Wednesday, January 05, 2005

A New New Deal: Part I

It's About Time...

I am not an economist. In fact the only real economist I know thinks of me as a regular dunce and has called me so in a major metropolitan newspaper. (More on that later) If anyone had any doubt that President George W. Bush is a man of action (and ideas) then you have been holed up in a cave for the last four years. The President has bravely stepped into the deep end of the pool of American economics with a pair of radical proposals that would have even Ronald Reagan hollering for a life preserver. As if remaking the Islamic world into a democratic bastion wasn't enough Bush has not only reached out and touched the third rail he has grabbed it firmly with both hands.

Social Security reform has always meant raising taxes or raising the retirement age. This was, of course, because it was the politically safe thing to do. Because AARP crowd is historically the single largest bloc of voters it was considered political suicide to even broach the subject of fundamental change to Social Security. Personally, I would not call the President's modest plan of allowing younger workers to direct a portion of their FICA withholding into private retirement accounts as fundamental reform - it's more like advanced tinkering. Amazingly the WWII generation seems to understand that the Social Security of the FDR era can not be sustained as the status quo. Bush did well with the older generation in his re-election bid. I think the President called this aquiring "political capital".

The opponents of the President want us to ignore basic demographic facts so they can pretend to be the key masters of Al Gore's famous Social Security lockbox. No such box exists. At the time FDR put Social Security into place the ratio of workers to retirees was around 40:1. Today it is 3:1. It won't be long now until it is 1:1 and soon enough it will reach into negative territory. Compounding the worker to retiree ratio is the rising life expectancy of all Americans. Originally the retirement age was set just a few years shy of life expectancy. As a society we are fast approaching a life expectancy of over 80 years. It's hard to understand how anyone can look at these numbers and not be concerned with the future of this program and all the retirees it is designed to support. Something has to be done. My fear is that Bush won't go far enough.

The dirty little secret is that a fully private system would be a smashing success and Washington (and many other govenmental entities) know it. I say this because right now many political office holders, municipal employees and various govenment agencies already have such a system and the results are nothing short of amazing. These fortunate few pay no FICA taxes the way the rest of us do. They also "own" their retirement plan, Uncle Sam owns yours and mine. With these private accounts if one should prematurely die their families get the money. Social Security pays $256 death benefit and... No, wait, that's it. One municipal worker with just over 20 years in boasted about the nearly 3 million dollars in retirement money that awaited him. He pays no Social Security taxes. This was accomplished with a modest investment portfolio that relied on the power of compounding interest and the long term growth of the stock market.

Social Security is essentially forced savings, this is not arguable. The problem is we are forced to save it in Uncle Sam's bank account not our own. Not only is this fundementally unfair it's economically stupid. President Bush has called for his own "New Deal" and he calls it the "Ownership Society" and I personally like the sound of that.

Next: The New New Deal: Part II - Real Tax Reform