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The Social Security (?) System

Social Security is likely the most debilitating chokehold that government enforces on people’s lives, by taking one of the largest bites out of your paycheck.

 

In simple terms, what Social Security boils down to is the government recognizes that it is unlikely that you will save for a rainy day, so they’ll do it for you, whether you like it or not. Unfortunately, there is considerable truth in that people don’t save for retirement.

 

The implementation of Social Security also drastically highlights the difference between the Aristocracy (Congress) and the peasants (us), because Congress doesn’t use the same Social Security System to cover their retirement – oh no, they have voted themselves a much grander plan, and they don’t even pay for it. Who could ask for better?  I’ll explain that disgusting situation at the end of this chapter.

What is Social Security?

Social Security all started with the Social Security Act of 1935, enacted under Franklin Delano Roosevelt’s “New Deal.”  Now I want to start with the basic premise that this legislation was illegal so we understand that fact before analyzing this program. There is nothing in the Constitution as developed by the Founding Fathers that even hints of this mammoth undertaking.

 

By 1933, at least 39 countries operated social security programs of some type to cover old age and/or unemployment. These 39 countries, including the Soviet Union, all had compulsory social insurance for old age, disability, and their survivors. These social security systems were more advanced than the American system would be until 1956.

 

Text Box: From an interview with Franklin Delano and Eleanor Roosevelt’s children, Elliott and Patty (prior to their death), regarding their father’s creation of the Social Security program, the following was revealed: 1. That participation in the Program would be completely voluntary, 2. That the participants would only have to pay 1% of the first $1,400 of their annual incomes into the Program, 3. That the money the participants elected to put into the Program would be deductible from their income for tax purposes each year, 4. That the money the participants put into the independent "Trust Fund" rather than into the General operating fund, and therefore, would only be used to fund the Social Security Retirement Program, and no other Government program, and, 5. That the annuity payments to the retirees would never be taxed as income. According to various sources, Franklin Delano Roosevelt (FDR) wanted—above all—to preserve American capitalism for himself and his class and was interested in social legislation only as a way to prevent social revolution because of the Depression. FDR was noted for his empathy for poor Americans. The resultant legislation was a modest solution. A more brazen president could have rammed legislation through his sympathetic Congress to establish a much more comprehensive and generous social security program, which included old-age insurance, survivors insurance, disability insurance, unemployment insurance, and a national health insurance plan, but he needed to throw in some good old political pragmatism. Let us not forget that these are issues we continue to battle about today.

 

FDR strove to establish “cradle-to-the-grave” social security. Gauging the political winds and taking into account the prevailing 1930s wisdom about economic policy, he weighed how much social security would be accepted by the American people, the economy, and the political power brokers, and pushed through the “most acceptable” and progressive law anyone could reasonably have expected in 1935.

 

As in any socialistic system (which is counter to the very premise of our free market economy), social insurance spreads the monetary retirement risk over all peoples ranging from the rich (who don’t need it but still must pay the freight) to prolific savers to penniless people, in the same way as life or automobile insurance. Today, the Social Security Administration administers three social insurance programs: retirement insurance (originally known as old-age insurance), survivor insurance, and disability insurance. These three programs are collectively called Social Security.

Current Status of Social Security

Most experts agree that Social Security is in considerable trouble, although a number of individuals dispute that fact.  According to many authorities, the system will become insolvent by 2041. Let’s be clear about this definition. By insolvent it means that government will only be able to pay 70% or 75% of the current benefits. Let us not forget that insolvency won’t occur for almost 40 years, so we have ample time to experiment with solutions before the pending disaster becomes reality.

 

Even if a solution is not desired this year or next, when the issue does raise its ugly head you will always have the analysis of the issues documented in this chapter to review at that time.

 

Over the years, the Social Security fund has been collecting monies from your paycheck to pay those people who have retired. But the amount of money being taken in eventually will not support all of these people. In the 1950s, there were 16 workers contributing to this old age fund for every worker who was drawing benefits. Today, the ratio is about three to one.  So how did the government miscalculate so badly you might ask?   A number of factors come into play.  For one, the birth rate has dropped significantly providing fewer workers to contribute. This is one of the reasons why you don’t see government clamping down on immigration because without immigration our population would actually be in downfall. For another, people are living much longer than was anticipated. Ironically, the people who need Social Security benefits the least, the well-off people, tend to live longer than the average poor person draining resources that in theory could be used to minimize the problem. But “Life ain’t fair” and these people paid the freight too, so they are fully entitled to reap the small harvest.

 

According to the Cato Institute, “If you think that paying the Social Security tax legally entitles you to benefits, you're wrong.  Despite the fact that your payroll taxes are called ‘federal insurance contributions,’ they are nothing like insurance policy premiums because there is no policy, no contract, and no legal claim benefits. Your payroll taxes are nothing special, just taxes. They're spent right away on checks to current retirees and items in the general budget, like the war in Iraq and subsidies for mohair producers.  The money that comes out of your paycheck buys you nothing, not even a right to retirement benefits. That's the upshot of the 1960 Flemming v. Nestor Supreme Court decision. Whether you're going to receive a Social Security check from the government at all depends entirely on the good grace of folks like Tom Delay and Ted Kennedy. Social Security provides no ‘guarantees.’ Every serious plan to make Social Security solvent involves higher taxes, smaller benefits, or both. You may feel that you've earned a right to Social Security benefits by paying all those taxes all those years, but all you've really got is a feeling, because the right, legally speaking, ain't there. Social Security is not secure. “

 

Social Security is not only used by 33 million citizens for old-age retirement, it provides benefits to 7 million survivors of deceased workers plus 8 million disabled workers and their dependants.

 

According to the experts, changes are necessary in order for the government to salvage the program. Over the years we have seen the percentage of our paycheck taken increase in leaps and bounds to fund the program. As of 2003, the maximum rate withheld from your check is 6.2% on all earnings up to $87,900. This amount is matched by your employer for a total of $10,900 – a substantial amount of our earnings power. And let us not forget, if your employer didn’t need to match your 6.2% contribution, that money would theoretically wind up directly in your pocket, so in reality you are paying the full $10,900. Few people are aware of this, but if you are self-employed, you are responsible for the full 12.4%.

 

With all of the ranting and raving about Social Security insolvency, there are many factors that can change any of the assumptions about the fund such as substantially increased population due to a sharp rise in the birth rate, or cures may be found for many diseases making people live longer, or the economy may grow in leaps and bounds adding billions and billions of dollars to the tax base which may partially or completely eliminate the problem.

So any drastic steps that may be tempting at this point in time may be premature.

 

In addition to Social Security, Federal, state and city income taxes, there are other taxes as of 2003 that are withheld:

 

q       Medicare taxes at a rate of 1.45% on all wages regardless of how much you make. For round numbers, let’s say you make $100,000. That means the government will take $1,450, a nice chunk of change.

q       Federal Unemployment (FUTA) taxes at a rate of 0.8% of the first $7,000 of the employee’s gross earnings for a maximum of $56.00.

q       State Unemployment varies by state. In New Jersey, the rate is 0.925% on the first $24,300 of gross wages for a maximum of $224.78.

Now the FUTA and state unemployment taxes may seem to be the proverbial “drop in the bucket,” but when you add up all of the payroll deductions and look at the big picture, we are being taxed into oblivion.

The Reality of Social Security

Too many people rant and rave that proposals to reform Social Security will hurt the poor, the very people Social Security is designed to protect, but let’s look at the facts:

 

q       Democrats and liberals point to the statistics that elderly poverty has declined from 35 percent fifty years ago to 10 percent today. First of all, everyone’s standard of living has increased drastically over that time, so naturally that number will decrease.  Secondly, most workers have more deducted from their paychecks for Social Security than for income taxes, leaving these people little opportunity to invest in 401 plans, mutual funds and even treasury bonds, where over time they are virtually guaranteed a higher rate of return.

q       The majority of Social Security money does not go the poor, but to the middle class and rich folks.  Why is that?  Because these people have made the maximum contributions (contributions – what a misnomer).

q       Poor people actually pay more into Social Security then they get back because 1) they are rarely college educated meaning they start paying earlier in their life, 2) many of these same people are unmarried making them ineligible for spousal benefits, and 3) they end collecting benefits for fewer years because their life expectancy is shorter.

Is Social Security a Good Old Age Investment?

Is Social Security a good financial investment? Let’s see what we get back from our investment. Assuming you have worked for 40 years starting in 1965, and your salary has gone from $15,000 per year to $65,000 per year, you would have paid roughly $2,000 per year into the system and your boss would have paid another $2,000 for a grand total of $160,000 over 40 years. Assuming you put that money into a savings account at 3% return per year, you would have $301,725.04 after 40 years - nearly double your money.

 

Keep in mind the significant difference between these two numbers, as they will come into play when we discuss privatization.

 

Now let’s look at how much you can realistically expect to get back from Social Security. For the benefit of doubt, let’s assume you receive the maximum of about $1,600 per month until you pass into that big golf course in the sky at the age of 76. That means you have been drawing Social Security for 10 years at $1,600 per month = $192,000. Therefore, if you had an option (which you don’t in this socialist government), retaining the old fashioned simple tax-and-pay method is not a very attractive proposition because you’ll lose your shirt, but alas, there is little we can do about it, or is there?

 

You might intelligently ask the question, why doesn’t the government do just that, put the money into savings accounts?  That’s a good question, but the government siphons off any monies that are not being paid to current retirees to pay off other bills, destroying that concept. So instead of earning interest on that huge pool of money, the government spends that money plus it actually borrows money from commercial lenders (mostly in Japan and China) to pay off the tremendous budget deficit of over $7 trillion. As the book is going to press, the administration has requested that the Federal deficit limit be increased again to just under $8 trillion to continue burying us under the out-of-control government expenditures.

Possible Solutions for Social Security

There are six possible solutions to the pending problem:

  1. Raise taxes to cover the potential deficit
  2. Reduce benefits in-proportion to anticipated payments
  3. Use personal accounts to increase Social Security monies
  4. Use partial personal accounts via savings accounts
  5. Replace Social Security in its Entirety.
  6. Start Social Security at child birth

And who are the people who are advocating the above approaches?  Raising taxes is the tried and true mentality of the liberal/Democratic axis, because it fosters bigger government and your dependency on the state.

And who advocates reducing benefits? Very few people!  That’s because its political suicide for either the Republicans or Democrats to even vaguely suggest that approach.

 

Lastly, Republicans, conservatives and business people advocate use of free enterprise techniques such as privatization (which I explain below) to reduce or eliminate the problem. Many Democrats rally against Social Security reform. Democratic Senator Jon Corzine of New Jersey, who made his fortune as CEO of Goldman-Sachs, doesn’t believe in applying free enterprise techniques to solve major problems. This is very confusing as I’m sure he didn’t make his money by insisting on leaving bad investments in his portfolio. He bellowed on the floor of the Senate implying that Social Security reform would be “a serious mistake in policy direction,” and “the proposals from the President’s Commission to Strengthen Social Security entail drastic reductions in future Social Security benefits,” and other claims. According to the Cato Institute, a right-wing think tank, “Many of Senator Corzine’s claims are mistaken and do not promote an informed debate regarding the future of Social Security.”  In other words, the Cato Institute was asserting that he didn’t know what the hell he was talking about. In defense of Senator Corzine, since a Republican proposed the plan, it is only natural that he would descend on the plan like a horde of locusts even if he were not well informed.

 

Now of the five choices, which plan do you think appeals to you the most?  Let’s examine each approach in more detail.

Raise taxes to cover the potential deficit

Currently, a taxpayer can retire at age 62 with partial benefits and at age 66 with full benefits. Starting in 2022, the age increases to 67.  Even with that minor age change because people live longer, there should be no gain in monies. Considering that the average man lives to be 74 and the average woman to 78, rising the minimum age will not help the situation unless we raise the age to at least 70 to cover the perceived debt, hardly acceptable to most people.

 

Currently, the cap on wage contributions is $87,900. Now if the upper limit were increased by $1,000 each year to $127,900 over the next 40 years, that change would add a relatively minor amount of money to the fund. But that approach is not fair if we don’t also increase the benefits for these people too, which in itself defeats the purpose. I refuse to accept the constant temptation by some people to keep taxing the “rich.”  The rich people are the 1% of people who make more than $292,000 per year and not the people who work very hard to make over $100,000 per year. Yes, I’m one of those people. I’ve made over $100,000 in a number of years, but I worked 50, 60 and even 70 hours per week during that time, on occasion until midnight or later to see projects through on time. Should I be penalized while most people work 35 to 40 hours per week and have ample time with their families and for recreation?  I think not!

 

We might try adding a smaller tax over the $87,900 limit – not at 6.2% but at a lower limit. Let’s say we tax all income between $87,900 and $125,000 at 2% and income between $125,000 and $200,000 at 1% without increasing benefits. But this is a relatively small amount of money since only 10% of taxpayers make over $87,900 per year.  Quite a few people are pushing the idea of removing the cap on wages. This would equate to the largest tax hike in history with an expected increase of $1.3 trillion in taxes over 10 years for 9.3 million taxpayers without any additional benefit to the people who are footing that bill. As an example, a person making $100,000 would pay an additional $1,240 per year.  Now if you lean towards the great socialist state, you will probably say, “Well, they can afford it.”  If you are a citizen who works damn hard to make that $100,000, you will be mad as hell at the prospect.

 

Suggestions have also been made that inflation/cost of living increases be eliminated. That is totally unacceptable as many retired workers can barely make it on their own especially with the rising costs of medications. In this case, Social Security has solved one of the problems for which it was intended. Poverty among senior citizens is down from 30% in 1960 to 10% today. But is the improved economic picture true because of Social Security or because people have more money due to the improved economy?

 

The one indisputable fact that people who continually ballyhoo increased taxes is that you are taking money out of the hands of the very people who may have better ways to save their own money through stocks or bonds, real estate or savings accounts. The more taxes you keep taking from the people the less that leaves for people to solve their own retirement predicament unless you are a big government liberal.

 

Therefore, raising taxes is definitely not the answer and is self-defeating.

Reduce Benefits In-Proportion To Anticipated Payments

If all else fails, the government will have little choice but to reduce benefits. But with people paying a large chunk of their paycheck, the Republicans and Democrats rightfully fear the backlash from the citizens, so this idea will never get past the “thinking” stage.

 

Reducing benefits is obviously not the answer.

Use Personal Accounts To Increase Social Security Monies

What does the term Social Security personal accounts mean?  The idea is that taxpayers would have the option to determine how some or all of the money they contribute to Social Security may be placed in savings accounts or invested in order to enhance their “portfolio,” in much the same way as investing in the stock market.   This is the ultimate form of  “privatization.”

 

Proponents of personal accounts argue that permitting workers to create personal accounts would better use the monies dumped in to the social security pot, where it gains no interest. That’s because the money is used to pay current retirees or the money is borrowed (“stolen”) by Congress to pay Federal bills to support their outlandish spending gaffes. The money is “invested” in Treasury bonds – Robbing Peter to Pay Paul, again.

 

According to the Cato Institute, “Personal retirement accounts would give each worker genuine property rights to his or her retirement savings. The money that goes into a PRA goes straight from your paycheck into an account that you own. It's not a promise; it's property. Instead of paying taxes for missiles and mohair, you get a tax cut that allows you to save and invest for your own retirement. And because what you save is yours by right, you can, unlike Social Security, pass it on to your loved ones when you die. With PRAs, you literally own the source of your retirement security, and it cannot be held hostage, whittled down, or bargained away by future Congresses.”

 

Workers would be permitted to create personal savings and investment accounts. Workers would pick a fund managed by a private investment firm (read “Wall Street”) from a list managed by Social Security. This would work in much the same way as the Federal employee thrift savings plan. As an option, for those Democrats who fear intrusion from the free market, minimize the potential risk by only permitting investments in indexed funds instead of investment companies. In that scenario, the risk and fees will be much lower.

 

According to one plan advocated under the Bush administration, workers would be permitted to invest 2.5% of those monies normally allocated towards Social Security, or about 40% of the total of the 6.2% now taxed (note that various proposals range from 2.5% to the full 6.2%). Under this plan, workers would manage their own investments until the fund reached $5,000. At that point, private investment companies would manage the account. It is estimated that over 75 years, the investment companies would make approximately $1 trillion in fees, so naturally Wall Street is salivating like Pavlov’s dog in favor of this plan.  In addition, critics of the plan argue that administering such as plan can be quite expensive.  But for the people who scream about the cutthroat capitalists on Wall Street making $1 trillion, then that must mean that workers will hopefully earn substantially more, like perhaps $10-20 trillion, so I don’t understand the problem.  Under another version of the plan, workers would be permitted to invest the full 6.2% the worker’s pay but not the employer contribution of 6.2%.

 

There is an inherent danger in this plan however. If the stock market went into the tank whereby the worker’s investment lost money, Social Security might be liable to pick up the pieces since the worker is guaranteed not to receive less benefits than under the old plan.  Over the last 60 years, the most successful investors have realized an 11 percent return on investment (ROI), so the likelihood of a long-term catastrophic drop in the market is very small.  What most opponents of personal accounts forget is that people already have a vested interest in the stock market whether they have invested in a mutual fund or even the stock market, so this new proposal is not radical in nature. In addition, if we witness another Black Monday that occurred in 1929, the collapse of Social Security will be the least of our problems. However, most Americans I’ve talked to do not want Wall Street involved in Social Security in any capacity.

Use Partial Personal Accounts Via Savings Accounts

Under another version of the plan, workers could invest the same 2.5% of the 6.2% of these monies into private savings accounts. A much better plan is to fully invest all 6.2% in savings accounts. This is a far more logical approach, as there is little risk as with investment accounts.

 

The monies gained from these tax free accounts would be used in part to pay social security benefits, relieving the pressure on the system. This all depends of course on how much money an individual invests over their lifetime.

 

There is one major difficulty with any of these capitalistic ideas. Let’s say that 50 million workers opt for savings accounts. That means the government would need to select 50 or 100 banks in which the money could be deposited at an estimated 3% interest. But that removes the money from the pool used to pay off current retirees. As we mentioned previously, for a worker who paid an average of $4,000 per year into the system, over 40 years the return should be about $300,000 instead of the $160,000 in payroll contributions. But why would the worker agree to the savings account plan if there were not some additional benefit to the worker?  How about splitting the difference between the worker and the government. Since the difference between the two numbers is $140,000, the worker would get $2,000 (instead of $1,600) per month on retirement and the government would retain $70,000 to help pay for the system. Then everybody is happy.

 

Opponents of the plan argue that the government would need to find $1-2 trillion to effect the transition from the existing to the new privatized system by raising taxes, creating a 1% national retail sales tax, or temporarily reducing benefits. 

 

Where does the $1-2 trillion figure come from?   To estimate the amount of money that would be needed, assume 50 million workers select the savings account option.  For the first year, the cost to Social Security would be 50 million times $4,000 per year or $200 billion. Yes, it is true that over the first ten years, the money needed to close the gap may approach $1-2 trillion.  Now why is that?  The monies for the 50 million workers would be moved from the government’s possession into a commercial savings bank. The money would not be returned to the government piggy bank until that person retired in order to pay that individual benefits.

 

But that’s not the answer.  Since we have somewhere between 20 and 40 years to resolve potential problems with the Social Security fund, we don’t need to jump in with both feet tomorrow.  To minimize the amount of money that will be lost to pay active retirees, use a phased system of offering savings accounts to citizens.  Every year, offer savings accounts to a small slice of the population range.  For example, in 2005 offer savings accounts to people from the age of 60 to 65.  The after 5 years, all of the monies gained from the savings accounts can be evenly split between the retiree and the fund, adding valuable assets to the pool.  Then 2 years later, offer the plan to people from 55 to 65, and so on.  In this way, the temporary drain on Social Security resources will be minimal, but the long-term gain will be substantial.

 

As one option on that plan, suppose we change the plan a wee bit and the worker gets two—thirds and the government gets one-third of the savings?  The worker will still get substantially more than they are allotted now. This could also add a considerable amount to the government coffers that they would withdraw as deemed necessary. Yes, initially they would likely take most of the money to pay current bills, but after 5 or 7 years as worker’s savings start to return to government coffers as these individuals retire minimizing the problem.

 

Even if we offered the plan to all citizens in one fell swoop, where will the $200 billion be found each year?  Personally, my solution would be to 1) close tax loopholes and 2) immediately go after the inept and corrupt defense contractors and reduce the defense budget by $100 billion and demand accountability from the military-industrial complex. That would solve the problem in a nutshell for at least the first ten years. Even if it requires borrowing small amounts of money, if the projected Return On Investment (ROI) would be substantially higher, this approach may well make this well worth the short-term deficit.

Advantages of Personal Accounts

Disadvantages of Personal Accounts

Replace Social Security In It’s Entirety

A completely revolutionary concept has been offered by hundreds of academics who suggest that the current Social Security system be scrapped and replaced by an entirely new system that draws on the advantages of the various concepts outlined previously.

This replacement process, known as the Personal Security System, would be accomplished in 3 steps:

 

1.      Replace Social Security contributions with a national retail sales tax. As stated previously, the average taxpayer pays about $4,000 into Social Security, so the national retail sales tax would need to recover slightly more that the $4,000 from each taxpayer.

2.      Eliminate Social Security withholding, as the new sales tax will be used to pay current retirees. Under this plan, the long-term problem of accruing sufficient capital for workers who retire 10, 20 or 30 years from now will be eliminated.

3.      An account would be set up for each taxpayer and that money invested in one, globally market-weighted index fund, providing the same rate of return for all workers. As with the other alternatives, workers would be guaranteed no less than the amount they would have received under the existing Social Security system. When the worker retires, his or her balance in the Personal Security System is sold off and converted into a pension plan that is indexed to inflation. The beauty of this approach is, although contributions are mandatory, at some as yet undecided ceiling level, the worker can say, “I’ve saved enough,” and cease payments.

In the final analysis, this approach has merit but is much too complicated. Therefore, it’s just not a very good idea.

Start Social Security at Child Birth

Former Treasury Secretary Paul O’Neill has suggested an entirely different concept for social security for American citizens.  He proposes that as soon as every child is born, the government invest $2,000 per year until the child is 18.  At that point, the child will have about $65,000 in his or her account.  The cost to the government for the 4 million children born each year will be $8 billion the first year, $16 billion the second year, on up to $144 billion a year after 18 years.

 

Without further contributions, assuming a 6% return on the money, when that individual retires at age 65, the nest egg will have grown to about $1,000,000.  There is merit in the approach considering that the cost of Social Security and Medicare in 2005 is already $750 billion.

 

To counter the fears of excessive profits being made by Wall Street or the perceived volatility of the stock market, to placate the single-payer “tax and spend” advocates, instead of investing the money place the $2,000 in a savings account at 4% interest.  After 18 years, the child would have $51,000 in the account.  Assuming 4% interest until the age of 65, the nest egg will have grown to $325,000, a vast improvement on the current system in which your money earns 0%, and more importantly it does not require any additional contributions from the taxpayer.

Social Security “Lockboxes”

Since it appears that President Bush’s much ballyhooed campaign to permit Americans to have privatized accounts within Social Security is doomed to the scrapheap of history, Republicans are trying to salvage their image by introducing legislation that attempts to rescue Social Security by proposing personal “lockboxes” so Congress can’t continue to steal from Social Security to fund other programs.   As opposed to the personal accounts concept in which the government might have needed to $1-2 trillion to fund the accounts, this idea does not create any new debt and would only use the existing funds flowing into the Treasury at about $85 billion per year.  Everyone recognizes that this bill does not solve the long-term insolvency problems with Social Security, but at least it’s a first step and prevents Congress from continual looting of the Treasury to fund many ill-conceived programs.

 

Other Countries Experience With Privatization of Social Security/Pension Systems

Of note, the Unites States is but one of many countries that are experiencing problems with their social security net. In Italy and Japan, the public pension debt is more than double their official federal debt.  France and Germany have public pension debts are four times as high as their official debt, while the United States public pension debt is about equal to the federal debt.

 

Let’s examine the experiences of other countries when they privatized their social security/pension net for their citizens.  In total, 20 countries around the world now have some form of private retirement accounts in order to alleviate the debt problem, including Great Britain, France, Chile, Mexico, Switzerland, Denmark, Sweden, Australia, Poland, and others. The experiences have been both positive and negative, but for the most part very positive.

Negative Experiences With Privatization

Great Britain: According to the American Prospect Online, a leftist think tank, the British have created a bloody mess since privatization was introduced into the British pension system during Margaret Thatcher’s reign in 1984.  One of the primary problems with the British privatization is the fee and charges to run private accounts can reduce pension lump sums by up to 30%.  Another mistake the British made was modifying the formula for basic state pensions. Prior to 1979, state pensions had risen in line with wages.  In 1979, that formula was changed so that pensions would rise in line with inflation, a far more costly proposition.  According to the article, the value of benefits will be reduced by 50% over 30 to 40 years.

 

The British government actually encourages citizens to opt out of the central government's State Earnings Related Pension Scheme (SERPS) into company or personal funds. Those who opt out of the state system receive a rebate from their payroll tax sufficient to finance a private pension at least equivalent to that which they would have been entitled to in SERPS.

 

As of 2005, Great Britain is now considering some rather drastic measures to curtail the pending shortfall of about 30 to 60 billion pounds in their fund.  According to Adair Turner, head of the government’s Pension Commission, university graduates may be barred from receiving their pension until the age of 70 while lower-paid workers could still retire at the age of 65 because of their anticipated lower life expectancy. Turner was quoted as saying,

 

“So we have to be sensitive to that when we put up the state pension age. For example, the person who starts work at 16 would be able to get something at 65. The person who went to university and started serious work at 23 is not going to get it until 70.”

 

Karl Marx would be overjoyed at this proposal as it fits beautifully into his “From each according to his abilities, and to each according to his needs” doctrine.  Slowly but surely, too many British politicians will continue propagandizing their socialist ideas to eventually obliterate the concept of hard work brings rewards.

Positive Experiences With Privatization

Chile:  Chile dumped its bankrupt social security system in 1981, and replaced it with personal accounts that are very similar to the Bush administration’s proposals.  Chile had a similar situation as the United States in that it would eventually owe more to retirees than the government could reasonably expect to collect in taxes from active workers.

 

Chile stopped collecting payroll taxes from the employer and employee and deducted a straight 10% from salaried worker’s paychecks.  That money is deposited in a retirement account managed by one of six private pension fund management companies. Since 1981, the fund has averaged 10.9 percent return as the money was invested within Chile.  If the money had been invested in the Standard & Poor’s 500 stock index, the return would have been 16.51 percent.

 

In retrospect, Chile has found that it’s very expensive to move to a privatized retirement system, that fund management by private companies can be fraught with danger unless closely scrutinized, but privatized pension funds can bring retirees much higher returns that can be expected from government control.  It should be noted, however, that as the funds have grown, administrative costs have fallen drastically.

 

Refer to: http://www.miami.com/mld/miamiherald/news/10686419.htm?template=contentOne oModules/printstory.jsp

 

Australia: In 1986, in an effort to address serious problems with the budget for retirees, a left-of-center government implemented a mandatory private savings plan called “Superannuation.” All workers are required to set aside 9% of their income in a fund of their choice. Even though school is still out on this young program, it is quite popular with Aussies.

 

Experts estimate that the average wage earner should be able to retire with two to three times the income they would have received under the old state-run system.

 

Refer to: http://www.heritage.org/Research/SocialSecurity/BG1149.cfm

 

China: China is one of the last communist regimes on the planet with the largest population in the world of over 1 billion people.  China’s social security system includes social insurance, a care and placement system, social relief and housing services.   Social insurance includes old-age insurance, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance. 

 

The old-age pensions consist of two parts: base pension and pension from personal accounts. How interesting.  Here we have the stalwart of communism investing in the stock market. The advent of personal accounts was started in 2001 and pays the recipient a 20% higher return than the conventional base pension.

 

Refer to: http://english.people.com.cn/200409/07/eng20040907_156193.html

 

In conclusion, the benefits of some form of privatization clearly outweigh any risks that may or my not surface.

Congress’ Social Security Plan

We all know how Congress (approximately equally divided between Republicans and Democrats) protects the little guy. They fight the battle of Capitol Hill to assure the taxpayer that there are adequate monies in the Social Security System so you can retire on an income just above poverty level (average $1,100 per month) to survive. That is assuming at the age of 66, you don’t have a huge debt of pre-Medicare medical bills and you are content to live on a diet of Alpo and bugs you may find in your backyard.

 

I wonder how the aristocracy will live on this Spartan budget after enjoying the frills of Congress after so many years?  Well, you need not be concerned because Congress has taken charge of that situation. When our elected representatives retire, they draw the same pay until they die, except that the amount may be increased by cost of living raises. And the total cost to each member is zero – zilch – nothing!  How fortunate, considering that Congress in 2004 raised their salaries by $4,000 to a level of $158,100. Congress has added $22,000 to their salaries over the last 5 years. Whoops, the fox is back in the henhouse again. That’s quite a jump from the first Congressional Congress which paid its members $1,500. It has been calculated that a number of members will realize $7 to $8 million in retirement pay before they die.

 

They enjoy other fringe benefits that you and I would envy, too. They pay $100 for their memberships to the House gym and Senate “Bath,” which is subsidized by the taxpayers. It has been suggested by some disgruntled citizens that if we yanked this plan fit for a king, and made retired Congressmen live on the same Social Security income with which we are destined, we would see some really fast changes in how it all works.  Indicative of just how disgusted Americans are with congressional royalties, in an unscientific survey of the American people, 84% said that Congress should not be permitted to set their own salary.

 

 

Conclusions

Make no mistake. The only rational approach is to use the free enterprise market to solve the problem. We have nothing to lose. The use of investment or savings accounts relies on the building block of the country, free enterprise, as opposed to the heavy-handed taxation mentality endorsed by the Democrats/liberals. If for some reason personal accounts don’t work, we have time to fix the problem, and we can always fall back on (Heaven forbid) the liberals plan to tax us even more and make us more dependent on the state.  However, in my discussions with numerous citizens, most Americans I’ve talked to do not want Wall Street involved in Social Security in any capacity, so the solution should eliminate that possibility.

 

Let us not forget that back in the days when Roosevelt initially proposed Social Security, people barely skimped by on a few dollars, and the liberal consensus was that the only way older people could be prevented from winding up in the poor house when they were too old to work was to forcibly take away some of their earnings for a rainy day.   Today, the average worker makes much more money, and should be smart enough to invest a portion of their earnings in some mechanism that will provide for their old age.  This is a necessity even with Social Security.  No one can live on an average $985 per month (that won’t even pay some people’s property tax), so in its current form, Social Security only provides for a small percentage of the needs of the elderly.

 

What is most amazing is that a number of newspaper columnists have suggested that the main reason Democrats fear privatization of Social Security is in the event that a bountiful harvest of monies is realized from the venture, it may tilt the political windmill and drive many fence sitters into becoming diehard Republicans.

 

As I was researching material for this chapter, I could not believe the number of negative articles and newspaper columns I reviewed rejecting the principles of free enterprise proposed for Social Security with classic leftist rhetoric. I was amazed at the inane arguments used by some of these writers to destroy the idea of personal accounts. One suggested that if the money were invested in government treasury bonds, then it would simply mean that the government would be up to its old tricks of “Robbing Peter to pay Paul,” and they would need to eventually pay that bill, but that’s not the case. What trickery!  No one has even vaguely suggested that idea. The money would be invested in the free market, in the stock market, or in commercial savings accounts, so the government wouldn’t be footing the bill for the interest, and instead be making money from the investment. How do these leftists think they have achieved their station in life, by principles of communism?  With all of its nuances and negative press, let us not forget that you achieved your lifestyle by applying good ol’ fashioned American capitalism.

 

One nationally syndicated writer, Paul Krugman, writes about a column a day in the New York Times and other major media outlets touting the dangers of privatizing Social Security.  After reading his daily columns, you might think privatization means the apocalypse is imminent. I wonder if his real fear is that privatization may make American more money destroying his leftist, socialist concepts.  The stupidity of all of these naysayer arguments is that all of the proposals are based on citizen’s participation on a voluntary basis.  So wherein is the problem?  Here we have the classic argument of the left telling me what I can do with my own money.

 

The issue is hotly debated on various television and news shows normally with one advocate from the right and one advocate from the left presenting their opinions.  When the right states that current proposals will make privatized accounts optional, the left counters with the statement that Social Security is sacrosanct – it is one of the few successful government programs - that is, even if you want to opt for privatized accounts, the left doesn’t want you to have the ability to exercise your freedom of choice.  I am sick and tired of people trying to tell me how to run my life

 

One of the greatest advantages of this utilization of the principles of capitalism via a form of personal accounts is that enormous amounts of money will be available to build America, that were previously deposited in the Federal bottomless pit, providing a massive shot in the arm for the American economy.

 

Reality dictates that because Social Security is such a complex problem cutting across every fabric of society, this issue will be supported and denounced by groups representing children, baby boomers and senior citizens, who are represented by the American Association for Retired People (AARP).  Therefore, since the country has 10, 20 or 30 years to find a fix, it is unlikely that the magic elixir will be found for at least 5 or 10 years, so we need not hold our breath in the meantime. As long as you can return to this article (which is updated daily), and the issue raises its ugly head prior to the next state or Federal elections, you will have this handy-dandy summary to evaluate the various approaches so you can decide for yourself.

 

If I was a wise American, I would assume that based on past government performance, there will be less money available to me when I retire than the government predicts, regardless of what innovative techniques are employed to rescue Social Security. Aside from Social Security, I would immediately investigate 401K plans and other investment tools and revise my household budget to make sure I have adequate money for my retirement.

 

The bottom line of the nasty dialog between the Republicans and Democrats is a fundamental fact.  Let’s assume for the moment that Social Security was abolished.  What would you do with the $4,000 average taxpayer contribution that is currently extorted from your paycheck?  Would you deposit it in an account where it gains no interest?  No of course not.  Well that’s how the government treats your Social Security money.  Even if the money is invested in simple bank accounts at 3% per annum, the average taxpayer will be able to retire on about $1,500 or $2,000 per month instead of the $1,000 people live on now.  Why would any sane individual contest that basic logic?

 

The clincher of all of this rhetoric is that raising its ugly head is the potential funding problems for Medicaid are a much more severe problem than Social Security will ever be.

 

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