The privatization argument reveals one problem: even though it would pretty well fix the current SS system, you’d still be left with an unconstitutional mandatory savings program. Even if it were something you could opt out from, it would still be something the federal government shouldn’t administer.
theperfecteconomist on January 11, 2011 at 3:47 PM
Is it really “constitutional” to force taxes on the young to pay retirement benefits to the elderly? Apparently, that question was already answered “yes” in 1935, so there shouldn’t be a constitutional problem. There are also Federal limits on how much a person can deduct from taxable income for investment in an IRA or 401k, and penalties for early withdrawal. The Government regulations incentivize saving for retirement, without actually mandating it.
Payroll taxes for Social Security are already mandatory, so that allowing a person to divert some of the money into a personal account regulated but not managed by the Federal Government would actually increase people’s freedom to choose their retirement.
If there is some concern over the Government’s ability to pay current and near-future retirees, the program could have a limit on the fraction of payroll taxes the person could divert to private accounts, with the limit being higher for younger workers than older workers. This would allow a “phased-in” privatization that would keep current retirees funded, while incentivizing private saving for younger workers. Although this might not seem “fair” favoring the young over the old, this problem has been 75 years in the making, and needs to be phased out gradually in order to avoid hurting any one age group too harshly.
There would be no “mandate” to save, but a CHOICE–where the person could choose how much tax money to invest in private accounts (up to the limit mentioned above) and how much to keep in the Government system. This is a CHOICE not currently available to low-income workers who can’t afford to contribute their own money to IRA’s and 401k’s.
Of course, there needs to be a downside risk: the person’s eventual benefits from the Government program are proportional to the amount of money contributed to it, so that the person forgoes some Government benefits by contributing to the private account, but the person might come out ahead by investing wisely and getting a better return on investment than the Government, with the risk of losing part of the private account if it is invested unwisely.
If enough young workers “opt out” of the Social Security system for private accounts, the eventual debts of the system will be lessened, while billions of new dollars pour into the stock market, thereby stimulating the economy and creating new jobs, with more people financing their own retirement. Over the course of decades, most workers would probably prefer the private accounts, and the mandatory contribution to the Government program could be gradually reduced to only cover those retirees without private savings.
Yeah, this does sound like what Bush wanted to do in 2005, and Democrats “saved” Social Security by doing nothing. Or did they?
Hey America, do you miss Bush yet? The ol’ dumb oil-gushin’ cowboy did have a few good ideas under his Stetson, didn’t he?
Products of the past…doomed…
Chinese President Hu Jintao: the US dollar-based monetary system is a “product of the past.”
He is right about that. And last week two major US credit agencies – Moody’s and Standard and Poor’s – underlined the point. They said America’s triple A credit rating would be lost if the nation continues to borrow so much money.
Amen to that, brother…
But how can the US borrow less?
Ben Bernanke says the US economy will probably grow between 3% and 4% this year.
Pretty good, huh? We can stop worrying, huh?
Wait a minute. We don’t know if the US economy will grow this year…and neither does Ben Bernanke. But even if it were to grow at 3% to 4%…would that mean we were enjoying a genuine recovery? Could the US dollar-based monetary system hold up after all? Could it surprise the Chinese and be a product of the future as well as of the past?
Let’s see how the present economic model works. You spend $10 trillion on bailouts and stimulus. This puts the whole country on course for bankruptcy…where the Chinese are telling you that your money is history…and the rating agencies are threatening to take you down a notch or two. But for your trouble you get, say, 4% growth.
Hmmmm…4% growth is equal to about $560 billion more GDP. But don’t look too closely. Much of this extra GDP is debt-fueled government boondoggling which adds nothing real to the nation’s wealth.
But in order to keep this “growth” going, you have to continue to run deficits – of about a trillion dollars a year. Hold on…what kind of business is Ben Bernanke running?
It costs more in deficit spending than you get in positive GDP growth.
Well, maybe you lose money every year…but you can make it up in the long run!
Hold on… The deficits are expected to run 5% to 10% of GDP for years. Maybe forever. If the growth rate is only in the 3%-4% range, it will mean that debt always outgrows growth. In fact, that is exactly what almost every economist projects.
Then, what’s the point? Well, maybe deficits can be cut…and the growth rate will pick up? Hey, anything is possible. And since we’re starting out in 2011 with a positive attitude…we’re ready to believe anything.
And maybe that’s what gold speculators were thinking on Friday. They sold gold – taking the price down $26 an ounce. Gold rises as confidence in the financial system falls. If gold is falling, it must mean the confidence in the Bernanke, Geithner team is increasing.
Based on the evidence so far, we’d have to take the other side of that bet. If Bernanke & Co. have any idea what they are doing it is not apparent from the public record. Even now, in the 5th year of the Great Correction, they still seem unable to see what is going on.
Bernanke:
“We got in trouble in the first place by making too many bad loans, right. So you’ve got to make good loans. We’ve got to have credit worthy borrowers.”
It may be that, in private, Bernanke has a clearer view of things. But we cannot tap his phone or channel his dreams. All we have to go on is what he says…and does. So far, he has said or done nothing that gives us confidence in the man.
He’s right: we got into trouble by making too many bad loans. But why did “we” do that? Because the Fed lent money too cheaply! It encouraged speculation and risk taking – especially by the banks, who must have known that they would be bailed out if they got into trouble.
And how could the Fed remedy the situation? Easy. It could raise rates – just as Paul Volcker did. It could put the squeeze on speculators. It could raise reserve requirements. It could allow the banks to go bust…send them a message they wouldn’t forget.
But what has Bernanke done? Just the opposite. He has rewarded the reckless speculators by buying up their bad bets (adding $1.7 trillion in trashy mortgage backed securities to the Fed’s core holdings). He has cut rates even more…bringing the effective rate down to zero for privileged borrowers. And he has created the illusion of “recovery” – by goosing up prices of stocks and commodities.
Bad policies. Bad in the short run. Worse in the long run.
Bill Bonner
for The Daily Reckoning
The US Deficit Recovery Program and Other Fallacies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
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