" and "children" would seem meaningless, and would produce only confusion and annoyance; but today, people who look around themselves often see, in their own communities, too few children to maintain the population, and sympathize with such slogans, if not with the proposed remedy -- which, indeed, would be both crude and weak: the only people whom an abortion ban would try to force to have children would be people who did not want children but had been careless about contraception; and even those people would often evade the law. In contrast, the incentives that existed before Social Security were imposed by people's own needs in old age, which could not be evaded; they encouraged almost everyone to have children, and encouraged careful people more than careless ones, since children were more useful to parents when raised carefully.

Emotional language involving "lives" and "children" is also commonly used by the opposite end of the political spectrum; but instead of trying to make more people, the attempt has been to save people that already exist, usually by increasing safety in one way or another. There has been a shrinking-back, partly voluntary and partly enforced by laws, regulations, and bureaucratic and judicial decisions, from physical dangers of all sorts: from industrial dangers, thereby reducing industrial efficiency; from the dangers of technological exploration, thereby slowing technological progress; and even from the dangers of confronting other people in war or in individual self-defense, thereby reducing our independence as a nation and as individuals. But no improvements in safety could do much to alter the trends in the population. Those trends are primarily set by the birth rate; the number of early deaths is not large enough to make much of a difference.

Conservative onlookers in the 1960s often blamed the social troubles on young people who had been misraised by their parents. Those young people also usually disliked the way in which they had been raised, although they had different ideas about how they should have been raised, and placed the blame for their mistreatment not on their parents, whom they usually just thought were a bit dim, but on "society" or "the system". Though they did not make the connection, the Social Security system had indeed, in effect, been promising parents that they would never have to depend on their children; parents would have been superhuman if none of them had slacked off a bit. By now, the slacking-off has gone much further. As compared to the past, average parents today spend much less time with their children, often leaving them to watch television for many hours a day; they let their children get less exercise, eat a less healthy diet, and adopt more offensive manners. Parents more often quench their children's curiosities with harsh words, instead of indulging them with careful replies. Despite the advance in wealth and knowledge, schools have deteriorated; they spend less time teaching useful facts and skills, and teach them more poorly. Individual parents often buck these trends; but the battle is an uphill one, since there are fewer good examples for them and their children to imitate, and since shared services, such as schools and the entertainment industry, respond to what average parents demand, not to what individual parents demand.

The deterioration of schools extends into higher education. On average, subjects which are solidly grounded, such as the hard sciences, are taught in less comprehensible ways, and their emphasis has shifted away from useful fundamentals and toward esoteric trivia. Subjects in which the truth cannot be reliably determined have become even more error-riddled than before. Yet in higher education there is mostly a free market; its deterioration is thus mostly the reflection of a decrease in the demand for a useful education.

These days, children more often become rebellious than they used to; but rebellion, though it is sometimes better than remaining passive, is not a good substitute for being raised well. When children leave home or graduate from college these days, and suddenly have to earn money in a world that they do not really understand, they often have the biggest shock of their lives. Some of them never recover from that shock; they turn to drugs, and waste many years, or their whole lives. Their parents often blame the drugs; but people who know something worthwhile to do in life seldom ruin themselves with drugs.

Even people who successfully stand up to the shock never escape their upbringing. The consequences can be seen in many adults raised recently; there have been rises in dishonesty, in sexually transmitted disease, in boastfulness, in obesity, and in other bad habits. Poor education has also taken a lasting toll: on average, people understand less than people used to about the devices that surround them in their daily lives, about the sciences and industries that are necessary to civilization, and about the workings of human institutions. As members of juries, they often are unable to follow the arguments before them, and end up awarding damages to anyone who has suffered, regardless of whether or not his suffering was his own fault. As voters, they often demand government help, even where government help is much less efficient than they would be if they helped themselves. As businessmen, they more frequently try to get laws passed that hurt their competitors than they did in the past.

The deficiencies of higher education have also had lasting consequences. In technical professions, many people learn on the job the things that were incomprehensible to them in college, or were left out of their educations; but that learning, being later in life, is more a matter of memorization and less of understanding. But people who were taught incomprehensible or trivial truths still usually end up in closer touch with reality than do people who were taught lies and distortions, and who thus have to overcome their educations before they can function effectively in private life, or find government jobs where their errors mostly damage other people, not themselves.

The progress of most of these trends has not been steady; instead they have made many advances and retreats, each of which has been much faster than their average rate of progress. Still, that average can be seen by anyone who has a reliable way of comparing their present state to their state a few decades ago. Taken all together, the trends amount to a general human deterioration, which has often been noticed by people of a wide variety of political persuasions. The most honest of them have usually stated that they do not know its cause. Others have put the blame on a wide variety of things, most frequently on technological progress, which has been continuing amidst the deterioration. They have never successfully explained how technological progress would have caused a general human deterioration; but in a way, there is an explanation: technology, in increasing human power, has increased the number of mistakes that humans can make; and when humans can make mistakes, we often do. In the past, when communication and transportation was primitive, and when most people lived on the land, farming using crude tools, complicated and expensive government programs like Social Security would have been completely impractical. But our new powers do not force us to make mistakes; they just enable us to do so. Critics of technology often denounce the complicated, artificial society we have today; and indeed we have greatly diminished people's natural incentives to prepare for the future, and tried to fill their place using a complicated mix of government programs. But we did that intentionally; it was not an unintended side effect of technology.

People who do not blame technology for the deterioration often put the blame on the moral effects of government social programs, over and beyond the effects directly created by the incentives they produce; but moral effects are usually weaker than direct effects; and of Social Security, general deterioration is a direct effect. Furthermore, Social Security is the largest program of them all: the largest in dollar terms, and probably the most damaging per dollar, since most other social programs pay people directly to discourage them from working or to get them to do useless work, whereas Social Security discourages investments and encourages neglect of children. On average, many dollars of work are done for each dollar paid back to investors; and the support that a child gives to a parent during old age is usually an even smaller proportion of the effects that he has on the world.

Social Security's destructive influence is large enough even to explain what happened to the Germans. During the late nineteenth and early twentieth century, birth rates in the first world were falling, as improved medical care made it much more likely that a child would survive. In Germany, during those years, the birth rate under Social Security was higher than the birth rates of the surrounding nations, none of which had Social Security. But the birth rate is an easily measured quantity, and, in a country of orderly and obedient people, can easily be maintained by an authoritarian government. A government can also teach children the subjects that can be taught in schools; but it cannot teach them the things that fall under the general headings of common sense and common decency. Those things can only be taught by a teacher who knows the student's mind intimately, and can see through any deceptions he tries, as parents can, and few others can; a government not only cannot teach them, but has difficulty even measuring them. A few narrow standards of behavior can be imposed on children by government coercion, but only at the cost of unbalancing their minds. From whatever cause, Germans raised in those years ended up with unbalanced minds, strong in national feeling and lacking in other positive character traits.

After two and a half decades of Social Security, the first world war gave the world an unambiguous measurement of the state of the German character. Germany was on the side that started the war (and that started it for an unimportant reason), and bore the brunt of the fighting on that side; millions of German soldiers gave their lives. In fighting so long and hard for so little cause, they were unique. Soldiers of the Austro-Hungarian Empire were much less aggressive, and often had to be reinforced by Germans. The other side was largely fighting in self-defense, and thus had more to motivate it; but even so, Russian soldiers eventually gave up entirely, French soldiers became mutinous, Italian soldiers became lax, and even the British, who had the best justification for entering the war, had lost most of their spirit by its end.

After the war, Germans' national pride was somewhat subdued, but they did not become more sensible; those who abandoned nationalism often went straight to communism. Eventually Hitler managed to revive the old nationalist feeling as racism, by blaming the defeat and the subsequent economic troubles on Jewish machinations. Despite the silliness and viciousness of his ideology, its political power grew steadily in the period leading up to the second world war; young Germans were even more attracted to it than older Germans were. Hitler needed little force to become dictator and to maintain his power; Germans who detested his ideology were almost all awed into submission by its rapid rise, and tried to hope that somehow things would all work out well -- as, indeed, did many non-Germans. But their hopes were in vain; the movement had to be crushed by brute force, at a huge cost, and committed numerous atrocities, large and small, before expiring.

Although Social Security can reasonably be blamed for an immense amount of damage, the same argument that places the blame on Social Security also shows that it can be phased out slowly and gently without doing further damage. Depriving current retirees of their Social Security benefits would not give anybody any incentive to change to a more forward-looking way of life; it would just be a cruel way to save money. On the other hand, people who are currently at the beginning of their working lives would be given massive incentives if they were told that they would never receive Social Security benefits; the only suffering that would be caused would be the suffering inseparable from those incentives, which would fall mostly on people who had chosen to neglect them. In between those two extremes, there are people who have paid Social Security taxes for some portion of their lives, and expect -- both by the rules of the system, and by common fairness -- to be paid back in rough proportion to what they have paid in so far; doing that, and no more, would give them about as much incentive to prepare as they could reasonably bear.

Under its current rules, Social Security will soon start to run deficits. The low birth rate during the last few decades has increased the ratio of the number of retirees being supported to the number of workers supporting them; and that ratio will increase further during the next two decades. Phasing out Social Security would, in one way, add to workers' burdens: there would be a period of time in which they had to prepare for their own future retirement, and at the same time had to pay taxes to support existing retirees. But in other ways it would subtract from their burdens: government spending on attempts to halt social declines by brute force could be greatly reduced, and the remaining need for extra money would be temporary, and thus could be met by borrowing. The deficits of the current system, in contrast, are not bounded, and the low birth rate that has caused them is itself a natural consequence of the system, so trying to fill in those deficits by borrowing would likely drive the nation into bankruptcy.

In 1935, when Social Security was adopted, the nation was in the Great Depression, still feeling some of the effects of the first world war, and worrying that there might be another. The Communist regime was new then, and was filling the world with lies about how well it was taking care of its citizens. It was only natural that many of our ancestors, in such circumstances, were attracted by promises of government-provided security in old age. Shortly afterwards, the nation was plunged into the second world war, and shortly thereafter, into the Cold War. During those wars, to try to end a program that so many people depended on might have been too divisive, endangering the war effort and thus endangering the nation as a whole. Today, after long efforts, foreign domination is no longer a serious threat, the economy is in good condition, and the old Communist lies have been thoroughly unmasked; we thus have the first good opportunity to try to end Social Security.

Copyright 2000 Norman Yarvin. May be freely redistributed.