Sat, 30 Apr 2005

The Social Security Mess

There's no doubt that the Social Security system is a mess. It's essentially a Ponzi scheme, bound to fail as the birthrate falls. My grandfather's generation set it up like this, and my father's generation piled on new "benefits", including medical and disability. It's ultimately unsustainable without tax rates approaching 100%, and that, of course, is a political and economic impossibility.

So people have been quite surprised to discover that I'm generally opposed to the reforms President Bush has proposed for the system, especially those who know of my strong libertarian leanings. What on earth could be wrong with private retirement accounts?

Well, there's actually nothing wrong with private accounts! What's wrong with the proposed scheme is that these will not really be private accounts at all. In a private account, I can deposit (and withdraw) any time I please, and while I may have to take an interest penalty if I withdraw before the term is up, I can certainly cease making contributions when I choose. Not so with Bush's proposed scheme - it's still a tax, it's still taken by force from it's rightful owner and deposited into some account over which he or she has a limited degree of control.

The difference in Bush's scheme is that these funds, rather than being used to pay benefits to present retirees as is the case now, will be invested in the private capital markets, at the discretion of the account holder, earning a return dependent on the vagaries of market. This will necessarily entail fewer deposits into the Social Security Trust Fund, which will, in turn, mean fewer dollars available to pay currently due benefits. Does anybody seriously think Congress is going to lower benefits for AARP members? Not a chance - so where's the money going to come from to pay them? There's only one place - a general tax increase.

Now, this may not have to happen for a decade - but it will happen under Bush's plan. It's also true that if we don't touch Social Security, there's ultimately going to have to be a tax increase as well - but that one won't come for several decades.

But the real problem with the Bush reform plan is the near inevitability of fraud. What funds and companies are going to be available for investors tax dollars? Why, the ones that meet government approval, of course, and are watched over by an agency of the government with serious regulatory powers - say like the Securities and Exchange Commission. Am I the only one who remembers Enron and WorldCom? Who doubts that "approved" in the context of bureaucracy is a synonym for "crony"? This opens the door to corruption on a vast scale - and that corruption will ultimately be outed.

When that happens (and it will happen - there's no "if" about it) the political blowback will be tremendous. Hordes of angry citizens calling their Congresscritters and complaining about having their retirement monies stolen with the collusion of the government! How do you think the AARP would react to that one? How would Congress react?

You got it: they'd immediately act to "make good" those investments. Which would defeat the whole purpose of the scheme, and raise taxes even sooner and probably by a larger amount than would otherwise be necessary to cover their constituents perceived losses.

Social Security really is an insoluble morass. The only way to fix it is to raise the birthrate (or otherwise increase the number of contributors) or just eliminate it entirely, neither of which is likely to happen in my lifetime. There are several ways to extend the viability of the system: eliminate the cap on taxable earnings for Social Security, eliminate the ability of groups to "opt-out" (especially the Federal employees - it just looks bad, fellas), or raise the retirement age again. None of these are particularly politically popular, but none of them would raise my taxes.

And hence my opposition. Adopting this scheme will raise my taxes sooner, and by a larger amount, than simply doing nothing. If you're worried about Social Security "being there" for you at retirement, don't be. It'll be there, dispensing barely enough cash to cover your dog food bill. Bush is right about one thing: the best way to handle the perceived crisis on a personal level is to set up and maintain a private retirement account. We can each do this now, one by one, contributing as much as we can afford, when we can manage to do so. I have no expectation of being able to live in my retirement strictly from my Social Security check. But I have no need for another government mandated and controlled saving plan, funneling my money to the political cronies of those in power so they can play on Wall Street.

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