Sunday, August 21, 2005

Social Security Rant

I see that Molly Ivans has weighed in on the SS debate, and for once I agree with her on two items. To wit: Don’t listen to politicians and reporters are notably weak on math.

From C-SPAN to the pages of local and national papers, one thing is clear. There is a chasm the size of the Mars Canyon separating the views on how to “fix” Social Security. These range from a little tinkering around the edges to a major overhaul involving, at a minimum, partial privatizing.

In this morning’s Sun (12-30-04), Tom Teepen of the Cox Newspapers says Social Security ain’t broke, so don’t fix it. A professor at UF (12-18-04) says that there is no “crisis” with Social Security. He says that the surplus is “invested” in U.S. Treasury bonds.

Yeah, well, there’s no crisis in the sense that there is no crisis when an airplane loses all its fuel. As long as the plane is in the air, nobody gets hurt. What the SS people have done is to keep the plane in the air by filling the fuel tanks with liquor from the booze cart and duty-free liquor from the passengers. How long’s that going to last? Some of the younger passengers want to knit together a few shirts and take their chances by jumping. I say let ‘em do it. It might lighten the load.

Yeah, the money was invested if by “invested” you mean spent. Invested as I would “invest” in a lottery ticket or a bottle of liquor. Currently the surplus is being invested in bombs, bullets and Humvee armor plating. What kind of return are you expecting on that? The fact is that the SS Trust Fund is nothing more than a bunch of I-Owe-Me’s.

The people who claim that there is no problem must have gone to a school where arithmetic was an elective. They chose dodgeball instead. A normal couple who puts aside 12% of their earnings for 40 or more years in a triple A 5% bond can expect to have about a million dollars saved upon retirement.

I am always wary of people who want to do something for my own good. I always ask what’s the catch? I also worry about a government program set up for my own good where the penalty for not participating is jail time. You don’t want to pay into Social Security? How would you like Maximum Security?

What do you think of a system predicated on people dying before they retire? You are forced to pay into a system for over 40 years and then have the temerity to die 1 day before retirement. If you have no close relatives, the government gets it all. The shuffleboard generation is living off the corpses of those who paid and died.

If anything like this were tried in the private sector, the instigators would do serious jail time. Ponzi would be proud.

Social Security is the quintessential embodiment of communism: “From each according to his means; to each according to his needs.” If you are rich, you pay more, and if you are poor you get more. Why wait for “trickle down” when you can just grab and give?

The communist experiment, born of the Russian revolution, lasted for 70 years. It was “successful” for that long only because of the use of mortal force. It came crashing down under its own weight in November 1989. Social Security is not much different and it will be 70 years old next year.

Social Security is the Robin Hood ethic full blown. Note that Robin Hood was an outlaw, and far from robbing from the rich to give to the poor, he took back from the government monies that had been extorted from the citizenry by force. That is the way it was according to the Disney version, anyway.

Social Security is called the 3rd rail of politics for the reason that it is fatal to politicians. They lose elections when they touch it. There is nothing inherently wrong with the 3rd rail. In fact it makes the trains go. It’s Kryptonite only to politicians.

It was one thing to have 30 or 40 working people supporting a retiree whose life expectancy was 65 or 70. It’s quite another when 2 or 3 workers try to support a retiree who lives well up into her 80’s and 90’s. And 2 of these workers are married and raising a family thus supporting kids through college as well.

Current projections have the number of centigenerians expanding in the next few decades, and Lord help us if we find a cure for cancer, heart disease and obesity. Workers will be supporting a generation of Methusala’s.

It’s time to cull the herd, lighten the load. What makes poor people more deserving of rich people’s money than rich people?

Social Security is founded on the belief that most people are too stupid to provide for their own old age. Why then is not SS only for those folks while letting the smart ones do their own thing? The bedrock foundation of Social Security is that, on average, it’s like a roach motel. You pay in, but you get nothing out. This is especially true if you happen to be black or Hispanic.

Social Security was initiated at a time when the country was in a great depression and the government was madly flailing about, trying anything to “fix” the problems of the day. Many of the so-called “solutions” were patently unconstitutional and the Supreme Court said so. Unfortunately Social Security made it through. In fact the country was in some ways rather enamored of Communism. The Supreme Court finally buckled when Roosevelt threatened to pack the court with judges sympathetic to his ideas. The phrase, “a switch in time saves nine” was founded at that time when even the supremes saw the hand writing on the wall and gave in to political pressures. After all the country was at war, and, as happens during any war, the populace is only too happy to give up its freedoms in an effort to survive. Unfortunately, as too often happens, once the danger is passed, the loss of freedoms, having become commonplace, stay in place.

Even the diehard preservationists concede that some modifications must be made to preserve the long term viability of the system. Even their tinkering around the edges involves raising the retirement age and/or limiting benefits. In order to preclude private accounts, they want to raise the cap on contributions. What this means is that those who really don’t need Social Security will be paying for it for those who do. In a bow to envy, the “rich” are required to pay more and get less since even when they receive a SS check, it is taxed as ordinary income.

Another fact I find astounding is the fear that some have with the stock market as if everybody who gets their hands on some of their own money will immediately start speculating in risky penny stock schemes. First of all, most if not all pension plans other than Social Security are currently invested in the stock market. Secondly, any plan passed will have many restrictions to ensure the safety of the money. And thirdly the return on SS contributions for a beginning worker today is projected to be on the order of 1 or 2 percent. Virtually any municipal bond will beat that.

There is a wide division of opinion on the severity of the SS problem from renowned experts of every stripe. Obviously some and probably most must be wrong. What if the “patch-it-up” crowd is wrong. Then 100 million citizens or more will be left holding the bag. What if the “private investment” crowd is wrong. Then some who chose unwisely will be out in the cold.

There is a SS commission that is fighting hard to be sure that there is no privatization. A report is due Wednesday, Jan 19th, 2005. One of the big worries is that the Wall Street brokers will strip up to 20% of the privatization funds. They say that the reason that SS administrative costs are so low is that it’s a really big program and the costs are spread out over 44 million recipients. They fail to mention all the people who get stiffed because they have the temerity to die before collecting their due. That money is available to pay those who are lucky enough to win life’s longevity lottery.

Of course, according to Larry Kudlow, virtually all of the people from the AARP to Paul Krugman to millions of state and federal employees have their retirement funds invested in the market. What’s sauce for the goose etc. Seems arrogant and hypocritical that the opponents of private accounts have no problem with their own private accounts.

(A friend of mine once had a motorcycle accident wherein he badly tore up his knee. The doctor said that the $5,000 operation would fix it, but that he would have a limp for the rest of his life. My friend then asked the doctor if ever had the same problem, who would he see. The doctor mentioned a surgeon in Atlanta, so my friend flew to ATL and asked that doctor to do the operation. That doctor looked at it and said that he didn’t need an operation, and that the knee would heal just fine by itself in 6 months. And it did just that. I forgot to mention that the original doctor had just purchased a million dollar condo. Do I need to point out the obvious moral here?)

So much is being made by the status quo crowd about the viability of SS in the out years. “Even if nothing is done, retirees in 2075 will get 81% of benefits…” Well, maybe. Nobody knows anything about 2075.

All these plans beg the basic question.

What’s so magic about the government involving itself in a retirement plan. If it could be shown that the government need not be there, would it get out? No. There are too many special interests that profit from the current system not the least of which are the members of Congress. I have often asked that question, “What if I could show you, Mr. Legislator, that what you are proposing is mathematically wrong and will do more harm than good. Would you be against your plan?” The answer is invariably no or at least something to the effect that there is no way I could prove that, so don’t even try.

Where does the money for old people come from? It comes from those of working age, roughly age 20 thru 60 with the more productive years generally, but not always, later. The Social Security Act shifted the retirement “burden” two generations into the future. Typically, prior to 1935, a worker provided for his own retirement. With the passage of SS, it fell to the next two generations of workers to provide for the previous generation’s retirement. Thus for 40 years, the government had a source of “free” money which it spent with lavish abandon. In order to “fix” the system, the current generation must take a hit and pay for two retirements in order to get the system back in synch.

Will this result in a drop in the standard of living? You bet. Somebody has to pay for 70 years of congressional prolifigacy. What is saving anyway but a lessening of one’s current standard in order to provide for a more comfortable life in those later years.

Paul O’Neill, former Sec’y of the Treasurer under Bush 43 has weighed in on the SS debate and how to fix it. He says that one should have a $1 million annuity stashed at retirement to pay for the necessities. Anyone (the long term working poor) who amasses less than that would get a contribution from the taxpayers to make up the difference.

My question is why? What’s the magic about a million dollars?

Think about it. A person earning $25,000 for their entire working life would retire at age 67 with something just over $530,000 assuming the 12.5% SS “contribution.” and a 5% reinvestment rate. This person would have lived for 45 years on about $22,000 per year. This person can now withdraw $26,000 per year for the rest of his life even if he lives to be 1,000. Additionally, remember that this person could very well have paid off his house, and any offspring type dependents would have long since moved out.

So we have a current system and all proposed systems wherein a “poor” person actually will live better in retirement than he or she did during the normal working life. That is not the definition of a safety net or poverty.

The current system and all proposed systems rely on the “rich” getting a poor return on their investment so that the poor can live well. You may not think that $26,000 enables YOU to live well, but for someone whose entire life has been at the $22,000 level, this must represent some sort of windfall. And that can be accomplished for about half of the million dollars proposed by former secretary O’Neill.

The fact is that SS is borrowed money in the same way that a government bond is borrowed money with a promise to repay. SS “bonds” however promise to pay a much higher rate of return than a normal bond and the rate is unsustainable. How did they get away with offering such a high rate? For one thing many of the “bondholders” died and their money went back into the pool. Another way was to enlarge to pool of contributors by adding more and more payers.

I cannot stress to highly the one reason that Social Security has been called “successful.” It is because a large minority pays in and gets nothing out. Their money is transferred to the survivors, and even with that extraordinary advantage over traditional retirement plans, the current payees can expect a miserly return of only 1 to 2%. In fact, Social Security, as with many government programs, is nothing but a swindle.

Interestingly private tontines are illegal in the United States.

I am not going to argue the merits or demerits of how the money was spent, but spent it was, and now that the pool of contributors is maxed out and the pool of payees is enlarging, the time has come to pay the piper.

SS is so typical of the “one-size-fit-all” solution that government always proposes. It is readily admitted that many if not most of the SS participants never had and never will have the need to be in that program. As always happens, when government shoulders a responsibility that was previously viewed as individual, then individual responsibility, a cornerstone of the American ethic, goes by the wayside. The problems first admitted to nearly 30 years ago and now nearly upon us are a result of this usurpation of personal responsibility.

How to fix it. The good news is that virtually anybody under the age of 35 is not counting on SS. Why don’t we just say to these people, “Yep, you’re right. You are going to pay and get nothing back. Our representatives of the 30’s, 40’s, 50’s and 60’s spent your money, and unfortunately the task now falls on you to pay it back”.

Mandatory contributions imply that virtually every worker is too stupid to pay for his or her own safety net. We know that that is not true, but it’s impossible to know in advance who are the responsible savers. So, stupid or smart, all are forced into the system to take care of the dummies. Seems like the group that doesn’t like mandatory contributing doesn’t need it and the group that profits from the system doesn’t really deserve it except by virtue of being alive and poor.

The opponents of privatization seem to have a pretty good handle on what’s good for everybody else. Whatever happened to “mind your own business”?

Saturday, August 20, 2005

Letter to my reps about the Fair Tax

Dear Representative Stearns,

I have just finished reading the Fair Tax book by Neal Boortz and Congressman John Linder. This note is to ask you most fervantly to support this legislation.

I Personally sent a lot of money to Washington last year in payment of my federal tax obligation, and I realize that I could very well pay that much again under the Fair Tax proposal. I fully understand that the Fair Tax plan will NOT reduce federal revenues. What it will do, however, is save me the money and time I had to pay my accountant to fill out the multi-page return. Additionally, it appears that the huge underground economy will finally pay its fair share.

Since federal revenues will not be reduced, I wouldn't understand why all 535 members of Congress shouldn't support this overhaul. I mean you still get to divvy up at least 2.5 trillion dollars, and furthermore I don't see this as any kind of a “wedge” issue like the war or abortion. I mean I cannot really see any potential opponent using this issue to try to win an your seat.

Moreover, the “poor” which we all care about so much, will not suffer one iota. They get a “prebate” for all their essentials according to this plan.

It seems to me that virtually the only people who could logically object to this plan would be IRS employees and that segment of the “K Street” lobbyists who are concerned with tax legislation. I wouldn't expect much grief from the IRS employees, but no doubt you will be getting an earful from “Gucci Gulch.” Those guys, most of them multi-millionaires in their own right, will fight this thing tooth and nail, and I can't say I blame them. But now it's time to allow them to go on to more productive pursuits. They are smart and they are rich. They will not suffer.

So for once, I beg you, I implore you to pass this legislation before we are subjected to all the obfuscation that will occur as the small (but rich) special interest groups will no doubt innundate us with in the coming months.

I leave you with this quote from the Founding Fathers:

"It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow."
-- Alexander Hamilton and James Madison (Federalist No. 62, 1788)