Don’t ‘Privatize’ Social Security, Phase It Out

The following article by Linn and Ari Armstrong originally was published October 29 by Grand Junction Free Press.

If you think that Senate hopeful Ken Buck called Social Security a “horrible policy,” then you’ve been listening to Senator Michael Bennet’s lies.

Here’s what Buck actually said in March: “It is certainly a horrible policy in what happened in the LBJ Administration back in the 60s when they took the money out of the trust fund to fund general fund programs, and what we ended up with was a system that will be bankrupt anywhere from 10 to 25 years from now.”

Obviously what Buck called horrible was funding general programs with Social Security taxes. He was not referring to the program itself.

And that’s too bad. Because Social Security is a horrible policy. It punishes work and discourages savings. It subsidizes wealthy millionaires retired to the golf course with the sweat of impoverished workers.

It hurts those who die early, preventing them from leaving their accumulated wealth to their children or recipients of choice. Notably, this especially harms some minorities who, on average, die sooner.

The left, which glorifies progressive taxation, nevertheless loves the regressive Social Security tax, which hurts poor working families most of all. The Social Security tax currently strips a combined 12.4 percent (half paid by employers) of every worker’s paycheck. Little could be more destructive to the ability of poor and middle-class working families to get ahead financially.

Contrary to popular mythology, Social Security is not some sort of investment program. It is instead a straight wealth transfer from workers to retirees. It is a major leg of the American welfare state. And, because of changing demographics, it will impose an ever larger burden on working families over the coming decades — unless the program is seriously reformed.

Does Buck want to “privatize” Social Security? In July, Buck said, “We’ve got to peg Social Security to [younger] individuals so those individuals have the ability perhaps to invest in various funds that are approved by the government. But those individuals also own that fund.” (We drew Buck’s comments from PolitiFact.com.)

But apparently that tentative proposal is no longer on Buck’s plate. On his web page Buck states that, for current beneficiaries, “government shouldn’t change those benefits.” We agree, though we wouldn’t be opposed to curbing benefits for the wealthiest recipients in order to lighten the load on working families.

Buck continues, “For older workers approaching retirement, we need to ensure that Social Security is solvent.” Again we agree.

For younger workers, Buck wants to preserve Social Security “as a safety net” while encouraging them to “save more through tax-preferred accounts.” This is a far better option than “privatizing” Social Security.

So why do we, your faithful free market advocates, oppose “privatizing” the program? Because the proposal known as “privatization” is the opposite of real privatization.

Buck tips the hand when he acknowledges that politicians approve (and therefore control) the accounts. Accounts mandated and controlled by politicians are not part of the private, free market economy. (The accounts are still mandatory if workers’ only other choice is a welfare program.)

A major problem with mandatory accounts is that they create immediate deficit spending. The basic idea is that a portion of one’s payroll taxes are redirected from paying off current beneficiaries into the accounts. What then fills in the gap? More borrowing.

Moreover, the accounts themselves do nothing to actually reform Social Security. To understand why, consider that the money redirected to the account could instead simply be returned to those who earned it, to spend or invest as they see fit. For instance, somebody might want to put that money into his own business, rather than into a politically controlled account.

We’re glad that Buck backed off of his suggestion to “privatize” Social Security. His incremental reforms are a far better way to go. We remain a bit nervous, however, about the “tax-preferred accounts,” which could unduly restrict how people use their own money and lead to political controls over those accounts.

Let us, then, offer a suggestion for real free-market reform. We should phase out Social Security entirely.

Here’s how it could work. The benefits of current recipients would be left untouched. Every year, the payout-age for Social Security (not to be confused with one’s chosen age of retirement) would be increased by a few months. So people close to retirement would lose a little bit of their benefits, while those further away would lose more.

So what’s in it for younger workers? With a steadily increasing pay-out age, the Social Security burden would slowly diminish. The tax should be reset every year to just cover benefits. Thus, the Social Security tax would shrink over time, eventually to zero, leaving workers with an ever-growing share of their own income to spend or invest as they see fit.

We have a simple name for such a reform: freedom.

***

Comments

Anonymous November 16, 2010 at 3:40 PM
Not a bad idea. Here’s my Social Security dream solution.

1) Continue to pay benefits to anybody who decides to stay “in the program.”

2) Offer the alternative of giving a one-time cash disbursement, to anybody who wants it, of the moneys “paid in” to the system over their life time. You’re free to do what you want with that money, but if you take the disbursement, you are effectively resetting the clock on your benefits.

3) Allow people to opt out of the system altogether by ceasing to pay the social security tax. Eventually stop requiring them to choose, and just stop collecting the tax altogether.

As more people take options (2) and (3), this would probably result in paying (1) out of the general fund (or via deficits), but honestly, that is where the money really comes from anyway, and the extra capital from (2) and (3) would almost certainly flood the economy with investments leading to real growth.

I might take the $100k I’ve paid over my life time and go start a small business. Or invest it in dividend-paying stock, giving myself a fairly substantial raise on top of the 12.5% raise afforded by not paying SS tax any longer.

Ari November 16, 2010 at 4:30 PM
The problem with the plan outlined above is that nobody has “paid into” anything. That money is gone. So if you wanted to pay people out, where is that money going to come from? More debt?

Anonymous November 17, 2010 at 9:04 AM
People absolutely have (involuntarily) “paid in” to the Social Security system. I know I have!

The fact that the money was immediately borrowed and redirected for other purposes does not change that fact. The government already owes the SS system those funds; so if I were to cash out, they would have to find another line of credit to replace what they already owe me.

It’s not that it would be “more debt,” so much as “replacing with different debt.” Pretty much the same thing as using credit card “B” to pay off credit card “A”. Debtor’s liabilities remain constant, but creditor “A” has their money.

In our case, though, since creditor “A” is also the (involuntary) debtor (how sick, right?), creditor “A” now has capital with which to make money in order to pay off card “B”.

Ari November 17, 2010 at 9:25 AM
How is paying more general taxes to pay yourself your Social Security benefits helping you? That’s basically what you’re advocating.

4 thoughts on “Don’t ‘Privatize’ Social Security, Phase It Out

  1. Anonymous

    Not a bad idea. Here’s my Social Security dream solution.

    1) Continue to pay benefits to anybody who decides to stay “in the program.”

    2) Offer the alternative of giving a one-time cash disbursement, to anybody who wants it, of the moneys “paid in” to the system over their life time. You’re free to do what you want with that money, but if you take the disbursement, you are effectively resetting the clock on your benefits.

    3) Allow people to opt out of the system altogether by ceasing to pay the social security tax. Eventually stop requiring them to choose, and just stop collecting the tax altogether.

    As more people take options (2) and (3), this would probably result in paying (1) out of the general fund (or via deficits), but honestly, that is where the money really comes from anyway, and the extra capital from (2) and (3) would almost certainly flood the economy with investments leading to real growth.

    I might take the $100k I’ve paid over my life time and go start a small business. Or invest it in dividend-paying stock, giving myself a fairly substantial raise on top of the 12.5% raise afforded by not paying SS tax any longer.

  2. Ari

    The problem with the plan outlined above is that nobody has “paid into” anything. That money is gone. So if you wanted to pay people out, where is that money going to come from? More debt?

  3. Anonymous

    People absolutely have (involuntarily) “paid in” to the Social Security system. I know I have!

    The fact that the money was immediately borrowed and redirected for other purposes does not change that fact. The government already owes the SS system those funds; so if I were to cash out, they would have to find another line of credit to replace what they already owe me.

    It’s not that it would be “more debt,” so much as “replacing with different debt.” Pretty much the same thing as using credit card “B” to pay off credit card “A”. Debtor’s liabilities remain constant, but creditor “A” has their money.

    In our case, though, since creditor “A” is also the (involuntary) debtor (how sick, right?), creditor “A” now has capital with which to make money in order to pay off card “B”.

  4. Ari

    How is paying more general taxes to pay yourself your Social Security benefits helping you? That’s basically what you’re advocating.

Comments are closed.