Tuesday, March 08, 2005

All Drunk Up

We’ve heard a lot lately about the state of Social Security. Bush wants private accounts to take the place of the present system. Democrats, and now some republicans, are insisting there’s really nothing wrong with the system. It may need a little tweaking and adjustment, but after those tweaks, things will be just fine for years to come.

That said, a little parable, a true story, sadly, about my father-in-law. Harold was in the Navy in WWII. His goal at the end was to save up enough money to get married and buy a house. To that end, he banked as much of his weekly paycheck back to his father as he could afford. August 1945 rolls around and the Japanese surrender. Harold returns stateside dreaming of his house, one he can afford after 3 years of constant savings. When Harold arrives home, however, he is confronted by terrible reality. His father drank all the money sent home during the war. All of it - gone.

Most of you have already guessed where I’m going with this. Guess who plays the taxpayer; guess who plays the federal government? Oh, it’s too easy.

Trust funds, lockboxes, social contracts, generational compacts, guaranteed benefits, all lies. The money you’ve banked with Uncle Sugar these last few decades – all drunk up. Social Security exists mainly in the minds of New Dealers who still believe the government will provide. I want to keep this first post short, so I’ll only touch on some of the stuff the MSM isn’t talking about – believe me, there’s plenty more.

First off, that trust fund idea – forget it. You think SS taxes are sequestered? Silly fool, SS taxes are heaped into the congressional feeding trough alongside all the other booty. But don’t take my word for it, here’s the Supreme Court ruling in Helvering vs. Davis (1937), just a scant 2 years after Social Security debuted:

“The proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.”

So much for the lockbox – now for another nice slap: Nestor vs. Fleming (1960)

US prosecutors discover a guy, Ephram Nestor, a Bulgarian immigrant, was a member of the Communist party in the ‘30s. We’re getting ready to deport him and he says, “Wadda minute, what about my Social Security?” He had paid into it for almost 20 years and was getting $55.60/month back in benefits at the time. Congress ruled in 1954 that anyone deported lost their SS benefits. So what happened to that guaranteed benefit? Here’s what the Supreme Court had to say:

“To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to the ever changing conditions which it demands. …. It is apparent that the non-contractual interest of an employee covered by the Act cannot be soundly analogized to that of a holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.”

Oooooh. How to put this – we don’t owe you nuthin’. How’s that? You pay in and pay in and pay in, but in the end, there is nothing guaranteed to you in return. Your benefits are not bottomed on a contractual basis; they are released to you at the discretion of politicians. The same people who are telling you investing in the stock market is a ‘risky gamble’ neglect to tell you the sure thing they’re betting on is a politician’s judgment call.

The “Trust Fund”

Nothing more than a bookkeeping device, a running total of the unfunded liability of the SS system. In 2002, the unfunded liability was calculated at $11.2 Trillion. The calculation was estimated with the current number of retirees, assuming no other retirees were added to the mix. The number is obviously much larger; I’ve seen estimates out to $70 Trillion. Leave it to government to label a liability as an asset. I’ve even had discussions where people suggest we sell Trust Fund bonds to the Chinese. Best of luck! I know you have all heard 2037 or some such nonsense, the date at which “SS will exhaust all its resources”. Bullshit, that date includes the unfunded liability – money the government doesn’t have to pay anticipated costs. The actual Drop Dead date on SS is 2013 (I’ve also heard 2011 and 2009). This is the date to actually concentrate on. On that date, the amount of payroll tax the government takes in will be less than the total required outlay for SS retirees. At that point, it’s raise taxes, cut benefits, or both.

Horrible, Horrible Transition Costs

We hear a lot about ‘transition costs’ – just how incredibly expensive it’s going to be to switch over to private accounts. Keep something in mind, transition costs will be there whether or not we go to private accounts. It is not there because of private accounts, it is there because the politicians in Washington failed to plan for the day when their Ponzi scheme owed more money to more people than it took in from the new fish. Nothing was saved, everything was spent – and the day of reckoning is just around the corner.

The “Risky Gamble” of the Market

Leftist pundits have now taken the tack of comparing investment in the stock market to gambling, as if people regularly lost everything in the market. We're supposed to believe the real goal of business owners (let's just call them Evil Capitalist, shall we?) is to bilk every investor out of every dime he ever invested. How's that for a win-win? They make no logical distinction between a wild, illogical bet (say, 37 in roulette) and a calculated risk (I think this Google is going to go places, put me down for 100 shares.) The fact is, any 10 year period in the market you wish define (include 1929 if you like) had better pay-outs (around 8%) than SS promises now (less than 2% for 30-somethings) – ANY 10 YEAR PERIOD. Needless to say, these sources, whether it’s the AARP, editorial writers for the New York Times or staff reporters for Money magazine, they’re all invested in the market up to their eyeballs - but for commoners? No way, too risky, can’t have regular people investing in the market – like millions do with their 401k, 403b or pension. (If someone can figure out the logic here, please call me.)

Several dozen countries have their own private account retirement plans as we speak – this is not the Brave New World we’re talking about here. Not only do private accounts work, not only do they guarantee each worker will have something to pass on to his or her children, they are remarkably powerful market stimulators. The American Enterprise Institute estimated private accounts would provide the American economy with a $17 trillion infusion of capital. In Chile, where private accounts went into effect in 1985, GDP growth has been in double figures for several decades. A rising tide lifts all boats, which means even at present tax rates, the amount of money the US government collects will GO UP - so why all the opposition?

I have only one guess – the relinquishment of power. Allowing people to keep and invest their own wages will deny the federal government of a huge windfall of cash they have happily spent for the last 70 years, oblivious of the bill due down the road. I mean, they have a point – THERE IS NO CRISIS NOW (The operative term is NOW.) So if you want to know where the democrats weigh in here (along with pantywaist republicans), imagine the Titanic right after it hit the iceberg. The democrats station themselves on the upper deck, urging you to return to your cabin. The Titanic is unsinkable, after all, of what do you have to worry? And when a plane flies into Tower 2, they’re on the intercom telling everyone in Tower 1 to return to their offices, there is no emergency in Tower 1. Now.

The problem with a time-sensitive crisis: you can ignore it until the last second. But by then it’s too late - too late to do anything. Is this really where we want to place ourselves? Do you really think investing your own money as you see fit, investing 6.2% of your paycheck, entails more risk than giving it all to a politician with the hopes of ever seeing it again?