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--By George Mason |
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Socialist Security Having fostered a climate of verbal violence, The European left feigned to be surprised when physical violence erupted at Genoa. Alarmed by the demonstrators' actions, the Chief of Police here in Washington has announced a six million dollar purchase of flame-retardant suits for his officers to fend off the demonstrator’s possible use of Molotov cocktails in anti-globalization protests scheduled for the end of September. Yet no campaign of verbal violence can match the history of lies, half-truths, political demagoguery and fear mongering attached to the subject of social security. It’s purposely difficult to get to the facts amid the noise and emotion. On July 24, the 16-member presidential bi-partisan commission released a preliminary report on the status of Social Security. It was met with union-hired pickets and dueling press conferences condemning the commissions work even before publication. Their preliminary report made no recommendations. A draft proposal will come in the fall. The report’s goal was to describe the problems. The Social Security System is Obsolete. If there were no current system, what we have now would never be proposed. Developed 65 years ago in the middle of an economic depression by people of a socialist mindset, "Social Security," the panel says, " was created in a world of large families with short life spans, where markets were perceived to have failed and faith in the individual had ebbed." Today, we have experienced the world-wide collapse of government-run command economies, witnessed the power of markets to create wealth through economic growth and gained stability from personal asset ownership by the middle class. We have a consensus for equitable treatment of all our people. We live longer, healthier lives and produce smaller families. Marketplace capitalism has proven to be the cure, not the curse. Authoritarian governments have not proven able to feed and house their people, let alone provide for retirement. Unlike six decades ago, today’s working population is not composed of just males who are the sole earners in the family. Demographics include young single people, self-employed, minorities and women. The average rate-of-return of less than two percent from Social Security is not acceptable when government bonds offer double the reward and asset ownership as well. Who among us is willing to risk retirement on the ability of a politician elected 35 years from now to substantially raise taxes on what is then left of current workers? The Current System Harms the Poor. For the most part, low and moderate-income workers have no other retirement plan. They work more years at lower wages, have a lower standard of living, a greater chance of periods of unemployment, lower life expectancy and an extremely remote chance of leaving financial assets to their family. Because the poor tend to die younger, there is a net transfer of wealth away from the poor to the wealthier and healthier segments of the social security pool. Their shorter life spans means that the poor subsidize the well off in the current system. As do we all, the poor pay 12.4 percent of what they earn as a compulsory general tax, not an individual investment. This required charge crowds out any chance at private savings because the poor need the rest of what they earn for daily living. Since they don’t own any retirement asset, when they die there is nothing left for the families of the poor to build upon and the cycle of poverty and dependence continues. Had the poor been allowed to invest the same funds in real assets, they would have at least twice as much available in retirement plus a remaining asset to pass on to the next generation. There Isn’t Any Trust Fund. Of all the lies told about Social Security, the idea that its commitments are backed by a "trust fund" is the most damaging. Over the years, workers have been deliberately deluded into thinking that Social Security taxes weren’t really "taxes" but "contributions" to their very own pension account. The political purpose was to minimize resistance to the imposition of higher taxes. In 1960, the Supreme Court ruled in Fleming v Nestor, that social security contributions were clearly a tax and that individuals had no rights to any benefits. That decision further affirmed that social security tax receipts were paid into the general treasury and not into any separate accounts. Under current law, workers and retirees have no legal ownership over any benefits. They have simply a political promise that can be changed or revoked at any time by any amount for any reason. All the FICA tax money paid in today goes out today. It goes to meet current pension obligations or to the Treasury in the form of a non-marketable but interest-bearing Treasury security. That social security "surplus" is then spent today to meet other obligations of the general fund. What remains is an IOU from the government (in general) to the social security system (in particular). The "full faith and credit" of the government simply means that when the IOU becomes due, the government promises to pay through then current tax receipts or borrowings. The trust fund is purely a political devise. Regardless of whether there are trillions in IOUs or zero, current taxes at the time will be used to pay promised benefits when they fall due. Reform is needed primarily to prevent a massive tax increase when the promises made to the 80 million baby boomers comes due. Doing Nothing is Not an Option. The march of demographics cannot be denied. As we look forward, there will be fewer people in the workforce and more in retirement. The ones who are retired are healthier and will live longer. Faster economic growth or heavy immigration will only alter the day of reckoning by months, not years. In 2016-17 the program’s benefit obligations will begin to exceed its revenues and gradually increasing general revenue subsidies will be required. The longer the alterations are ignored, the more severe the solution will become. The tough choices, alone or in combination, are these:
What is the Alternative? Last week, Representatives Jim Kolbe (R-AZ) and Charles Stenholm (D-TX) introduced a detailed proposal to create private accounts within the Social Security system. It vividly illustrates that coming up with a politically acceptable plan that includes private accounts is nearly impossible without relying on a heavy dose of general tax revenue during the transition. To keep the promised payments going without interruption, the bill reduces the guaranteed payment, increases the level of earnings subject to tax and reduces the annual cost-of-living adjustment. It also accelerates the schedule of conversion to age 67 from 65 and adjusts annual benefits in line with extended life expectancy. Changes would be phased in and would not effect anyone within ten years of retirement. The issues they raise will have to be addressed. Using a portion of the surplus to create savings and investment opportunities within Social Security would allow Americans to acquire inheritable financial assets of their own and enjoy competitive market returns, such as these. Long Term Rates of Return In Retirement/Month Social Security* – 1.36 percent 1000 U.S. Treasury inflation-protected bonds – 3.4 2500 50-50 indexed S/B portfolio - 4.9 percent 3600 35-year whole stock market index – 6.4 percent 4700 39-year S&P 500 – 12.5 percent 9200 * Not a financial asset Caution. During the August recess it might be good to re-think a possible Bush blunder. Social Security
and Medicare, says economist Robert Samuelson, must be considered as a coherent whole, not as separate issues.
The underlying issue is generational fairness – how to be decent to the old without plundering the young. The young
will not forever be willing to be compelled to underwrite the vacations of the old who seem to them to be fairly
healthy and financially well off, Samuelson concludes. The worst of all possible outcomes is the stated goal of
the Left - to pass an additional prescription drug benefit and do nothing about Social Security while generating
a climate of verbal violence. |
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