The Public Policy

Social Security and the Ghost of Ephram Nestor

Entitlements? Uncle Sam's big bait and switch.

By 4.6.11

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Very few senior citizens have heard of Ephram Nestor. And not many junior citizens, either. Nestor was a Bulgarian who came to America in 1913 and lived here continuously for 43 years. Then, in July 1956, he was deported for having been a Communist from 1933 to 1939, a period of time during which membership in the Communist Party as such was not illegal and wasn't even a statutory ground for deportation.

For nineteen years, Nestor and his employers had made regular payments into the Social Security system. In 1955 he became eligible for payments from Social Security. When he was deported, the government cut off his payments. Nestor sued.

Nestor lost. The case, Flemming v. Nestor (Flemming was the secretary of Health, Education, and Welfare), established the principle that entitlement to Social Security benefits is not a contractual right.

Seniors today worry about that principle even though they have never heard of Ephram Nestor. They are right to worry, and all the more so when they read statements like the following one from Washington Post columnist Robert J. Samuelson.

He described as "highly misinformed" Americans, which includes the elderly, who believe that the elderly have "earned" their Social Security through their lifelong payroll taxes. Both Social Security and Medicare, Samuelson writes, "are pay-as-you-go. Today's taxes pay today's benefits; little is 'saved.' Even if all were saved, most retirees receive benefits that far exceed their payroll taxes."

Of course they do! What should they expect? Only to get the same number of dollars back, without any return on the funds and without any compensation for inflation?

Proponents of changes to the Social Security program will not win the support of seniors, or juniors, by making that argument.

People who have paid, for decades, into a retirement system are entitled to think they are entitled to get their money back with decades' worth of interest.

The point Samuelson ignores is that if people had not been required to pay into the Social Security system, they could have put that money in the stock market instead. In which case, their retirement payments would not only be more secure but also larger than the payments they will get from the current Social Security system.

Reformers -- in the nature of things, that means Republicans -- must make a different proposal, one that addresses the concerns of future recipients, who believe, correctly, that their benefits under the current system are no more secure than Ephram Nestor's were.

The only sensible proposal will include allowing workers to save some of their retirement funds in personal accounts that they can invest, in some sort of fund, in the stock market. That obvious concept has been demonized by liberals with the word "privatization," privatization being to liberals what garlic is to Dracula.

Rep. Anthony Weiner (D-NY) mocks the concept of allowing workers to invest in the stock market: "Boy, that's seems smart, huh? Investing Social Security in the stock market." "Boy, talk about lessons unlearned."

President Obama also dissed the stock market in his State of the Union speech: "We must [solve the Social Security problem]… without subjecting Americans' guaranteed retirement income to the whims of the stock market."

Democrats love to dump demagogically on the stock market when it takes a tumble. Today, however, the market is making a magnificent comeback. But the key point is that one year -- one decade even -- does not a retirement fund make.

A few years ago, the Congressional Research Service studied 35 different 41-year time periods and determined that there was not a single period in which a worker would not have been better off investing his payroll taxes in stocks than remaining in the Social Security system. Boy, doesn't that make investing your retirement fund in the market sound like a good idea, huh? Who's unlearned now?

The president said in his State of the Union speech that "the state of our union is strong." Though not strong enough, apparently, for Americans to invest in.

But Chile is strong enough for Chileans to invest in. Chile privatized its retirement system in 1981. Workers are required to invest at least 10 percent of their salary in a personal retirement account, but they can invest more, and they can determine when they retire -- whether it be age 45, age 65, or age 85. The poor and people unable to work can still be covered by a government plan.

If Chileans can have private plans, why can't Americans?

Because the liberals won't let them. And unless the Republicans can learn how to teach Americans about personal retirement accounts, Americans will be doomed to the clunky Model T retirement system designed by Franklin Roosevelt and preserved by generations of big-government liberals.

Small-government Republicans will have a receptive audience. A Pew Research poll taken last September found that 58 percent of the public favors allowing workers younger than age 55 to invest part of their Social Security taxes in personal retirement accounts. Seventy percent of those younger than age 30 favor personal accounts, while -- pay close attention, please -- 66 percent of those under age 30 voted for Barack Obama. Wow! That's called an opportunity.

If Republicans lack the imagination to seize that opportunity, they deserve to be haunted for life by the ghost of an ex--Social Security recipient, a poor, unfortunate, ex-Communist Bulgarian immigrant named Ephram Nestor.

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About the Author

Daniel Oliver is a Senior Director of White House Writers Group in Washington, D.C. He served as Chairman of the Federal Trade Commission under President Ronald Reagan.