"Government is not reason; it is not eloquence; it is force! Like fire, it is a dangerous servant and a fearful master."
George Washington.
" ... There will always be a party for giving more to the rulers, that the rulers may be able in return to give more to them. Hence as all history informs us, there has been in every State & Kingdom a constant kind of warfare between the governing & governed: the one striving to obtain more for its support, and the other to pay less. And this has alone occasioned great convulsions, actual civil wars, ending either in dethroning of the Princes, or enslaving of the people. Generally indeed the ruling power carries its point, the revenues of princes constantly increasing, and we see that they are never satisfied, but always in want of more."
-- Benjamin Franklin, in a letter to the Federal Constitutional Convention, as recorded by James Madison on June 2, 1787. |
Read Ayn Rand's book Atlas Shrugged
Brainstorm Magazine, Feb. '99
by Ted Abram, American Institute for Full Employment
|
Why is Social Security bankrupt? Why does a $30,000 a year wage earner pay $3,720 a year for Social Security, and yet there is no trust fund to pay $17 trillion of future Social Security obligations? Why did the Social Security tax go from 2% of the first $3,000 of an employees salary in 1937, to 12.4% on $72,600 of the employees salary now. Where is the money? Where has the money gone?
Congress and Presidents have spent the money. Currying favor with the voters, they have spent the money on increased Social Security benefits and unrelated programs, while shifting the tax burden to future generations.
Dr. John F. Cogan of the Hoover Institution in The Congressional Response to Social Security Surpluses, 1935-1994, chronicles the congressional and presidential propensity to increase benefits when there are short term surpluses, with no concern for the long term fiscal viability. Most egregious is the raising of benefits just before an election, such as the 1972 election, when Democrats and Republicans bestowed benefits on voters.
During 1971, the House had passed a 5 percent increase in benefits and the Senate Finance Committee had responded with a 10 percent increase. A stalemate over welfare reform prevented either increase from being enacted. Edmund Muskie opened the 1972 presidential election season with a call for an across-the-board 15 percent increase. Within weeks his bid was raised, first by presidential candidate Wilbur Mills to 20 percent, then by candidate Hubert Humphrey to 25 percent. President Nixon opposed these increases as exorbitant until July, when Congress sent him legislation raising benefits by 20 percent effective in October, just before the general elections. The president not only signed the bill into law but also claimed credit for it. The president authorized a note from the Social Security Administration to accompany the October benefit checks. The note gave full credit for the increase to "a new statute enacted by Congress and signed into law by President Richard Nixon."
At the American Constitutional Convention, Benjamin Franklin described the penchant of rulers to increase their power and control by taxing and bestowing favors, coercing their citizens to become dependent.
" ... There will always be a party for giving more to the rulers, that the rulers may be able in return to give more to them. - Hence as all history informs us, there has been in every State & Kingdom a constant kind of warfare between the governing & governed: the one striving to obtain more for its support, and the other to pay less. And this has alone occasioned great convulsions, actual civil wars, ending either in dethroning of the Princes, or enslaving of the people. Generally indeed the ruling power carries its point, the revenues of princes constantly increasing, and we see that they are never satisfied, but always in want of more."
-- Benjamin Franklin, in a letter to the Federal Constitutional Convention, as recorded by James Madison on June 2, 1787.
The example of Social Security shows Franklin was right. Although in this case the rulers have reached beyond the ruled and taxed future generations.
In the 1880's, German Chancellor Otto von Bismarck created Social Security to gain citizen allegiance for his militaristic government. Rather than have citizens save and invest, Bismarck promised retirement benefits and taxed the future earnings of the unborn. This pay-as-you-go scheme spread to many countries and in 1935 was passed into law in the United States.
Today, all countries that adopted the pay-as-you-go system of Social Security face serious fiscal problems caused by shifting in age distribution of their populations. Soon there will not be enough workers to pay for future retirees. The following is the crisis the United States must confront:
Congress and the President must make paradigm changes, or as stated by Senator Gramm of Texas: "If unchanged, Social Security's current structure ultimately will force us to choose between massive tax increases that erode economic opportunity for our children, and staggering benefit cuts which destroy our parents' retirement security."
Soon, there will be a fierce debate in Congress, pitting those wanting to raise taxes or reduce benefits and continue Social Security, against those wanting personal accounts, greater retirement savings and freedom. The decision made will effect every citizen's freedom and financial security, as well as the economic future of America. The Congressional and Presidential decision on Social Security is of the utmost importance.
Any decision reached by those on the hill must include personal accounts. There are two major economic reasons to convert to personal accounts:
At age 25, if the $30,000 a year worker is allowed to invest their FICA contribution, that person would have at retirement, in real 1997 dollars, $387,528 if invested in bonds, $1,036,960 if invested in stocks for retirement. Current Social Security would pay $1,711 in monthly benefits, compared to $2,518 from the bond fund and $8,737 from the stock fund.
Harvard economist Martin Feldstein estimates that and the increased savings from personal accounts will boost the United States economy by 5% of gross domestic product (GDP) each year. The net present value of the gain would be an enormous $10-20 trillion, which would critically help America maintain its position as a world power.
The crucial issue is how to transition to personal accounts while maintaining the promises made to retirees and future retirees. Morally and politically these principles must be maintained:
Fortunately we have the experience of Chile, Australia, England and many other countries that have partially or fully converted from a pay-as-you-go system to various forms of personal accounts.
Most successful is Chile. In 1925, Chile was the first country in America to install Bismarck's pay-as-you-go system. In 1980, facing the same demographic problems that the United States faces, Chile converted to a privately administered national system of individually owned, privately invested retirement accounts. After 16 years, pension benefits are 50 to 100 percent higher (adjusted for inflation) than they were in the government-run system. Most important, the Chilean rate of savings has increased to 25 percent of GDP, creating $30 billion in pension funds that have pushed the national economic growth rate from 3 percent to 7 percent.
In Chile the worker has 10 percent of his wages automatically deposited by his employer each month into the worker's own account. The worker chooses one of about 14 private Pension Fund Administration companies to manage his account. Chile's government sets limits on the types of investments and the mix of the portfolio. At retirement the person can purchase an annuity or make regular withdraws. Any savings, above the amount needed for retirement, is the property of the investor and is used as he or she desires. At death all remaining assets are part of the investor's estate.
In the United States and until 2001, there is enough excess from Social Security taxes to craft a reasonable transition. With Baby-Boomers beginning to retire, every year that passes decreases the opportunity for an equitable and peaceful transition. Experience has shown that Congress and the President can be expected to seek the politically easy solution. When facing insolvency in 1977 and 1983, Congress responded with increased taxes and reduction of benefits. Again, Congress and the President will gravitate to tinkering with the present system: reducing benefits, raising taxes, extending the age of eligibility. But this time around tinkering with Social Security will only delay the inevitable massive tax increases or reductions in benefits, and will continue to retard personal and national economic growth.
To overcome the intransigence and timidity of Congress and the President, there must be strong public support for personal accounts. Fortunately, there are strong coalitions of institutions and leaders, from liberal to libertarian, coalescing to educate the public as to how Social Security can be converted to personal accounts. Economic Security 2000, founded by Sam Beard (once an aide to Bobby Kennedy), advocates personal accounts to help the poor accumulate assets. The Third Millennium, representing Generation X, foresees the intergenerational crisis and the massive tax burden. Senators Bob Kerrey, D-Neb., and Patrick Moynihan, D-N.Y., recognize the crisis and have offered plans to create personal accounts. The Heritage Foundation and the CATO Institute, representing the conservatives and the libertarians, have numerous papers on the means and benefits of converting to personal accounts.
There will be strong opposition from the same groups that Franklin understood and Bismarck assuaged, people wanting more benefits from government. The unions and groups dependent on government subsidies will vehemently oppose. They will challenge the cost, the practicality, the anticipated results and the vagaries of the private markets. These issues should and must be debated.
However, the important debate is the continuing struggle for citizens to be free from political domination and manipulation. The Magna Carta, the Petition of Rights and the Constitution of the United States are attempts to codify the rights of citizens to be free and to prevent the rulers from seizing their property. The pay-as-you-go Social Security system, where Congress and the president bestow benefits to voters in return for maintaining power, is what Franklin and the Founders attempted to prevent with the government to take peoples' wages (property) and promise benefits (contracts) that can not be performed. The Constitution and especially the Bill of Rights are our written set of principles to protect the citizens' property and to enforce contracts.
Owning a personal account will prevent the egregious political manipulation that has occurred. It is essential that the public become directly involved in the Social Security debate. Congress and the President will not allow personal accounts without substantial public intervention. More important the future of democracy, the American Experiment, depends upon the Congressional and Presidential decisions on government's biggest program.
Assumptions: Retirement at age 67, Salary Scale 5.00%, inflation 3.00%, Bond return 6.00%, stock return 10.00%
|
"On
Opting Out"
Alan Greenspan
"My own preference is strongly in the direction of moving towards a privately financed system." Edward H.
Crane
"Social Security privatization is, nowadays, the single most important step toward a society of liberty. It combines personal freedom with widespread property ownership, and those are the pillars of a free society." |