SS privatization graph [Archive]

teknobucks

02-09-2005, 09:08 AM

The Social Security Speech You Didn’t Hear

by D. Saul Weiner
"My fellow Americans: Lately you’ve been hearing a lot of discussion about the Social Security program. Some people are saying that the program is in crisis and we need to move toward privatization in order to shore it up. Others are saying that the concerns are overblown and that we don’t need to take any drastic measures for Social Security to remain viable. Tonight I’m going to give you the straight story. First I’m going to dispel certain myths about the program which have created a great deal of confusion in the minds of citizens. Next, I’m going to assess the arguments made for and against the semi-privatization plan. Finally, I will lay out a solution which will solve this problem once and for all. I can’t promise that you’re going to like everything that I tell you, but I’m going to give it to you straight.

Getting the Basic Myths Out of the Way

The first thing to understand is that the "contributions" that you and your employer make are just tax payments, nothing more and nothing less. In fact, despite the bogus benefit statements you receive periodically, the government is under no obligation to pay you anything. Granted, if the government backed away from its verbal assurances we might have some serious civil disorder on our hands. But it is under no contractual obligation to provide the benefits to which we have all been led to believe that we are entitled by our participation in the program.

To make matters worse, for many years you have been taxed at a higher rate than is necessary to pay current beneficiaries. You may have believed that these "excess taxes" were in fact saved and invested so that Social Security would be able to pay future beneficiaries when the demands on the program were greater. In fact, no such saving has taken place. These excess taxes were spent on other government programs and all that the so-called Social Security Trust Fund received was nothing but IOU’s. These IOU’s take the form of Treasury bonds. When payments on these bonds come due, you will be taxed ONCE AGAIN in order to make good on these government obligations.

Another way of describing the previous point is that Social Security is a pay-as-you-go system. This is entirely contrary to the way that private pension plans must, by law, be financed. In a private plan, employers must contribute to the pension fund all throughout a worker’s career so that, when it comes time for his retirement, his pension is fully funded. By way of contrast, there is no such assurance under a pay-as-you-go system. The only thing that enables such a system to appear to function for a period of time is a workforce that is sufficiently large that it can afford to pay for the older generations’ benefits. This means that Social Security is in fact a Ponzi scheme and, like all Ponzi schemes, will break down when the ratio of payees (beneficiaries) to payors (workers) becomes too high. Thus, the fiscal crunch related to the aging of the baby boomers is a predictable breakdown of a program which is not being financed according to the principles of sound pension funding. What’s more, this is why every time the government assures us that it has "saved Social Security" and put it on sound footing, we always have a new crisis in another 10 or 15 years. One cannot "fix" a program whose basic design is fatally flawed by twiddling with the various financial parameters (tax rates, retirement ages, benefit formulas, participation).

Is Semi-Privatization the Answer?

Some of those who have studied the Social Security program and its periodic crises have come to realize that we must make some fundamental changes if we are to find a long-term solution here. I give them credit for grasping that we need to think outside the box. As one follows the debate about initiating a system of semi-privatization (i.e., allowing participants to place a portion of their taxes into semi-private individual investment accounts), many confusing assertions are made on both sides of the argument. Let us examine some of these contentions.

Pro side: "Individual accounts will save the day as they provide for higher rates of return on investment." Reality: Nothing is being invested under the current program. Therefore the current system does not have any rate of return! How can a semi-private program provide a higher rate of return, when the current system does not involve any investments or any rates of return?

Pro side: "Individual accounts will help younger workers build up a good retirement income." Reality: Certainly if younger workers are able to save significant amounts and earn solid returns on them, that would be a good thing. But if the government must take on additional trillions in debt in order to pay for current and imminent beneficiaries, paying off this debt will place an additional strain on these same workers. Will they really come out ahead?

Con side: "The Trust Fund is not projected to run out until 2042. Why do something rash when the potential day of reckoning is so far off?" Reality: The Trust Fund is a mirage. The problem first manifests in 2018 (under intermediate assumptions) when projected benefits exceed projected taxes; at that point, it becomes necessary to begin tapping into the Trust Fund, by using tax revenue first to make interest payments and then (starting in 2028) to meet principal payments. In other words, taxes will either need to be raised in order to satisfy obligations to the Trust Fund or diverted from other potential uses.

Con side: "Those advocating Individual accounts are selling out beneficiaries by taking away a guaranteed income and subjecting their retirement money to the risk of uncertain returns from the financial markets." Reality: In our current system, the way we provide a "secure income" to beneficiaries is by forcing younger workers, who may or may not be able to afford it, to underwrite the pensions of retirees. In other words, beneficiaries are insulated from financial risk by passing it on to workers. Is this really the way to attain a secure society (social security)?

The bottom line is that these semi-privatization plans foster the illusion that we can have our cake and eat it too, but do not appear to offer the elusive long-term solution.

Solving this problem once and for all

Folks, by now you know that we have a major problem on our hands and that continuing with the status quo or pursuing a semi-privatization approach will not provide a lasting solution. What then do we need to do in order to solve the Social Security problem once and for all?

Before laying out the solution, I want to talk a little about alchemy. Many scientists, including the great Sir Isaac Newton, pursued the field of alchemy, the dream of converting base metals into gold. None succeeded. What does Social Security have to do with alchemy? Everyone now working has "contributed" lots of money to this program; all of this money, including the amounts not needed to pay beneficiaries, has been spent. We cannot recoup these sunk costs. Others have come out ahead in this shell game. Our position is an unenviable one. Anyone telling you that we can make everyone whole going forward is practicing a modern-day form of alchemy. The best we can aspire to do is to make the most of a bad situation.

We cannot make everyone whole and we cannot allocate the "pain" through the political process by making arbitrary cuts. Therefore I propose that we freeze all social security benefits today at the level that has been earned thus far. Also, we will phase out the payroll taxes and pay remaining benefits out of the general Treasury fund; there’s no need to maintain this contribution fiction any longer. What’s more, we need to begin a program immediately to sell unneeded government assets (such as land and forests) and dedicate the proceeds of this program to cover Social Security benefit payments. Finally, I have signed a pledge renouncing my Social Security benefits and will ask all members of Congress who can afford to do so to sign this same pledge. While there is no shame in receiving these benefits for any retiree who is dependent upon them, I will ask all other Americans who can afford to do without them to voluntarily make this same commitment.

For younger workers and future generations, I will be sending out statements in the coming weeks showing how your tax burden will decline over the coming years relative to the continuation of the current program. If you are willing to voluntarily invest this extra take-home pay, I believe that you will find a reason to be optimistic about your prospects for a comfortable retirement.

Nevertheless, I am sure that many of you may have some concerns about the proposal that I have put before you today. In my next speech, I will be talking about how we can substantially reduce a great deal of counterproductive government spending and regulation. When we accomplish this, we will be able to greatly reduce your tax burden and to generate the kind of economic opportunity which will enable all of us to easily compensate for whatever hit we may have taken on Social Security. We can make this work."

February 9, 2005