A Simple Fix For Social Security?

Unless you’ve been living in a cave, you must be aware by now that Social Security is in big trouble. To those who know the real nature and history of this Ponzi scheme, the story is nothing new and has come as no surprise. It seems that the media and the general public however, have only recently become aware enough of the crisis to give it any real attention.

You have probably also heard by now of President Bush’s proposal to “fix” social security by partially “privatizing” it. This proposal is not only ridiculous in the sense that it will not fix the long term problem, it is also extremely dangerous. It would provide the government with an even more frightening amount of regulatory control over markets than it currently has and would inevitably lead to perverse and highly unpredictable distortions across the world’s capital markets.

It is not the purpose of this essay however, to discuss Bush’s privatization proposal. Instead, I wanted to look at a different proposal that has been put forth to try and fix our entitlement woes. This proposal has been advanced by Florida Democrat Robert Wexler of the House of Representatives. Mr. Wexler’s proposal is much more traditional and it is likely that we will see many more like it over the next several years. He calls it a simple fix for Social Security. The proposal can be summed up in two words: raise taxes.

Mr. Wexler’s line of reasoning is quite simple really. We don’t have enough money to fund Social Security so all we need to do is get more money. We can do that easily by raising taxes, only on the rich of course, and that will ensure that we can continue to provide income and health care services to all our retirees until the end of the world. He has even given the proposal the name of “The Social Security Forever Act.”

The Act proposes assessing a 3 percent payroll tax that would also be matched by employers, on all incomes over $90,000. Doing this, as the name of the Act implies, would supposedly provide all the funding needed to meet Social Security outlays forever. This is supposedly “fair” because as things stand, seniors are being forced to pay for the Bush tax cuts which Wexler claims have benefited only the wealthy.

This plan is so full of holes that I don’t even know where to start. First of all, this is the solution that has been offered to fix virtually every fiscal crisis that has beset our nation since before the New Deal. We are always told that the problem is a lack of funds, the solution is to tax the rich and that doing so will put an end to the problem forever. History tells us that none of these assertions are true.

The problem is not a lack of money. The problem is out of control spending. Money taken in for Social Security is not set aside for that purpose and saved in order to meet future outlays, rather it is spent on any number of current boondoggles. Giving the government 3 percent more in taxes will not provide any significant money for future payments because we can be almost certain that that money will be spent on something that at the time seemed more urgent. Instead, we will be presented with another tax increase further down the road and then another, and another, all with the promise that this is the last one and that it will fix the problem forever.

If an improvident man is deeply in debt, and unable to make his payments, what friend would say, “hey, the problem is that you don’t have enough money. Here, take some of mine and then the problem will be solved.” Only by controlling his spending can such a man right his financial ship. Without significant cuts in government spending, accompanied by controls on future spending increases, we can be certain that expenditures will always rise to exceed income, and that the government will always be searching for new ways to get its hands on more of our money.

This is exactly how we have gone from a once competitive, low tax nation, to the bloated, high-tax welfare state that we have today. Also, these tax increases are NEVER confined only to the rich, and as more money is needed it is the middle class that finds itself increasingly burdened. This is the history of the U.S. income tax to a T. Aside from it’s inability to fix the problem, such a tax increase would also serve to further hamstring an already injured U.S. economy by increasing labor costs for employers and by reducing real wages.

But we still have not yet touched on the real problem with the Social Security system. To understand what the problem is it is important first to understand its nature. Social Security is a Ponzi scheme. Such schemes are named after Charles Ponzi who conducted an investment scam in the 1920’s. He promised investors 50% interest in 90 days. For a while he delivered on his promises. He did so by paying old investors with money he got from new ones. This scheme works well as long as incoming investment exceeds promised payouts, but once the money stops coming in the whole pyramid comes crashing down. What it amounts to is a transfer scheme where those who get in first gain handsomely at the expense of those who come late to the party. This scheme is inherently insolvent from the moment it begins, but that insolvency only becomes visible once new investment slows down.

While illegal in the private sector, this type of scheme is obviously okay when done by the government because that is exactly what Social Security is. It is not a real pension fund or a form of insurance, since pensions and insurance are funded by those who eventually use them out of current consumption, just like most working people try to do with a 401k or IRA. Instead Social Security is a giant transfer scheme where those who got in first benefited, but those who come later on, who also have paid into the system their whole lives, will eventually be left holding the bill and receiving nothing in return.

As long as those in the workforce (from which the money to fund the plan was taken,) were substantially more numerous than the aged population, the scheme worked fine. Not only could the government pay out promised benefits, but it found that it had a tidy sum left over which it could then spend on whatever it wanted. Now what we are seeing is that not only has the government spent itself into trouble by plundering the supposed “Social Security trust fund,” it also has a demographic problem on its hands. Once the baby boomer generation starts retiring in mass is when things really start to get ugly, and it doesn’t get any better form there.

So what’s the real solution? Scrap the entire system. Yes, that’s right, kill the entire thing. Reveal it to the public as the inherently bankrupt, Ponzi scheme that it is and get rid of it. It should never have been started in the first place. It represents demagoguery at its finest. It would perhaps be prudent to provide a short grace period, say five to seven years to allow those who were and are depending on it to make other arrangements, but then all payments would cease.

I realize this plan would result in a decreased standard of living for many people and would probably provoke outrage among Americans who would feel they had been tricked and swindled. Rightly so. They have been taken in one of histories greatest swindles. They have fallen prey to the siren song of socialism, that deceptive tune that tells us we don’t need to take responsibility for our own lives, or our own retirement. But despite the fact that it would be a painful transition, it is a transition that must be made. The whole thing is built on false hope and a lie. Prolonging that hope will only result in greater pain later on.

Sadly you will probably never hear this kind of proposal from a politician, (except maybe from representative Ron Paul of Texas.) Why? Because to propose any cut at all in Social Security payments, let alone outright abolition, amounts to political suicide. Too many people depend on it and feel entitled to their “fair share.” A recent CBS news poll produced the following results:

SHOULD THE GOVERNMENT PROVIDE A DECENT STANDARD OF LIVING FOR THE ELDERLY? Yes 80% No 16%

It is this kind of entitlement mentality that makes it virtually impossible to make any real progress in solving the Social Security crisis. I fear part of the problem is that many people who voted in the poll didn’t read the question as it is stated above. Instead they read something like: SHOULD THE ELDERLY HAVE A DECENT STANDARD OF LIVING?, and they thought, “of course they should.” They just assume that the only way for the elderly to have a decent retirement is for the government to provide it.

What the question should really say is “SHOULD WORKING PEOPLE BE FORCED BY THE GOVERNMENT TO PROVIDE RETIREMENT MONEY OUT OF THEIR OWN POCKETS FOR EVERYONE WHO WANTS TO RETIRE?” This is much more accurate. You see, the government can’t provide anything unless it takes it from someone who produces it. Government can consume, use, transfer or destroy but it does not produce. This is why the transfer process is so insidious because it serves to cover up the theft that is taking place and makes it seem as if the government is actually paying money out of its own pocket. You get a government check in the mail signed by a bureaucrat that draws money from a government bank account. How different would it feel if each check you got was a personal check that had a stranger’s name, address and phone number on it and when you cashed it, money was drawn out of John or Jane Smith's personal account?