Thinking Outside the Box!
Dr. Chuck Ormsby
Thinking
Outside the Box!
Dr. Chuck
Ormsby
>>Valley Patriot>> |
Social Security:The Big Lie
Around 1960, I had a high school assignment to prepare and give a 15-minute presentation on a topic of my choice. As is common for young students given such a daunting task, I came home and looked for guidance at the family dinner table. My dad, who was a senior executive at the John Hancock Life Insurance Company, suggested I speak on the coming insolvency of the Social Security system. “What?” I said. My dad went on to tell me that everyone, by law, had money taken out of their paychecks to fund their retirement. Being young and naïve and not yet fully grasping the evils of compulsion, I said, “That sounds like a good idea.” “Well, there is one little catch”, he warned. “Pray tell father”, I said, “What could that be?” (Actually, I didn’t speak like that, but it does effectively convey my innocence at the time.) My dad went on to explain that, while everyone thought their money was being saved for their retirement, it wasn’t. In fact, the expected retirement payments were just government promises and they might never be paid. Even if the government tried to keep its promises, the system would eventually lead to bankruptcy: Either the workers would be bankrupted by the required payroll taxes, or the retirees would see reduced benefits that were well below what any respectable life insurance company would have paid out. Armed with a mountain of data, charts and graphs pulled together by the highly paid economists at John Hancock, I went off to class and gave my presentation. After I finished, my classmates appeared to be stunned … probably because it was the most boring thing they had ever heard. My teacher had quite a different reaction. She said something like, “No, that is not possible. Everyone knows that Social Security is a safe and wonderful program and it will ensure that everyone will live happily ever after. Now, please sit down.” I think the John Hancock economists got a C- or a D+ on “my” ninth-grade presentation. My teacher’s response was understandable in 1960. But it is inexcusable today, especially for those actively engaged in the Social Security reform debate. While the nuances of Social Security can be complex, the fundamentals are very simple. Here are the facts: * There is no money being saved for you. * Where the number of workers per retiree used to be 42 to 1 (1940), today it is 3 to 1, and by 2050 it will be down to 2 to 1. Every worker will be supporting themselves and ½ of a retiree. * Initially, Social Security taxes were 1% of the first $3,000 of income ($30 maximum tax). Today they are 12.4% of the first $87,000 (or $10,788), an increase of 35,960%. * While it’s a bad deal for almost everybody, those who live the longest get a better deal. Those who die young really get slammed. Result: the poor and minorities, who die younger, get the worst of a bad deal. So much for compassion for minorities. * The younger you are, the worse it gets. Payroll taxes will grow every year and sap your financial strength. * Social Security’s effective return today is around 2½ %; and even that cannot be sustained due to demographic trends. * The bad deal is becoming obvious … Reality is setting in. There is only one silver bullet. We must stop draining the economy of its strength through taxation and start boosting and harnessing the economy by reinvesting and building capital assets. More investment means greater productivity, higher real wages, more jobs, more goods and services, lower costs, and a higher standard of living. This is not just one of several available options. It is the only option. Every other approach suppresses growth, reduces our overall wealth and makes success impossible. There is no way to steal what we need … it must be earned. So how do we do it? First, those who have already retired or are near retirement have depended on the promise of Social Security. Promises made must be kept. While society has an obligation to fulfill its promises to current or near retirees, it does not owe them retirement payments that grow in real terms year after year (adjustments for inflation, yes, but not increases that exceed inflation) Currently, Social Security payments are indexed in a manner that reflects increases in real wages and productivity. With this scheme, workers entering the workforce would receive 60% higher payments in retirement (in real terms) than current retirees. This sounds great but, of course, this is just another reason the current scheme is failing. Workers will never see these payments. They are a mirage. This leads us to the First Fix: We must tie current benefit increases to inflation, not inflation plus productivity increases. This protects seniors (no loss of current benefits in real terms), but gives future generations some breathing room. Next, we also need to use the power of our free economy. Instead of the anemic 2½ % return artificially maintained by Social Security (prior to its inevitable crash), we need to harness the historic and reliable 8-10% annual growth seen in private investment markets. To take advantage of this, we need to institute our Second Fix: Let our workers, who voluntarily choose to, put a significant fraction of their Social Security “taxes” into private accounts. Real ownership … not government promises. How does putting these “taxes” into private accounts help? That’s easy: While it takes 28 years for a dollar to double at 2 ½ % compounding, that same dollar grows to over $11 when invested at 9%. The more than 5-to-1 advantage of private investment over the anemic “return” of Social Security is only the beginning. There are several other key effects: * With the huge influx of investment capital from private retirement accounts, productivity will grow and real wages will increase … thus further increasing retirement savings and account growth while stimulating economic expansion * Since economic growth will be faster, the private investment markets will sustain higher multiples (e.g., higher P/E ratios for stocks) than currently exist and thus, the portfolio values of current or near retirees will be substantially boosted (a significant payoff for the modest concession of seniors to accept inflation adjustments only). How do we continue paying current or near retirees the inflation-adjusted Social Security payouts we owe them? First, note that this is a short-term problem, not a long-term one. Those who chose to participate in private investment accounts would forego an age-dependent percentage of what they would otherwise be owed under Social Security. Thus, out-year liabilities would be drastically reduced and the shortfall, which could be financed with Treasury Bonds, would be substantially diminished. For example, a young worker in his early 20s, who hasn’t paid significant Social Security taxes and who chose to divert 50% of his Social Security taxes into private accounts, would give up half of his “promised” benefits. Older workers, who have already paid substantial Social Security taxes, would be guaranteed the level of benefits they have already earned. Their decision to invest some percentage of future Social Security taxes, would just lead to a commensurate reduction in benefits, with no net loss. The payoff of this approach is huge. A worker investing $2000 every year starting at age 20 would retire at 65 with an investment account worth approximately $1,060,000, instead of a Social Security promise of approximately $163,000 (if he lives to collect it). He will own the $1,060,000. It will be his. If he dies a year later, the $1,060,000 is still there for his family. Minority, immigrant and poor families can acquire real wealth. People figure this out pretty quickly. When Chile instituted a plan like this in 1980, about 25% participated. Participation has now increased to 90%. But there is a downside. It will be a nightmare for Nanny-State Democrats who will no longer be able to run the plantation. At last, they will need to find a real job.
*Send your comments to ValleyPatriot@aol.com |
The
Apollo 13 astronauts, with the help of skilled NASA and
corporate engineers, overcame the problem and in a few
days returned safe and sound. It will take more than a
few days to rectify the Social Security mess brought to
us by Government planners.