Real Social Security Reform

By Carl Milsted

Conservatives claim that Social Security is a bankrupt Ponzi scheme, that Social Security provides a worse return on investment than the stock market. They are right.

Liberals claim that George Bush’s plan to fix Social Security will make things even worse, that Bush’s plan is primarily a plan to enrich Wall St. They are right as well.

In order to fix our retirement system we need to have a fresh look at why we have Social Security in the first place, and what are the negative side-effects of Social Security. Social Security was created for two reasons:

1. Many people are poor savers and investors. They either save too little or take bad risks.

2. During the Great Depression, the government thought the unemployment problem was caused by a finite number of jobs; therefore, unemployment could be fixed by encouraging people to retire early.

The first reason is with us today. The second reason was never true. There is never a shortage of jobs to be done; there is only a shortage of income to pay people for doing those jobs. Charging taxes on wages in order to pay some workers to retire shrinks the total pot of income with which to write paychecks.

The key to understanding unemployment is to ask, “labor surplus in relation to what?” It cannot be consumer demand per se since laborers are consumers. Labor can be in surplus with respect to land and capital. The real story of the Great Depression was that there was a shortage of savings during the 1920s that led to the crash. People were investing what they didn’t have; they were buying stocks on margin and putting money in over-leveraged banks. When this pyramid of debt crashed, people responded by re-learning how to save. Alas, the government adopted the pseudo-scientific reasoning of John Maynard Keynes and stepped in to discourage this savings. The result was high unemployment during the entire decade of the 1930s.

And this is the real sad story behind Social Security, the biggest of the Depression era anti-savings programs. Social Security discourages savings by taking wages and promising a retirement payout. The result is lower wages, both by the taxes withheld and by the fact that is less capital to finance the businesses that hire the workers.

But the first rationale does have some merit. There are people who are either unthrifty, unwise, or just plain too unlucky to save and invest enough to retire on without sinking into serious poverty. True, without the promise of Social Security there would be far more wisdom and thriftiness than we have today, but it would not suffice. Further, many people are used to a long era of high returns on the stock market and would expect this continue. But if we replaced Social Security with people saving for retirement, the rate of return on investment would go way down! On the up side, wages would go up.

If you are a true leftist, you should celebrate this effect. With a high rate of savings, more of the national income goes to the working class and less to the investing class. Getting rich becomes easier, but staying rich becomes harder.

So how do we restore national thriftiness while protecting the old from financial
disaster?

The Bush plan is to drive savings into massive index funds. This would be a huge boon to Wall St. firms that manage such funds. It would also be a boon to the big corporations that have access to these funds.

I have a better plan: one that moves more capital to Main St. and less to Wall St. The first step of the plan would be to eliminate the payroll taxes used to fund Social Security and replace them with consumption taxes. We could use a national sales tax or a carbon tax (simple and good for the planet!) or a combination thereof. Such taxes would be regressive, but so are the current payroll taxes.

Unlike payroll taxes, consumption taxes allow an automatic deduction for those workers who opt to save. Unlike IRAs, 401(k)s or company pension plans, workers would get the tax deduction regardless of how they saved. Savings could go into paying off the credit cards and the mortgage, buying a solar power system, taking a break from work to go back to college, or starting a small business. It is no longer necessary to go through Wall St. or the banking system in order to get the tax deduction. And with my system, we can get rid of all the special savings plans that are in the income tax code.

You might note that my plan provides no record of taxes paid. How do we determine how much people should get upon retirement?

The answer: everyone gets the same thing, regardless of employment history. In other words, those who are well paid during their career need to save if they want to maintain their lifestyle when they retire. The working poor need not save since they will be well prepared for living off the flat rate retirement safety net.

Yes, I am calling for a reduction in the payout. We need a cut; else this country is going to go bankrupt. Already half of the federal budget goes into bond interest and entitlement programs, and this is going to get far worse when the baby boomers retire.

However, this is only a cut for the middle and upper classes. It is a small boost for the lower classes. And since it is an unconditional payout instead of a welfare check, the poor can still benefit from working and saving should they choose to do so.

My plan is a left-wing plan. It targets a greater fraction of the federal payout to the poor; it simplifies tax collection for small business; it moves money from Wall St. to Main St; it raises wages while reducing unemployment; and puts an end to the corporate serfdom of employer managed retirement plans.

But the elitist Left won’t like it. For it also puts responsibility back into the hands of the working class. Like it or not, power and responsibility go together.

Dr. Carl S. Milsted, Jr. is a Senior Editor of the Free Liberal. He is the author of HolisticPolitics.org. By day, Milsted is a physicist who writes software for national defense related applications. He hopes to eventually move on to the more interesting and lucrative field of Mad Science.