Sunday, June 05, 2005

Friedman on Social Security

Milton Friedman has never liked Social Security. He never liked Ponzi schemes either, but then I am being redundant. To my dear mother's generation Mr. Friedman is dealing in heresy. This is largely because this multi-decade old scheme hasn't yet peaked and begun the inevitable collapse that characterize all such frauds.

Friedman was calling for privatization of Social Security in the early sixties. Barry Goldwater made it a campaign issue in the '64 presidential sweepstakes - and lost in a landslide. We hear now (according to mainstream media polls) that President Bush is failing to convince America that private accounts are a good thing. What the media will not report is that private accounts for Washington politicians and many governmental entities are paying huge dividends that dwarf the measly Social Security checks my mother receives. These fortunate few pay no FICA taxes and "own" their retirement savings that can be ultimately passed on to their heirs.

The tipping point for this Ponzi scheme is still a ways out there so the crisis that President Bush talks about feels a million miles away. The Democrats are actively endorsing all attempts to label the impending collapse of Social Security and perhaps the economy itself a counter-scheme by the Republicans to steer even more money to their Wall Street friends. It is dishonest and frankly dangerous to keep ignoring the 800 pound gorilla in the room. Why is OK for elected federal officials and municipal New York City sanitation workers the enjoy private accounts and not the rest of us? The Democrats love to cite the sacred trust Social Security binds us to, the beloved "lock box", the guarantee we will all enjoy. What good is that guarantee if the government can't pay it's IOU's. Why is the insurance industry not facing the same crisis as baby boomers age and payouts to beneficiaries accelerate? Friedman addresses this here:

"Everybody goes around talking about the problems created by the declining number of workers per retiree," he said. "How come life insurance companies aren't in any problem?"

The question is quintessential Friedman: simple, accessible and formidable.

Life insurance companies take premium payments and invest them in factories and buildings and other income-producing assets, Friedman said. These accumulate in a growing fund that can then pay benefits. Social Security, by contrast, operates pay-as-you-go, collecting payroll taxes from workers that immediately go to pay retirees.

The biggest misconception about the program, he argues, is that workers believe it works like insurance, with the government depositing taxes in a trust fund.

"I've always thought it disgraceful that the government should be essentially lying about what it was doing," he said.

Isn't this true? How can the Democrats argue against the truth? Sorry, that was a silly thing to say. There is no "lock box" there is no "trust fund", what we have are empty IOU's and empty promises. When the collapse comes the govenment that refused to deal with this now at President Bushs' urging will be taking benefits from retirees AND taking higher taxes from wage earners. I commend President Bush for having the guts to take on this issue. President Clinton said many of the same things Bush is saying, but just like that little issue of regime change in Iraq, Clinton did essentially nothing.

In the end we are foolish not to be planning for our own financial health in retirement. Owning a home, contributing to a 401K and IRA's are a few things we can do to give us fighting chance when Social Security fails us. Friedman, Goldwater and President Bush may be brushed aside on this issue but we can't say we weren't warned.


Timothy Birdnow said...

Social Security will go belly up unless we spend 3 TRILLION dollars NOW to fix it! If we do nothing, the S.S. defecit will grow to 75 TRILLION. This is way past crisis stage.

There has been an insane scheme going around which would a.cancel the Bush tax cuts and b.extend withholdings to all income without a cap. This would, of course, completely wreck the economy as the wealthy seek to shield their wealth rather than build it. The loss in revenue due to the economic depression which would follow would do more to kill Social Security than would simply ignoring the problem.

Much as I hate to lose the money I`ve put in, it may be beneficial in the long run for the United States if Social Security failed since it will no longer be an issue the left can demogogue. They have twisted the political and economic landscape for 60 years with scare-mongering. Social Security has given the Democrats a piggy bank to raid in order to buy votes. If people would have market-driven alternatives, they would have more money to retire on-and the government would have less to blow!

Still, the pain will be intense. I hope we can find a way to transition without peoples` lives being ruined. I fear that no matter what we do, Social Security is going to die.

Anonymous said...

The central problem is that even if I have enough for retirement (I do, as it happens), my future is also dependent on you (and you, and you) having enough.

I don't want to live in a world where I pass 50 homeless people on my way to the market, deciding how much I can spare this week to keep you alive.

That is not a happy future.

Think about it. Most people fail in the stock market. I kept mine (from a dot com IPO) but 49 out of every 50 of my coworkers, who shared that success had misinvested it, and were back to where they started within 2 years. They bought Red Hat at freaking $250!

We need (we ALL need) a system that takes care of everyone (including the idiots), so we don't end up in a wrecked future where 49 out of every 50 are poor.