The
Death of Social Security:
A Modest Proposal
by
Gregory Bresiger
1)
The Critics' Problem.
Social
Security, a program whose assets have been arrogated by unscrupulous
politicians over the years, should be privatized. But how does one
go about accomplishing this commendable goal? How does one undermine
a program when so many entrenched interests are feeding at its trough
and expect to be fed by the rest of us forever?
The
fault of almost all critics of Social Security and their privatization
proposals so far has been this: The solutions are almost as bad
as the problem. The transition costs are usually so large that taxpayers,
at least initially, would see their bills rise. After 65 years of
Social Security's outrageous costs and a payroll tax that has risen
from two percent to 15.30 percent to support the original programs
as well as Medicare1, some privatization
reforms might result in more, not less, bureaucracy as the costs
of transition mean more government all in the name of "privatization."
Privatization might end with as bad a name as, well, Social Security.
For
privatization to work, reformers must push a competitive system
in which people have the option to sever the connection with a government
program that is neither "wise" nor "frugal."
Privatization must mean that citizens – or at least some of
them – have the option of retaining more of "the fruits
of their labors" and that they can save as much or little as
they wish for a retirement they may or may not ever want. And, in
formulating plans for the destruction of Social Security, one must
remember that the modern concept of retirement – -people put
out to pasture at 65, told not to work, to take it easy with economic
penalties imposed on those free spirits who don't obey and continue
to produce – was an invention of governments2
engaged in crackpot Keynesian full-employment schemes.
I
do not offer here a complete privatization proposal. I will only
propose some general principles and tactics that I believe would
be useful in guiding a drastic Social Security reform that, I hope,
would eventually mean the end of the Social Security Administration,
its tens of thousands of bureaucrats and its thousands of bothersome
lobbyists. The special interests in back of Social Security will
hold up the American taxpayer for more and more of his or her hard
earned money if this welfare program – carefully disguised
as insurance – continues as is.3 But to get
from here to private systems the question is: Where does one begin?
2)
Recognize Your Opponents Strong and Vulnerable Points.
The
elderly, many of whom have been fed an endless diet of government
and AARP propaganda contending that Social Security is some sort
of religion and that anyone who criticized it eats babies for breakfast,
generally are not the ones who will listen. Indeed, it's hard to
criticize someone who believes that his or her retirement plans
are dependent on a continued payment of Social Security. Many Social
Security partisans, even if one proves to them that private systems
are much better than Social Security4, are petrified
of the idea of managing their own money.
Sixty-five
years of Social Security has accomplished its goal. It has weakened
individual initiative and responsibility. Social Security has turned
adults of all ages into children who are afraid of controlling and
directing their own property. Better that someone "smarter"
than them, such as Social Security bureaucrats, controls everything
for them, these people implicitly believe.
In
the process of changing our culture, Social Security hasn't wiped
out poverty, but transferred it from politically connected groups
to those apolitical people who just want to be left alone, but always
end up paying the bills for a run amuck welfare state. I'm not saying
these people are restricted to any one-age category, but these poor
fish tend to be older and believe – mathematics to the contrary
– that it would be impossible to manage without Social Security.
Privatization
means the opposite of the current system. It means people are treated
as adults, enjoy their own property and take responsibility for
their lives. But many of today's elderly Social Security's worshippers
want the government to "protect" them and they don't want
Big Daddy to go away even though Daddy is dishonest. Daddy is all
they know. The thought of life without Daddy is a nightmare for
these people.
So
let's begin Social Security's eventual termination with the young
workers. They are best potential allies of Social Security privatization.
Most are not libertarians, but many have a natural skepticism about
the government and its myriad pricey programs that they must pay
for. Some are even contemptuous of Washington. That's because a
few realize that they are among the most conspicuous victims of
what one government commission has called "intergenerational
injustice."5 They will be the ones
targeted to pay the biggest payroll taxes bills (Some estimates
are as much as 25 percent tax rates in the next few decades) in
the coming years and get the least back.6
You
know who I am talking about. They are the people who tell pollsters
that they are more likely to see UFOs than collect Social Security
in 30 or 40 years. They are very suspicious of Big Daddy on the
Potomac. They have no confidence in the government or the ability
of "Daddy" to keep from breaking into the kids' piggy
banks.7
What
would happen if young workers never were required to join this egregious
system? And what would happen if workers in their 20s – say
at age 21, 25 or 29 – were able to opt out of the system? These
tend to be people with lower incomes. They are just starting their
working lives. For them, payroll taxes are huge. The regressive
nature of this ridiculous system hurts them a lot. They would likely
be the most willing to take a lump sum payment to make them whole
for their payments, if any, into the system. Since most of these
workers haven't been "contributing" to Social Security
for very long and since the losses are greatest for those who have
been in the system and have lost decades of compounding that could
have taken place in private systems, it should take relatively little
to make those in their 20s whole.
Some
younger workers, realizing the advantage of being free of this oppressive
tax, would want nothing in return to escape. If even just a few
thousand were able to win their freedom, an important precedent
would be set. For the first time in the history of the modern leviathan,
it actually will have been reduced in size. A revolution will have
begun. And, once this started, I hope it would never stop.
This
huge Social Security system would spring a leak. I believe tens
of millions of young people – likely among the most entrepreneurial
and financially literate in our nation – would opt out if given
the chance. And, as they accumulated lots of money in IRAs, savings
accounts, funds, etc.8 – money that was their
property, not the plaything of pols and bureaucrats – others
would start clamoring for their freedom.
Most
important, this opt out provision could be presented as a "reform"
that was designed to save a Social Security system that is projected
for bankruptcy in the next twenty to thirty years. Every young person
leaving the system would relieve it of some actuarial responsibilities
that threaten to bankrupt it. The reform could be offered as part
of a "save Social Security" plan, but I believe it would
become a Trojan Horse: Allowing some out of jail would leave to
others demanding the same. Pressure would build as the current system
was exposed as fraud because of private competition.
3)
The Snowball Gets Going.
Some
of those in their thirties and forties would also push for their
own privatization plan. How would we pay for them? For people of
my generation – I am 46 – who have been "contributing"
to the system for 30 years. We've been hurt for a long time. The
bill to make us whole would cost a lot more than for those in their
20s. We've had a lot of money taken from us. Money we could have
put into equities and bonds, which would have produced much, much
better returns than the so-called Social Security trust funds, whose
real returns have been a pitiful one to two percent because all
they "invest" in is treasuries, the worst investment around,
one that is guaranteed to lose ground to inflation and taxes.9
Clearly,
the government has benefited greatly over the past three years from
the gross overtaxing of workers who must support this system. Some
of the so-called surplus is a result of the black ink generated
by a Social Security system with unfairly high tax rates. Now huge
Social Security "trust fund" surpluses are projected to
accumulate over the next 12 years. But in 2,012 the system is projected
to start running deficits again until a decade or two later the
system is projected to go bust.10
While
the system has these huge, unjustified surpluses these trust fund
proceeds should be paid out for two things: To take care of those
credulous souls who want to continue to receive Social Security,
but also to pay off those of us who want out, but want to be made
whole for the outrageous taxes that they have been forced to pay
over the years. These payroll taxes, in many cases, have been higher
for many people than their income taxes. I would suggest a lump
sum payment. This payment would reflect the payments made over the
years plus the average annual returns of the stock market, which
is about nine percent. The payments should be set by a commission
of taxpayers and investment experts. Pols should have nothing to
do with setting the numbers.
How
many baby boomers – those today in their 30s, 40s and in some
cases 50s – would take advantage of this buyout? My guess is
millions of smarter people would take advantage of the plan, but
not at nearly the rate of the younger group. Yes, hundreds of millions
of dollars would be paid out by the trust fund. I like that because
it would mean pols would have less money to play with, it would
mean they would be returning the property to the people who own
it. And, at the same time that tens of millions of people receive
billions of dollars due them, the government would be relieved of
billions of dollars of actuarial obligations. As the reform gained
more and more adherents, someone in Congress might insist, given
that the Social Security had smaller obligations and less money,
that the Social Security administration start to reduce its bureaucracy.
With
billions of additional dollars in the hands of citizens, savings
rates could increase dramatically as happened in Chile when it privatized
its Social Security system. Higher savings rate would mean the price
of money – interest rates – would decline, stimulating
the private economy to achieve what it was naturally capable of
instead of hamstringing it with various useless taxes.
4)
Tax Relief and Keynes.
At
the same time that Social Security privatization was proceeding,
at the same time that billions of dollars were going into private
hands, friends of privatization should insist that this would be
the best time to end all taxation on savings and capital gains.
This would represent the reversal of Keynesian ideas that have infested
our economy for more than 60 years. Under consumption and over saving
extended the Great Depression, John Maynard Keynes said in his The
General Theory of Employment, Interest and Money.11
Unfortunately,
too many economists and policymakers have accepted this claim. So
many Western governments since then have swallowed this lollypop
and the many other Keynesian suckers that followed. If savings was
bad, Keynes argued, then greater consumption was good so the government
had to stimulate consumption,12 even if it had
to trick workers with the skillful use of inflation, bond illusion
and other political techniques.
These
policies were, unfortunately, wildly successful in the political
arena. They also affected our culture in subtle ways.13
Savers and investors were given a bad name. Those who receive dividends
were obtaining "unearned income, according to the tax code,
as though those who save, who abstain from giving themselves a higher
standard of living, are somehow pernicious people. They were and
are depicted in major media as mean-spirited.
Big
spenders were great people. They created work. Government deficits
were – all of a sudden in the 1930s and 1940s – not bad
but good. Social Security, which has helped push governments into
the red, was a way of keeping the economy in balance. It was part
of a larger counter-cyclical policy that Keynes and his supporters
said the government was obligated to pursue to ensure adequate levels
of consumption and low unemployment (Little was said about the price
of this: inexorable inflation, inflation so relentless that two
to three percent annual inflation is today applauded by the mainstream
media as a modern miracle that should provide Alan Greenspan with
the first opening in the Blessed Trinity).
But
now, several generations after Social Security's founding, these
spend your way to wealth policies have pushed Americans so far away
from self-sufficiency that even the ruling elites are worried that
people don't save enough; that they are depending too much on Social
Security, a program that is advertised as wiping out poverty, but
which actually transferred it to the younger workers who are hurt
to this day by payroll tax rates that cripple them, preventing them
from saving and becoming independent of government largesse.14
Interestingly, it was Abraham Epstein, a socialist who helped push
for a government Social Security program in the 1930s, who condemned
the payroll tax as regressive and a terrible way of financing a
system of government pensions.
If
the government is so concerned with private retirement savings,
if the Clinton administration says it is worried that the savings
rate is too low, then there should be no problem ending all taxation
of savings. Taxation of savings and capital gains represents double
and, in some cases, triple taxation. Payroll taxes are also a form
of double taxation. Who would like the option of keeping this money
for themselves as their property?
The
essence of Social Security is that the system's assets are not the
taxpayer's property or an entitlement.15
Social Security is a mandatory program in which taxpayers are ordered
to pay into a huge government pot. This pot is controlled by pols
and their bureaucratic buddies.16 The
latter know that the former are driven by their desire to win elections.
They are constantly changing their minds over who can take from
the pot and how much each special interest group can grab.17
The
terms of today can mean nothing tomorrow or ten years from now,
which is why elderly people who are depending on a certain level
of benefits are also victims of this sleazy system. Examples: Social
Security benefits once were not taxable. Today almost all benefits
are taxable. Some have suggested that this terrible system should
someday be "means tested" in order to be saved. This is
merely an excuse to steal from an unpopular group – the rich
– under the guise of justice, even though everyone, regardless
of income during the course of a lifetime, had money taken from
their wages with the promise that they would receive payments in
old age. No one said that one would be penalized later on if one
were successful. No one would suggest cutting off those who already
receive Social Security. That would be inhumane. Besides, tens of
millions of Americans believe that they wouldn't survive without
Social Security. And even some of the rich who collect Social Security
are among its biggest supporters, arguing they are entitled to everything
they want. They, too, can become attached to the welfare state.
The
only way to break this dependence cycle is to stop throwing new
victims into the pot and to return the property to the taxpayers
as quickly as possible. And the only way to start a virtuous cycle
is to begin is not with a universal approach of simply abolishing
the whole program – the ruling elites have too much stake in
the current system – but to begin with the simple proposition
that anyone who wants to opt out will be given the opportunity and
that the saving that result from the reduction in actuarial obligations
is the only way to keep Social Security from dying.
Cloak
it as a Social Security "reform," as a way of saving this
grand (sic) old program beloved by pols who see victories in their
tinkering with the benefits. Eventually, I believe, this disguised
save Social Security proposal will destroy it. Once competition
between Social Security and the private sector is allowed –
once taxpayers are allowed to opt for a Social Security Federal
Express is permitted-it will begin a process that will destroy Social
Security. When the program was debated in the early 1930s, a proposed
amendment that would exempted employers who provided their employees
with private pensions were quickly scuttled for obvious reasons.
"It would be inviting and encouraging competition with its
own plan (Social Security), which ultimately would undermine and
destroy it."18
6)
The Importance of the Debate.
If
Social Security starts unraveling, if even part of the battle is
won by the privatizers, then a bigger process will also begin that
could ultimately lead to the destruction of the leviathan. This
is way a small elite group is so determined to make no changes in
Social Security.
No
program or government bureau or department is as conspicuous a part
of the average American's life as Social Security. It is the jewel
in the crown of the American leviathan. It is to the welfare/warfare
state what India was to the British Empire. Once Britain lost India
as a colony in 1947, Britain was never the same world power.
If
Social Security is destroyed, or if its influence is even reduced,
it will be natural for average citizens to look critically at other
federal programs. If a citizen can do without Social Security, why
can't they do without a lot of other wasteful government programs
that interfere in their lives and can be dispatched without any
economic and social loss for the average, overtaxed citizen? Indeed,
many Americans would now say that, when one deals with the federal
government, less is much better than more.
References
-
"Since 1937, Congress has raised Social Security taxes 24
times – an average of once every 2.5 years – each time
in the belief that the increase would guarantee the system's solvency."
See Gareth Davis and Mark Wilson's piece, "Clinton Leaves
Door Open to Tax Hike" on page A14 of the Wall Street
Journal of 2/5/99.
- FDR's
"Alan Greenspan," Fed Chairman Marriner S. Eccles, pursued
Keynesian policies without having read "The General Theory.."
or any Keynesian. But the idea of the government injecting inflation
to save economic problems is as old as it is flawed. See Marriner
S. Eccles, Private Entrepreneur and Public Servant, by Sidney
Hyman,) p99, (Stanford University Graduate School of Business,
1976).
- Payroll
taxes are projected to hit 24.6 over the next twenty-five years,
according to a government commission that investigated the problem.
See The Bipartisan Commission on Entitlement and Tax Reform,
(Washington, D.C., Government Printing Office, 1995), p55.
- Let
us assume that a low-paid worker merely contributes $100 a month
for 40 years to his 401(k) plan. And let us assume he obtains
a so-so rate of return. We will assume nine percent. At age 65,
the worker has $471,643. And, more importantly, the money is his.
It is his property. No administrator tells him how the money may
be spent, invested or used.
- Kerrey-Danforth,
ibid.
- Ibid.
- Attending
a Securities Industry Association conference in Florida in the
early 1990s, I heard economist Douglas Bernheim of Stanford University,
who has studied the problem of low savings rates for Merrill Lynch,
describe the problem of the Social Security trust fund. "The
history of the Social Security system is that, whenever there
have been big surpluses, Congress can't resist using them."
(Author's notes)
- The
average investor could obtain much better performance with private
investments than Social Security. This is admitted by many former
Social Security. Sam Beard, a former aide to Senator Robert Kennedy,
says the average worker who sets aside $30 a week in an untaxed
account of average securities would have over $1 million in 45
years. He argues that private accounts would be better than traditional
Social Security because "millions of Americans distrust government."
See Restoring
Hope in America. The Social Security Solution, by Sam
Beard, p10, (Institute for Contemporary Studies, San Francisco,
1996)
-
The compound rate of return of U.S. stocks between 1926-1993 was
10.2 percent. The return of treasuries was about 4.8 percent two,
according to Ibbotson Associates, Chicago. Over a long period,
a difference of 5.4 percent in annual returns is incredible. Say
you and I both invest $200 a month over 40 years. I get four percent
a year. You get nine percent a year. At the end of 40 years, excluding
taxes, you have $943,000, while I only have $237,000. You have
beaten me by some 300 percent! The investment polices of the Social
Security administration have been a disgrace, another reason for
privatization and a fact that should be pointed out time and again
by privatizers.
- Kerrey-Danforth
Commission, Ibid.
- "An
act of individual saving," Keynes wrote, "means –
so to speak – a decision not to have dinner today. But it
does not necessitate a decision to have dinner or to buy a pair
of boots hence or a year hence or to consume any specified thing
at any specified date. Thus it depresses the business of preparing
today's dinner without stimulating the business of making ready
for some future act of consumption." And that, Keynes later
concludes, results in "a net diminution" of consumption."
The
General Theory of Employment, Interest and Money, p210,
(Macmillan Press, London, 1973).
- Ibid,
p332. Keynes praises FDR's inflation injection policies.
- Savings
rates have dramatically dropped over the past 65 years of Social
Security, but also the American philosophy has been dramatically
changed. Writes economist Carolyn Weaver: "Before the advent
of Social Security, the public sector had only a limited role
and the federal government had essentially no role in alleviating
poverty. Of the 4,207 benevolent institutions in the U.S. in 1904,
only 485 were public and they housed less than a third of all
inmates." See Weaver's The
Crisis in Social Security; Economic and Political Origins.
(Duke Press Policy Studies, Durham, North Carolina, 1982) p 20
- See
Murray Rothbard's Power
and Market, Government and the Economy, (Institute for
Humane Studies, Menlo Park, California, 1970). Rothbard notes
that the poorer wage earners are often the ones who are hurt the
worst by the system. P135.
- In
the 1950s, a Republican Congressman from Nebraska, Carl Curtis,
studied Social Security and concluded "that Social Security
is not a contract, not even insurance in the legal sense of the
word." He also cited the little-known section 1104 of the
Social Security act, which permits Congress "the right to
alter, amend or repeal any provision of this act." See Social
Welfare in the United States, Poyntz Tyler, editor, p55, (H.W.
Wilson Company, Bronx, New York, 1955)
- "Nothing
in Social Security law requires the government provide a fixed
amount of benefits if the actuarial tables fall out of balance."
That comment came from Major Garrett and Timothy J. Penny in their
book
The Fifteen Biggest Lies in Politics, (St. Martin's
Press, New York, 1998) p148.
- But
this kind of chicanery was actually predicted before Social Security
became law. At the Senate hearings on the adoption of Social Security
in 1935, one senator asked: "What guarantee is there? Has
the citizen any guarantee? Has the citizen any moral guarantee…that
some man might not come into power who would take more than he
ought from one and give to another?" See A
New Deal for Social Security, by Peter Ferrara and Michael
Tanner, (Washington, D.C, Cato Institute, 1998) p20.
- Ibid,
p22.
December
8, 1999
Gregory Bresiger is a business writer and editor living in New York.
He works for Financial Planning and Traders magazines
among others.
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