Tuesday, March 01, 2005


Social Security - A Little Reform is Not Enough

I have previously written here and here, among other spots around the web, in support of Social Security reform. I’m in favor of partial privatization, and the sooner the better. But while it is a step in the right direction, private accounts as proposed by President Bush will not solve the problem because the proposal does not go far enough. The “head in the sand, there’s no problem” Democrats are full of crap and they know it. So are the Republicans who tout the proposals as a solution to the problem.

Let me say this one more time for the younger viewers out there: it is not rocket science. It is not even complicated. When the baby boomers retire, either the system will collapse or the retirement age and the social security payroll tax will both skyrocket. Period. We can play games all day long with actuarial charts and fiscal projections, but the fact is if the Social Security scam were being operated by anyone other than the government it would be illegal.

Social Security as it now exists is nothing more than a Ponzi scheme (named for the guy who invented it, and went to prison for fraud), also known as a pyramid scheme. It works like this: I solicit investors by promising them a return on their investment, a profit so to speak. And they are happy investors because they make money. They make money because I pay them with the money I collect from subsequent investors, whom I then pay out of the money I collect from subsequent investors, who invest because they can see that the previous investors are making money. Get it?

It works great, until I get greedy and take too big a cut for myself, or I don’t find enough new investors to keep paying all the previous investors. At that point, when those who are expecting to collect are too numerous for me to pay out of money collected from new investors, the system collapses.

Social Security works exactly the same way. People collecting today are being paid out of the taxes collected from people who are paying in today. But when the baby boomers retire, there will not be enough folks paying in to continue to finance those taking benefits out.

At that point, and most estimates say it will be around 2040, the system would collapse. Except the politicians who long ago looted the “trust fund” of all actual cash (took too big a cut for themselves), and who have manipulated the system to curry support (buy votes), can’t possibly let that happen. So benefits will begin to decrease, and taxes and the retirement age will increase.

Long before that point, most estimates say around 2018 or 2020, the system will begin paying out more than it takes in. Those collecting will no longer be paid by the taxes of those paying in. Additional money will be either taken from other programs or, more likely, new and ingenious federal taxes will begin to appear to generate cash. National sales tax, anyone? The only other alternative will be to begin raising the retirement age and the Social Security payroll tax at that point.

I was for privatization when Reagan proposed it in the ‘80’s. I was for reform when Clinton supported the idea and talked about the "looming crisis" in the 90’s. And I’m for it now, when Bush supports it. But to really solve the problem, partial privatization is not the answer. The system must be phased out, those already dependent have to get a reasonable level of security (although indexing to wages rather than the cost of living is nuts and must be changed), and no new “investors” can be allowed to enter the system. Take a look at what Chile did. Look at what Slovakia has done, phasing out the welfare state that was communism.

It’s time to abolish the Ponzi scheme and move to a system that represents actual investment. I’ll leave it to the rocket scientists and actuarials to work out the details.

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