Social Security 70 Years Too Old
When President Franklin Roosevelt signed the Social Security Act on August 14, 1935, the life expectance of an American was 62 years. The solvency of Social Security depended on many folks dying before they could collect it. That is the reason SS provides a positive return to those who live to collect it.
by Fred E. Foldvary, Senior Editor
But those days are coming to an end. Folks are now living to 80 years of age, and there is a wave of babies born after World War II who start turning 65 starting five years from now, and then they will drain the trust fund of SS until it goes bust. Then what? Either benefits are cut, or more revenue sources are taxed or borrowed.
As folks live longer, the return on those who live to collect it decreases. The expected return in the future is about one percent. The real long-run return on the stock market is seven percent. All workers would be much better off with private accounts than with Social Security.
So why are people opposed to privatizing Social Security? Those who oppose privatization either don’t understand it, or else they are solidarity-seeking state socialists who love government and hate individual choice. They don’t wish to admit this, so they make up phony arguments against providing individual choice. (See, for example, the report Selling Us Short at www.thetaskforce.org.) Here are some common myths:
1. That SS lifts folks above poverty. False! The money was taken from them in the first place. If the same money were invested in private accounts, the retired would be much richer.
2. Keep SS because it also provides insurance. No! The insurance aspects can be split off into a separate program, or privatized. It is not a sound excuse to preserve the retirement part.
3. Private accounts would not be adjusted for inflation, while SS is. False! Privatization can adjust for inflation either with stock-market and commodity investments that increase more than inflation, or with inflation-protected bonds where the investment stays adjusted up for inflation.
4. Private accounts would not provide a lifetime income, while SS does. False! Privatization can and should convert the retirement funds into an annuity that would provide lifetime income.
5. Private accounts do not provide benefits to heirs and survivors. False! Private accounts provide more benefits, since the total amount is private property transferred to heirs, and private plans today do offer insurance to survivors.
6. That private accounts would force folks to invest in companies they feel are morally bad. False! There are today ethics-based “socially responsible” mutual funds that avoid investing in vice-based or war-based outputs. Or one may invest in treasury bonds. These choices can and should be included in privatization.
7. That private accounts would have large administrative costs. Wrong. Today one can obtain professionally managed large accounts for an administrative cost of one percent of assets.
8. That SS provides greater benefits than private accounts. Ridiculous, since even bonds provide a higher return than SS.
9. That privatization is a risky gamble. False, a misunderstanding of financial markets. During a 45-year time interval (age 20 to 65), stock-market averages consistently rise. The portfolio should become more conservative as one approaches retirement. There would also be an option to invest only in inflation-protected treasury bonds, which never lose value.
10. That there is a huge transition cost to privatization, which would require huge borrowing and increase interest rates, causing a depression. Not if it is done correctly. The privatization should begin with individual accounts funded with treasury bonds. Government would not need to sell bonds to the market, because the bonds would be directly deposited into the private accounts. The increase in government debt is offset by a decrease in future liabilities to pay social security benefits. Privatization does not increase government liability, but only shifts it in time.
The fact that opponents of privatization have to make up myths shows that they do not have a good case. At 70 years of age, Social Security is unsustainable. It creates poverty and depresses economic growth as earnings get transferred rather than invested. Social Security is a statist monster that needs to be humanely expired. It was a bad idea in the first place.
-- Fred Foldvary
Copyright 2005 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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