by Gregory Bresiger
December 8, 1999
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.
Gregory Bresiger is a business writer and editor living in New York. He works for Financial Planning and Traders magazines among others.
10 dec 99