Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Vol. 9, No. 3; Winter 2003

Insurance Fraud

Social Security: False Consciousness and Crisis. By John Attarian. Transaction Publishers, 2002. xvii + 393 pgs.

Nearly everyone knows that the Social Security system faces eventual collapse, but John Attarian remarkably claims that semantics lies at the root of the crisis. He follows the great literary scholar Richard Weaver in emphasis on calling things by their proper names: "Definitions, Weaver insisted, must be scrupulously accurate; he attributed much of humanity’s confusion of thought to ‘failure to insist on no compromise in definition’" (p. 226, quoting Weaver).

Even if Weaver is right, how can Attarian’s radical claim be justified? Surely the crisis stems from matters of finance, and even definitions that satisfy the most careful grammarian will not suffice to replenish the depleted trust funds of Social Security.

Attarian does not deny the obvious. He is no linguistic idealist, who makes reality the creature of vocabulary. Quite the contrary, he analyzes the financial crisis in careful detail. But, he maintains, a widely held illusion makes virtually impossible any attempt to confront the crisis effectively. To meet impending disaster, benefits to current beneficiaries of Social Security must be drastically cut. Unfortunately, owing to an unrelenting propaganda campaign by the government, most people believe that their Social Security benefits are insurance payments to which they have a legal right. They accordingly reject all proposals for severe cuts. Attarian’s principal aim is to trace the origins and progress of this illusion.

In his presentation of the financial issues, Attarian relies on the work of A. Haeworth Robertson, a former chief actuary of Social Security. (Robertson, by the way, has weighed in with a strong endorsement of Attarian’s book.) Even the Board of Trustees of Social Security acknowledges that when the post-World War II "baby boomers" retire, the system will be strained to the utmost. Benefits, contrary to popular belief, must be paid for out of current taxes. Because the baby boomer cohort is exceptionally large, the burden on taxpayers will be greater than ever before.

Given this circumstance, disaster threatens. "The generation born after 1965, whose taxes will pay the baby boomers’ benefits, will . . . grow far more slowly than the beneficiary population. . . . This means that the burden of supporting each beneficiary will be spread over ever-fewer taxpayers" (p. 7).

Have we not overlooked something? Is it not the case that Social Security taxes are deposited in a trust fund, which is kept separate from the regular budget? Why cannot this fund be used to assist the baby boomers?

This objection, Attarian is quick to point out, rests on a misunderstanding. The trust fund consists, not of money, but of treasury bonds that earn interest. If current taxes do not suffice to meet benefit payments, the bonds must be cashed. Doing so will impose even further strains on the economy. "Well before the actual exhaustion [of the trust fund’s] date, then, OASDI’s [Old Age Survivors and Disability Insurance] "trust fund" will start making claims on general revenues and then running actual deficits. . . . To cover these deficits, OASDI will present bonds in these amounts from its ‘trust funds’ for redemption. . . . Another way of grasping the magnitude of the Treasury’s burden is to note that the peak amount of Treasury debt in the ‘trust fund,’ before liquidation starts, will be about $6.0 trillion under intermediate assumptions, or about $3.27 under high cost assumptions. ‘Trust fund’ exhaustion means that all these debts will be cashed in" (pp. 34–35). Attarian suggests that the efforts to meet this burden will lead to "budget deficits of $500 billion or more by 2025, and larger ones after that" (p. 35). If he is right, the crisis of Social Security will bring ruin to the entire U.S. economy.

Readers of the Mises Review will not be surprised to learn that the Old Right stalwart John T. Flynn identified the basic problem of the trust fund so long ago as 1939. In an article for Harper’s which appeared in that year, Flynn noted that any "investment beyond strict cash hoarding is a claim against the entity whose investment instrument one purchases. The Treasury bonds in the reserve, then, are just the government’s claims against itself, hence have no real value. . . . Moreover, the interest on the reserve in the out years would have to be paid from taxes levied in those years. Besides the payroll tax, then, there would be a growing tax burden just to pay the interest on the reserve" (pp. 124–25).1

Given this dire situation, a key question arises: how much time is available to attempt preventive action? It is here that Attarian’s mentor A. Haeworth Robertson enters the scene. Robertson argues, with our author’s entire concurrence, that we should adopt estimates at least as pessimistic as the Social Security Board of Trustees’ "high cost" assumptions. "Because the stakes in Social Security are so high, we should not lean on luck and pin our hopes on optimistic budget surplus and productivity growth projections. And compelling grounds exist for pessimism, or at least skepticism, about future productivity growth. Given all this, it would be appropriate to use the high cost assumption. . . . Robertson’s position is the one of prudent, responsible, statesmanship" (p. 17).

If, taking Robertson’s advice, we adopt the high cost projections, danger lies near at hand. "In 2010 [under these assumptions] . . . the payroll tax will stop generating a surplus over outlays. The cash flow surplus turns negative that year, and by 2015 is a substantial deficit" (p. 12).

One way to meet the impending deficit is to raise payroll taxes, but these already impose a heavy burden. To increase them further might crush productivity altogether. Must not benefits be cut? But, as mentioned before, a widespread belief that these benefits are insurance claims blocks attempts to reduce costs in this obvious way.

Attarian contends that this belief is incorrect, and the government knows it. He goes to great pains to show that Social Security lacks the essential features of a real insurance program. For one thing, benefits may be changed at the will of Congress. By contrast, in genuine insurance, the beneficiary has a contractual right to what he receives. And the point is much more than a theoretical one. Congress has in fact changed the benefits, sometimes to the disadvantage of beneficiaries, several times since the Social Security Act was first passed in 1935.

In making this point, Attarian calls to his aid the government itself. In Helvering v. Davis (1937), the Supreme Court considered whether Social Security was an insurance plan. If it was, its constitutionality stood in doubt; what in the Constitution authorizes the federal government to establish compulsory insurance?

In response, the government pointed out the alleged insurance premiums were nothing but taxes. The government had no obligation to pay out anything in benefits. The Supreme Court in its decision entirely accepted the government’s position.

Attarian goes further. In a brilliant observation, he notes a surprising feature of the Court’s decision. Social Security raised serious constitutional issues, but the Court’s analysis was perfunctory. Indeed, so careful a legal scholar as Justice Cardozo merely repeated paragraphs from the government’s brief in his decision. Attarian plausibly suggests that, owing to pressure on the Court from Roosevelt’s court-packing proposal, the Court ducked the constitutional question.

One point in Attarian’s discussion surprises me and leads to my only criticism of his outstanding book. Again and again, Attarian insists that Social Security is not insurance: attempts by the government to argue the contrary are efforts to promote a "false consciousness" among the public.

In his discussion of Helvering, though, he expresses great sympathy for the arguments of the attorney who maintained that the program was insurance. "Some of the awkward fabrications of the administration’s position were exposed by Edward McClennen. . . . The administration clung tenaciously to the literal language of the Act and to arguments which were logically conceivable but utterly preposterous, e.g., that some future Congress might not vote appropriations for benefits; McClennen pointed doggedly and repeatedly to what the Act was doing and was clearly meant to do" (pp. 107, 109).

Attarian, I suggest, cannot have it both ways. Is Social Security really insurance, and government arguments to the contrary efforts to deceive? Or is Social Security not insurance, and government arguments to the contrary of that part of a false campaign? There can be little doubt that Attarian favors the second alternative; aside from the passage I have just mentioned, he always denies that Social Security is genuine insurance. In his discussion, for instance, of the later case of Flemming v. Nestor, in which the Supreme Court ruled that Social Security benefits do not confer legally binding rights, he never suggests that the insurance view has merit.

If Social Security is not insurance, why do so many people think that it is? Since the inception of the program, Attarian shows, the federal government has engaged in a massive propaganda effort to induce the public to view the program as insurance. Government publications constantly tell people that their payroll taxes are "insurance premiums" that are saved for their future benefits. Social Security, we are assured, is not a welfare program: it is a far better insurance policy than people can obtain through private efforts.

The government’s efforts to create a "false consciousness" have gone further. Critics of the program have not been slow to claim that the program operates through "terminological inexactitude," in Churchill’s familiar phrase. Attarian discusses in detail the contentions of several of these critics, including Dillard Stokes, Ray Peterson, and Carl Curtis. The last of these, a congressman and later an influential Republican senator, held hearings aimed at showing the problems of the insurance view of Social Security.

Faced with exposure, the government responded with defiance. Its spokesmen denounced the critics as enemies of the people, who aimed to destroy confidence in a social insurance scheme that ranked with the wonders of the world. Foremost among these champions of the program were two men: Arthur Altmeyer, a principal intellectual inspiration of Social Security and its longtime Commissioner; and Wilbur J. Cohen, Altmeyer’s assistant and later Secretary of Health, Education, and Welfare. Cohen, often called "Mr. Social Security," was untiring in his efforts to derail "enemies" of his pet project. When Joseph Califano, HEW Secretary under Lyndon Johnson, proposed benefit cuts, Cohen threatened to organize demonstrations of retired people to picket him. Cohen exploded at him: "What you have said proves you don’t believe in the Social Security program. It is a separate program. People have rights" (p. 261, quoting Califano). Evidently, Cohen was the most dangerous sort of advocate—one who believes his own propaganda.

Attarian’s thorough account of the critics leaves him open to an objection, but I think he can successfully turn it aside. The vital core of his case is that a government campaign has created a "false consciousness" among the public. People falsely believe, owing to government propaganda, that Social Security is insurance; and as a result they will not countenance reductions in their benefits. But if, as our author has shown so well, a constant stream of critics has exposed the true nature of the system, why does this not suffice to dissipate, or at least weaken, the false consciousness?

In response, our author could appeal to the immense resources at the disposal of the government. Constantly repeated statements from "authoritative" spokesmen that Social Security was indeed insurance drowned out the protests of critics. For every person who read Flynn or Curtis, thousands read government pamphlets touting the official line.

Some supporters of the free market might here interpose another objection. "Is not Attarian too pessimistic?" they will ask. "Has he not forgotten the virtues of private saving? If workers invest in private accounts, will not the miracle of compound interest enable them to do far better than they could have done through government aid? If so, what becomes of the supposed crisis of Social Security?"

One of the principal virtues of Attarian’s book is to provide a convincing refutation of this all too common thought. It is certainly true that an individual can do better for himself on the free market, but the objection overlooks a vital point. What about those who have been promised benefits under the existing system? If persons withdraw from Social Security, the tax base to pay for these benefits will be reduced. The crisis of Social Security, far from being ended by privatization, will be worsened. "The transition cost problem is in large measure the revenge of the false consciousness" (p. 322).

1See my reviews of Flynn in the Mises Review, Winter 1995 and Spring 1999.


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