Wednesday, August 8, 2012

The “Personal Account” Path to Ending Social Security


Social Security is unjust, immoral, and un-American. It is a violation of individual rights. It should be phased out and ended. The question is how to do it.

Ending Social Security is not the problem, legally speaking. Benefits are not guaranteed, no matter how much or for how long one has paid in to the system. Congress can simply end all SS taxes, stop paying current benefits, and rescind all future benefit promises in a simple, sweeping legislative action. Of course, this would be cruel, since Social Security is so deeply entwined in people’s financial lives. No one in his or her right mind would advocate such a draconian step. The problem is finding the most equitable plan; one that protects the promises given to those currently in the system; is politically feasible today; and spreads the cost of funding those promises fairly during the phase-out period.

While it would be best to simply let new entrants into the workforce keep their 12.4% SS “contribution” while finding other sources of revenue to make up the shortfall needed to pay promised benefits, that approach is simply not feasible. Getting the political support for ending Social Security in a single plan, it must be acknowledged, is a political pipe dream. If we who advocate individual freedom hang our hats on that all-or-nothing political approach, rejecting incrementalism, we cede control of the debate to those whose goal is to “fix” Social Security in perpetuity.

Personal accounts are a politically necessary medium-term political compromise because the country is not ready to abandon the notion that the government must ensure some level of retirement security for every worker. Personal accounts would be a much easier “sell” than complete one-step abolition, while setting us on a longer-term path toward ending Social Security. The argument is simple: The politicians have had their chance at managing our retirement money, and have failed. They’ve brought America to the brink of national bankruptcy, rather than ensure our retirements. Personal accounts give financial control to the individuals who earned the money, rather than political money launderers who didn’t.

I do not support private accounts along the lines of President Bush’s meager 2-4% of the 12.4% total SS tax. Nor do I support accounts controlled by the government. Like my plan for tax credits for education, privatization must be tailored so as to act as a transitionary vehicle toward a complete phase-out. Mandatory accounts controlled by politicians would be far worse than the current system. It would give government, as a shareholder, commensurate control over private business.

Current proposals for personal accounts that I am aware of are presented as ends in themselves, and leave government in control of the money (with very limited choice for individuals). This I reject. I advocate only a plan that unequivocally advances freedom—albeit incrementally—until the system is completely abolished. This is both a practical and a moral necessity.

For sure, private accounts within SS are government-enforced savings, and thus a violation of individual rights. But what we have today is forced redistribution backed only by hollow promises of old-age benefits, rescindable at any time by congress. My plan would redirect existing SS taxes from Congress to the individual that earned it. It would not add one dollar of additional taxation, nor would it be an added program of forced savings layered onto the status quo. Yes, the same dollars would be taken by force. But at least the taxpayer would have possession of, and a right to, his/her own money, rather than the politicians. I consider SS personal accounts to be a step toward individual rights, especially property rights - preferably without, but even with, minimal investment controls (more on that later). They can be advocated as a step in the phase-out process.

My plan would work as follows:

  1. 1.       All new entrants into the workforce would have his/her entire 12.4% payroll tax (employer “contribution” included) automatically deposited into a self-directed IRA or 401k type account in the depositor’s own name.
  2.  2.       All current workers would be given the choice of opting into the private accounts, or staying with the current system. Those who opt into the private accounts would have all of their previous SS taxes returned to them in a lump sum, and deposited into their new personal accounts.
  3.  3.       Those currently collecting benefits would see no change. The current schedule of benefits would continue until death.
  4.  4.       The shortfall in revenues created by shifting moneys previously earmarked for current benefit payouts into the personal accounts would be made up by floating government bonds, reduced spending elsewhere, a temporary across-the-board income tax surcharge, or a combination of the three.


Point one: This would be mandatory. Once again this step is a political necessity. But it would advance us toward more liberty because it would re-establish the principle of property rights. The money would be the individual’s and the individual’s alone, to draw on in retirement as he pleases. The personal accounts could be set up like Individual Retirement Accounts, including the entire range of investment options now available for such accounts.  The owner would designate beneficiaries, so that any money left in the account after his death can be passed on in the form of inheritance. Not a dollar of it would fall into the hands of politicians.

Point two: This is self-explanatory, but fair, I believe. Each worker would calculate the relative benefits of each approach as it relates to his personal circumstances. Leaving the current system would obviously benefit workers farthest from retirement, but it would be their choice.

Point three: Simple fairness requires promises to be kept. See my post, The Social Security Injustice.

Point four: One of the biggest clouds hanging over the financial future of this country is the huge unfunded liability created by Congress’s over-promising of benefits under the current set-up. This cloud would immediately begin to shrink under points one and two, coupled with the continuing die-off of current beneficiaries. The increased need for alternative revenue sources as younger workers pull out of the system would be offset by the surge in national savings as the personal accounts begin to grow.

This would also be much fairer. Simply phasing out Social security benefits and taxes would leave wage and salary workers holding a huge bag. They would have incurred the entire cost of honoring current promises through years or decades of slowly falling SS taxes, with nothing to show for it in the end. On the other hand, under my plan, the cost would be more broadly borne through income taxes. For example, retirees on Social Security would help pay the costs, since most SS benefits are subject to income tax.

Over time, the Social Security System would increasingly be made up of personal accounts, ending the sinister charade of tying current benefits to current workers’ taxes. Eventually, as personal account holders grow into a majority, it would be an easy step to make the case for making Social Security voluntary, effectively ending the program. 

To get started toward that goal, let us declare that the politicians have had their chance at managing our retirement money, and have failed. They have over-promised benefits, creating tens of trillions of dollars in unfunded liabilities, putting in jeopardy the promised benefits of today’s taxpayers. This same irresponsible “generosity” threatens economically ruinous tax hikes and/or inflation. Washington has back-stabbed us with our own money. It’s time to turn management of our money back over to the people to whom it rightfully, logically, and morally belongs—the people who earned the money in the first place. Let us begin with personal accounts.

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10 comments:

Joe The Economist said...

How do you plan to pay existing beneficiaries who have retired, and really can't return to work?

Joe The Economist said...

- "would be made up by floating government bonds, reduced spending elsewhere, a temporary across-the-board income tax surcharge, or a combination of the three."

What you are suggesting is that younger voters will see a difference between financing SS payments out of payroll taxes or income taxes.

Which grows faster the cost of the incremental debt or the privatized account? People may well arrive at retirement with a large PSA but an even larger income tax bill.

All you are doing is shifting the pocket from which the financing comes...

"reducing spending elsewhere"

This is a good idea, but cost savings should be used to pay for the debt not payoff retirees who created the debt as younger voters.

Mike LaFerrara said...

“"reducing spending elsewhere"

This is a good idea, but cost savings should be used to pay for the debt not payoff retirees who created the debt as younger voters.”


I don’t think it’s that simple. It’s true that many or most of today’s retirees bear political responsibility for the unfunded SS liability and the national debt. But not all of us are in that category, and many young voters today continue on the same path as their elders. Furthermore, today’s retirees still paid taxes all of their lives, so—regardless of their political leanings—they should still get their promised benefits. I don’t think you can simply lump everyone into this or that group in order to pin blame.

The whole system is unjust, and there is no fair way to deal with it. We’re stuck with trying to find the least bad of a series of bad options. The least we can do is to set a goal of extricating government from retirement planning altogether.

“All you are doing is shifting the pocket from which the financing comes...”

There are no easy answers to financing the unfunded liability, given the insidious pay-as-you-go nature of the system. But the solution doesn’t have to be complex.

The least unfair thing to do is to broaden the financing burden as much as possible, in my view. It’s true that new workers who had nothing to do with creating or perpetuating the current system will be unfairly stuck with some of the burden of phasing it out. But if no systematic plan to cover the promised benefits of retirees is implemented, the default option is likely to be inflation (the federal printing press), which would rob everybody of their purchasing power. One way or another, everyone is going to pay. Furthermore, it must be remembered that, under the current system, young workers today are likely to get screwed even worse than many of today’s retirees.

Of course, there are reforms that could soften the blow to new workers—which I didn’t mention—such as raising the retirement age, reducing benefits, or raising SS taxes for workers opting to remain in the current system.

One thing is certain; the longer we wait, the harder it becomes.

I must reiterate that I don’t favor “fixing” Social Security. I favor ending it. But if fixing it is one’s goal, then personal accounts is still the best option. The current system is essentially a gargantuan money laundering scheme. Any plan that leaves politicians in control of disbursing the money would simply perpetuate the problem, because that is the structural problem with the current system.

Joe The Economist said...

"But not all of us are in that category, and many young voters today continue on the same path as their elders. Furthermore, today’s retirees still paid taxes all of their lives, so—regardless of their political leanings—they should still get their promised benefits."

In 1983 we could have fixed Social Security. Instead we took the political path to preserve it for those who hadn't paid the full cost and shifted the burden onto those who couldn't vote. Your plan here is to reward those who put in the least and penalize those who put in the most. The vast majority of people who are working today had no vote in that. There is no reason to expect them to accept the terms of a deal in which they had no vote. One of the most basic foundations of our country is that taxation without representation is wrong.

Joe The Economist said...

"Of course, there are reforms that could soften the blow to new workers—which I didn’t mention—such as raising the retirement age, reducing benefits, or raising SS taxes for workers opting to remain in the current system."

You can't 1/2 end the system. If there is a current system, you haven't ended it. You have simply switched the pocket from where the financing comes.

I work with Fix Social Security Now. We provide one stop shopping for people interested in Social Security reform. This is our page on 'retiring' Social Security - feel free to tell us where we are wrong.

http://www.fixssnow.org/contentdetails_Sunset-The-Social-Security-Program_42.aspx

Joe The Economist said...

"But if fixing it is one’s goal, then personal accounts is still the best option. "

It really depend upon what the goal of a system is. If you want to provide insurance (supplemental income) to make sure that someone does not outlive his assets - insurance is the cheaper path.

With PSAs you have to lift an entire population out of poverty. With insurance, you can focus the resources on the population which survives. Getting old is a risk, shared-risk insurance is the cheapest way to handle that. That is why we have health and auto insurance. These are hugely expensive costs where you focus the resources on the incident rather than spread it out over the population as a whole.

Joe The Economist said...

"One way or another, everyone is going to pay. Furthermore, it must be remembered that, under the current system, young workers today are likely to get screwed even worse than many of today’s retirees."

What I tell young workers is that they are unlikely to be as screwed as boomers and Gen-Xers because they will be generation that abandons the system. They will vote for Congress that says payroll taxes go to pay down the debt. They are going to ask how we built up a 2.7 trillion dollar trust fund while running up 14 trillion in debt.

My guess is that happens after we try the normal shift the burden to non-voters, as Simpson-Bowles does. It cuts benefits on people who can't vote by up to 1/3rd. According to IBD, 28% of the country thinks that the system is a ponzi scheme today. Just wait until we cut benefits by a third.

Here is AndrewBiggs blog. He covers Social Security for AEI. The lead article is a cover for Veronique de Rugy's "Generational Warfare," publish in Reason Magazine this month.

http://andrewgbiggs.blogspot.com/

Mike LaFerrara said...

Yes, the 1983 “reform” was grossly unjust. As a Boomer who started working in 1966, I was one of the victims. As I see it, any phase-out plan is going to have to tap general revenues, which necessarily socks young workers one way or the other.

I don’t call any government program “insurance.” Insurance is the voluntary purchase of protection against unforeseen catastrophic financial expenses, and properly applies only to the private sector, to the extent that it is unregulated. Social Security (and the like) is not insurance. It is government redistribution of wealth, a legalized criminal undertaking. Today’s “health insurance” is not insurance, either. It is government redistributionism executed through quasi-private “insurance” companies. It is in the nature of fascism—socialism through the back door—not free enterprise. One of the reasons statists manage to get these programs passed is because they frame them as insurance, to give them an aura of respectability, rather than what they really are. We should stop allowing the Left to frame the terms of the debate by adopting their false terminology.

The fundamental difference between insurance and government programs is force. Private insurers cannot force you. Government can. If Social Security is insurance, then so are communism, fascism, Nazism, or any other form of socialism.

I have visited your site, though briefly. As time permits, I’ll study it further, and I’m sure there are good ideas there. But I did see one glaring injustice; means-testing (in the Larsen Plan). That is nothing but screwing anyone who took responsibility of saving for his own retirement, rather than rely solely on SS. Benefits are already skewed toward those who contributed least. If benefits are to be cut, they should be cut across the board. Means-testing is grossly immoral, and should not be part of any SS reform or phase-out plan.

I don’t consider my plan for personal accounts a half-way measure. It is an incremental step toward full repeal via a gradual phase out the current program. My point was that if we can’t achieve full repeal, then at least go with unfettered personal accounts, so each person’s taxes fund only his own retirement. That would at least end the redistributionist element, a moral improvement.

It is not the government’s proper function to “lift an entire population out of poverty”—or, for that matter, anybody. We who advocate freedom must get away from the idea that we are all our brothers’ keepers. That ethical doctrine is incompatible with individual rights. John Allison, the new incoming head of the CATO Institute, put it well: “The libertarian vision is a moral vision and we own the moral high ground.” We should start claiming it.

By the way, Joe, thank you for taking the time to discuss this subject with me. Visit anytime, and thanks for the links.

Joe The Economist said...

"My point was that if we can’t achieve full repeal, then at least go with unfettered personal accounts, so each person’s taxes fund only his own retirement. That would at least end the redistributionist element, a moral improvement.
"

What I don't understand in your view is why continue it at all. I see the libertarian view which is end it. I disagree with them on how to end it. Here you want to replace it with a system that is just as much governmental force as the last one. Mind you, your plan keeps the existing system with a more immoral taking of money- bonds paid for by those who can't collect.

Here we are increasing the size and scope of the system.

Just from what I have seen, Bill Larsen could be the foremost authority on Social Security. I don't agree with his conclusions, but I have never found his facts to be wrong. Most of the 'experts' apply a political bend to facts. Interesting guy.

Mike LaFerrara said...

I'll try to clarify a little better.

I don't see any fair option but to honor the promises made to people who have paid SS taxes, then incorporated benefits into their retirement planning. I don't see how exempting "those who can't collect" from paying towards it is feasible. This inter-generational trap was set long ago by the framers of SS.

As to ending it, as I've said, the ideal would be to simply end it for new workers and let current workers opt out. Both would simply keep their money and do with it what they want. The mandatory personal accounts are just a bow to political reality, if that's what it takes to get the ball rolling. Yes, it is "a system that is just as much governmental force as the last one."

That is unavoidable, because any way you look at it, the key to ending SS is to philosophically challenge the whole notion that the government has any right to use force to guarantee anyone's financial security, in any form, at any age. That is the broader moral battle that must be won before we can build the political strength to end any of the major welfare state entitlements.

In the meantime, at least we can end the laundering of money through Washington--and establish the principle that each worker's retirement should be based on his own earnings, with no "unfunded liability" to others--while we build the necessary philosophically necessary foundation for repeal. Without that foundation, our efforts will remain strictly academic.