From: Brian Holtz [brian@holtz.org]
Sent: Saturday, June 04, 2005 7:32 PM
Subject: RE: Candidates - RE: Best LP issue: fascism or entitlements?
The original plan for SS was not implemented because it was not constitutional.  The law we are discussing was the next best thing which could pass the Supreme Court.  Notice, for example, how this law refers to percentages of  taxable wages instead of the actual taxes collected. 
I've never heard any specifics for such assertions about the constitutionality of the "original plan" for SS. The SS Act of 1935 was the original SS law, was never overturned by the Supreme Court, and in fact was upheld by the infamous 1937 Steward Machine Company v. Davis 301 U.S. 548.
The SS law, even as finally implemented, clearly intended to establish a kind of insurance and to pay for it in advance.  
It was indeed an insurance program rather than a retirement savings program. Benefits were indeed "paid for in advance" in the trivial sense that even from day one, payroll taxes collected stayed ahead of benefits paid.  It indeed tried to create the impression of benefits being "paid for in advance" in the crucial sense of a cohort's benefits being financed solely from that cohort's contributions. However, I've seen no evidence or argument that this was the case. The fact that the benefit schedule was fixed, whereas the contribution schedule included a ramp-up in the tax rate, is prima facie evidence that even the 1935 law did not pre-fund its benefits in this crucial cohort sense.
Insurance programs often do pay some people large windfalls.  For example, new employees entitled to health insurance can often buy their eye glasses, have their dental work done, even get maternity leave and benefits, soon after hiring. 
We're talking about the old-age pension benefit of SS, not disability insurance or unemployment insurance or survivor's insurance. If you know of a private PENSION program offering multi-thousand-dollar returns on a $50 lifetime contribution -- as Ida May Fuller was due under the 1935 law -- I'd love to know where I can sign up.
If the exact amount of the tax receipts was used as the "annual premium", it would only reflect confidence that the original plan included the correct tax rate.  
Which tax rate did the 1935 law consider "correct" -- its initial 2% 1936 rate, or its scheduled 1949 6% rate?  What was "correct" about this ramp-up was that it was the correct way to buy votes from near-term retirees at the expense of a later cohort -- who in turn was bribed by later Congresses via even higher rates on even later cohorts.
Clearly this law describes a pay-as-you go system. 
To clarify, "pay as you go" in the context of SS means that a given cohort's benefits are not paid entirely from its contributions, but rather rely at least in part on the contributions of later cohorts. "Pre-funded" means that a cohort's benefits would indeed be paid entirely from its contributions.
 
I've seen no actuarial evidence that Social Security was pre-funded in this sense even during the 1936-1939 reign of the 1935 SS Act. Politicians promising to pre-fund does not count as evidence, even if that promise is written into law.  We Libertarians know better than to assume that political promises were kept just because they were written into law.