Wednesday, June 01, 2005

Social Security Reform: A Fictional Crisis?

For the last year, our esteemed senator to the West, Senate minority leader Harry Reid, has been charging the Bush White House with fabricating a “fictional crisis” in the form of the Social Security situation. What Harry does not realize is this is more than his own rhetoric; he is dead on.

This is a fictional crisis. After all, what’s wrong with a nationwide government sponsored pension plan? Nothing. Soviet Russia had one, Cuba has one, and China has one. All the great countries that have ‘compassion’ for their workers have implemented such a program (I wonder if gulag workers got an added benefit?). It would be stingy of a government to not let us earn less than the rate of inflation on 12 percent of our income for our entire employed life. To hell with the idea of ownership and control over our own assets and income, this is an entitlement society; the government is entitled to our income. The fix is simple; Harry has spoken of mere ‘tweaking’ as the answer. All we need to do is ‘tweak’ payroll taxes in the upward direction and ‘tweak’ benefits in the downward direction and we can provide for current and future workers for a few more years; when we get into trouble again with another “fictional crisis,” we can repeat the process. If we are lucky, in a few decades the returns on Social Security may reach one tenth of the rate of inflation, far better than the returns on “risky investments” like diversified stocks and bonds. Any way you cut it, this most certainly is not a crisis. This was the plan all along, a full-fledged government controlled income redistribution system that discourages investment and capital formation.

Now let us talk about fiction. By his own admission, Harry states that our current system will provide 100 percent of benefits to seniors until 2055 after which we begin the ‘tweaking’ process. Therefore, he admits that it will go broke; somehow that is not a crisis? This is just like politicians, lollygagging and procrastinating, it will always be someone else’s problem and far beyond their next re-election cycle at that. Now for some facts: In actuality, according to the CATO Institute, Social Security “will begin running payroll tax deficits within 13 years.” “By 2042, it will be legally and financially unable to pay full promised benefits, resulting in cuts of 25 percent or more.” Currently Social Security makes up nearly a quarter of the federal budget and by 2030 that figure will be more than a third. Furthermore, because of its “pay-as-you-go” set up, Social Security depends on current workers’ earnings to pay current retirees’ benefits; this means that changes in the worker to retiree ratio will adversely affect benefits. In 1960, the ratio of workers to retirees was 5:1; in 25 years, that ratio will only be 2:1. Add on to that the fact that the Government has saved very little Social Security tax income and you have an obvious budget problem. When Social Security began, workers were only in retirement for a few years before dying, now that life expectancy has risen by nearly 8 years, the problem is worse. Go tell that to Harry. But wait! There’s more!

Not only will we be facing serious budget problems in financing Social Security, there are inherent problems with it from a macro-economic standpoint. Dr. Larry Wimmer, an expert in historical economics, has said that one of the greatest problems facing our country’s economic future is the decline in the personal savings rate. In fact, in 2001the personal savings rate fell to its lowest ever recorded rate of only a half of a percent. Social Security’s promise of assured retirement benefits discourages workers from saving additional income, meanwhile the money collected in payroll taxes is spent or consumed by the government; further sucking away vital funds from the investment sector. This cripples our economy’s ability to grow as it restrains capital accumulation. It has also increased our reliance on foreign investment and capital inflows which in turn finances our trade deficit. If Social Security were to be partially privatized it would drastically increase the savings rate, leading to greater domestic investment, greater economic growth, less dependence on foreign investment and ultimately a reduction in the trade deficit; not to mention more empowerment of the workers who gain ownership for their own assets and their own future.

Take, for example, a worker earning the Bureau of Labor Statistics’ average household income for 2002, $36,764; if this worker earns this same wage for 35 years (age 30 to 65), paying in 12 percent of his income every year at a rate of 8 percent (easily found in a safe, diversified investment), at retirement he will have a nest egg of $838,000.00. Compared to the 1.8 percent rate of return on Social Security, the same worker could only hope to fetch $215,000.00, not to mention the 3 percent loss to inflation. The mere annual interest earned on the first nest egg would calculate into an income of 67,000 per year, nearly 5,600 per month; nearly five times the current Social Security monthly payout. When you pull out your calculator and begin to think, it becomes obvious that there is a crisis; it is called highway robbery. No matter how you cut it, the Social Security ‘crisis’ is a hairy one.

*This article was first featured in "The Liberty Letter" official periodical of the Utah Federation of College Republicans (www.ut.collegerepublicans.org)