Social Security is a Ponzi scheme (Part 10)

Milton Friedman – The Social Security Myth

Uploaded by on Mar 5, 2010

Using Social Security as his prime example, Professor Friedman explodes the myth that the major expansions in government resulted from popular demand. In a speech delivered more than 30 years ago, he directly relates this dynamic to today’s health care debate. http://www.LibertyPen.com

Uploaded by on Jan 8, 2009

Professor Williams explains what’s ahead for Social Security

 

Governor Rick Perry got in trouble for calling Social Security a Ponzi scheme and I totally agree with that. This is a series of articles that look at this issue.

Social Security Private Option

by Michael D. Tanner

This article appeared in the Washington Times on January 22, 2010.

Could it be time to put Social Security reform back on the table? That would seem to be a bizarre question, given the spectacular failure of President George W. Bush’s attempt to reform the troubled retirement program. Yet, none of Social Security’s problems have gotten better during the intervening years.

Social Security is the largest government program in the world, accounting for 23 percent of the federal budget. The Social Security tax is the largest tax the average American family pays. Indeed, nearly 80 percent of Americans pay more in Social Security taxes than they do in federal income tax. And, millions of seniors depend on Social Security for their retirement income.

The program is unsustainable. It cannot pay future benefits without drowning our children and grandchildren in debt and taxes. Social Security will begin running a deficit by 2016, just six years from now. In theory, the Social Security trust fund will pay benefits until 2037, which should serve as cold comfort to today’s 31-year-olds. But that figure is misleading because the trust fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs. Even if Congress can find a way to redeem the bonds, the trust-fund surplus will be exhausted by 2037. Overall, the amount the system has promised beyond what it can actually pay now totals $17.5 trillion. Yes, that’s trillion with a T.

[S]tudies show that long-term investment remains remarkably safe.

Equally important, workers still have no ownership of their benefits. This means that workers are left totally dependent on the goodwill of 535 politicians to determine what they will receive in retirement. Low- and middle-income workers are still unable to accumulate a nest egg of real, inheritable wealth. And younger workers still receive a dismal rate of return on their money.

If Social Security’s problems haven’t changed since the Bush years, neither have the possible ways to fix those problems: Raise taxes (the Social Security payroll tax would have to be nearly doubled to keep the program afloat), cut benefits by as much as 25 percent or allow younger workers to invest privately.

We could always raise taxes or cut benefits enough to bring the system into balance. Some have suggested removing the cap on income subject to the payroll tax. But while that would be the largest tax increase in U.S. history, at least $1.3 trillion over the first 10 years, it would increase Social Security’s cash-flow solvency by just seven years. Raising taxes or cutting benefits will make an already bad deal worse for younger workers, many of whom will end up paying more in taxes than they receive in benefits. And raising taxes will do nothing to fix the fundamental problems of ownership, inheritability and choice.

The only workable solution still is to allow younger workers to invest privately a portion of their Social Security taxes through personal accounts so as to take advantage of the higher returns earned through investment in real assets, and offset the reduction in government benefits that will be required to bring the system into solvency.

Critics undoubtedly will point to the collapse of the stock market in 2008 and suggest that private investing is just too risky. However, studies show that long-term investment remains remarkably safe. If workers retiring today had been allowed to start privately investing their taxes 40 years ago, they obviously would have less money than those who retired a couple of years ago, but they still would have more than Social Security promises. Remember, someone retiring today would have begun contributing to his or her retirement account 40 years ago, when the Dow was at less than 1000.

Michael Tanner is a senior fellow at the Cato Institute and author of Social Security and Its Discontents.

More by Michael D. Tanner

Not every worker would want to take on the risks and volatility of private investment. Some might prefer the political risks of today’s system despite its looming insolvency. But that’s why personal accounts have always been – and should continue to be – an option. Those who want to remain in the current system should do so, but those who wish to invest a portion of their money privately should be given that choice.

Not surprisingly, a great many would do so. A survey taken last year by Sun Life Financial at the nadir of the market’s decline found that 48 percent of American workers would opt out of Social Security even if doing so meant the loss of all future Social Security benefits (something far more drastic than is being proposed). Among workers younger than 30, the number wanting out of Social Security was a startling 59 percent.

Today’s conservative leaders might want, understandably, to stay far away from any initiative associated with Mr. Bush. Yet no one who aspires to political leadership can ignore the need to reform entitlement programs, including Social Security. Those who are willing to do so in a way that gives workers more choice and more control over their money may find themselves doing something that is surprisingly popular as well as good public policy.

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