Wednesday, March 16, 2005

Social Security Basics

Cutting through all the noise and posturing, there are two essential reasons why Social Security has to be reformed to something better. Those reasons are, the present plan is both unethical and non-functional.

The present Social Security plan is unethical on two facts; people pay in different amounts to the proportion they receive, and the present plan requires people to pay for other people’s benefits.

The analogy is often made, that people now are paying for their parents’ receipts, but that is not true. First, the amounts coming from people whose parents are receiving benefits do not match the benefits being paid, but also there is no earmarking of funds; statistically, money paid into a fund goes to people you are almost certain to have no connection with, whatsoever.

Second, Social Security cannot operate as it is presently designed and legislated. For any career-length period of time since the beginning of Social Security, Social Security benefits growth has always been significantly slower and smaller than the Dow Jones average growth for the same period, meaning that a simple Index Fund account beats Social Security in every historical example. Conversely, that also means that for any known career-length historical period since the creation of Social Security, payments from Social Security have not been able to match the growth of American business, as represented by the Dow Jones Average.

Further, it is mathematically impossible for any fund to function in an environment where the contributing population is steadily declining, the beneficiary population is steadily increasing, or both factors exist, as is the case now.

Republicans have had trouble selling the need for Social Security reform, because of serious questions about the transition and the nature of the reformed program. Democrats, however, have gained no traction, because they refuse to admit or address the critical (and now obvious) flaws in the current Social Security program.

There are, basically, five options available to the U.S. Government:

1 - Ignore the problem - Insane as it sounds, this is the Democrats’ position. This course can lead only to an eventual crisis, or the outright collapse of the Social Security program.

2 - “Fix” Social Security, but leave it basically as it is - such tricks as rasing the age for benefits and restrciting conditions, increasing the payroll cap for Social Security taxes, and so on, can keep the program alive a while longer, but cannot correct the fundamental flaws in the existing program. It will also anger the voters when it becomes obvious the problem only becomes worse through delays.

3 - Abandon SSA for PSA’s - This is a non-starter, for the obvious reason that it would hit upcoming retirees hard, denying them the chance to build up investments, but also denying them any financial consideration for the taxes they have paid up to this point, on the promise that they would be receiving a stipend. Abandoning SSA completely at this time would be political suicide for anyone.

4 - Phase an all-SSA program to an all-PSA program - While this would avoid the pitfalls of option 3, it would essentially disallow any real choice, which would have serious political fallout.

5 - Phase from all-SSA to a program offering at least 3 choices, with a transition treating the options equally - This is basically the option proposed by President Bush, which is not only the option offering the most choice, but also the most overall stability and responsiveness to the taxpayers.

The details are going to take shape over the year, but the plan must not be allowed to be ignored, or be overcome by the desire politicians have to make a boondoggle wherever money is involved. The three salient points to keep in mind are these:

1. The money you are paying into Social Security right now, you will never see again. It is being spent in the same way, that tax money is always spent.

2. Anything you receive from the government, was paid for by someone else. Equity does not exist in any present government economic plan.

3. Change is the historical norm. People forget too often, that Government programs are meant to solve only limited problems, and no project was meant to be permanent. Interstate tariffs and poll taxes don’t exist anymore, and there was a time when there was no FDIC, no SEC, no Income Tax, and of course there was a time when there was no Social Security. The time to change how tax money is spent is long overdue, especially in the face of the facts.

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