Taxing Times - Sept. 21, 1995
A41 at MDBE.COM
Thu Sep 21 14:41:00 MDT 1995
TIME TO PRIVATIZE SOCIAL SECURITY
Commentary (c) by Steven D. Laib JD, MS
When he Social Security Administration and its associated "trust fund"
were created by the Roosevelt administration, it was in the wake the stock
market crash of and the associated Great Depression. The fact that people
who had speculated in the stock market and lost their life's savings was a
major factor in promoting the idea that saving for the future was not
something which could be counted on in a free market. If one could lose
that much money that fast, there was no safety in private institutions. The
only answer, many thought was to put the matter in the hands of the
Congress, ever the master of the quick fix needed some way to fund the
lives of older people who were no longer working, and did not have the
financial reserves to pay their way. They took the easy way out. They took
from the working people and paid it to those who were working no longer.
The demographics were good at the time, the economy could afford it and
with the retirement age set at 65, there was no problem with having too many
This last item was of major importance to the congressional scheme. In
order for there to be enough money for the system to work, there had to be
enough money coming in, and not too much going out. In the 1930's and '40's
before the wide spread use of antibiotics, without the means to perform open
heart surgery, with heart pacemakers not yet invented and many other
therapeutic techniques in their infancy or not yet conceived of, relatively
few people lived to collect large amounts of benefits.
What Congress ignored, as did the Presidency, and what they have
ignored ever since, was the fact that the system was potentially unstable
from the demographic context. While modern medicine was not yet there, the
signs were on the way. People had been living longer since the turn of the
century, and it was obvious that the trend was continuing, what with the
rise of automation and the trend away from heavy physical labor as the
staple of the working public.
Congress has continued to ignore changes in the demographics ever
since. Their quick fix approach has brought us increases in the FICA tax,
and the addition of the Medicare tax. It has delayed, but not solved what
was a looming problem. No one wanted to deal with it straight up and
promote the obvious answer. Get rid of the transfer payment system before
it was too late.
What is so unfortunate about this is that we need never have arrived at
this juncture. With the advent of federal deposit insurance following the
depression, it would have been possible for a form of directed self savings
be instituted at the outset. Working people could have contributed to their
own savings in an insured account while at the same time contributing to the
retirement of those people who had not had the time to contribute to the
plan while working themselves. These original recipients would gradually
phase out and be replaced by people who had been saving under the plan ever
since. Tax increases would probably not have been necessary.
A system such as this has been in place in Chile for some time, and has
been declared an unqualified success. The healthy economy has made for high
employment and the savings rate under their self funding retirement has made
it possible for greater amounts of capital to be available for lending to
business which has sparked growth, employment and more savings. And just
think if all of the money paid into the social security system over the
years had been real savings, what a difference it would make to interest
rates when you consider the increase in the amount of loanable funds.
One recent proposal which has been making its way around congress has
been the "American Dream" savings account (ADA); kind of a glorified IRA.
It would be a voluntary, after tax, account which the account owner could
use for retirement, home purchase, education or possibly other purposes.
Its earnings would be tax free. At last word this account would be limited
to $2,000 per person per year.
This is a good idea, but it does not go far enough. Under the present
situation the young person who is looking forward to major expenses which
this kind of account could help fund is taxed too heavily to make it as
useful as it might be. Without a cut in the level of taxes which one has to
pay, many of us will find that there will be no money to put into this
account. Some people will be forced to choose between the different
benefits of an IRA vs. an ADA with no appreciable gain in savings. This
would be counter productive.
One information source, which this column believes to be reliable,
recently talked about a conference which purportedly involved the source,
Hillary Clinton and Ira Magaziner at the time that the Health Care Bill was
making its way through its formative stages. The gist of what happened was
when they two government representatives were asked about the possibility of
using medical savings accounts for health insurance purposes, the source was
told that the public was not smart enough to make good decisions about their
own health care, and that the hand of government was needed to control the
process. It is almost certain that the same view of retirement savings
pervades the hallowed halls of many a government office today.
It there a good reason for this? Of course not. The public governs
its affairs pretty well over all, when its given the chance to do so and the
information needed to make the decisions intelligently. The reason, then
can be traced back to nothing more than the desire for greater levels of
government control and greater numbers of employees to exercise that
control. Never a good idea where the freedom of the individual citizen is a
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