Feedback: The Social Security Debate

As you probably know, CSE invites readers to comment on the articles sent in our weekly email and posted on our web site. CSE appreciates the time many readers take to post comments. We read these comments, and this week I am going to respond to some of the many comments readers have posted regarding Social Security. My apologies to those comments I was unable to get to. I will respond to statements on other topics in the future.

Thanks for reading, and keep the comments coming!

—Max Pappas, CSE Policy Analyst

On Social Security

“Stock-based retirement plans are somewhat dangerous, I think. Even blue-chip investments are not safe in the long run as any company can fail.” –Steve Van Brown, Cleveland, Texas.

Here Steve Van Brown brings up an issue that concerns many voters, especially after the tech stock bubble burst and the Enron scandal.

The stock market is volatile, but history shows that markets go up over the long term, and saving for retirement is a long term process. The stock market has averaged a 7.56 percent return since 1926, even after adjusting for inflation, and about 7 percent over the past 200 years. It even grew by 3.36 percent during its worst 20-year stretch, from 1929 though 1948, which includes a stock market crash, the Great Depression, and WWII. Most investors would also hold bonds, which usually offer a 3 percent to 4 percent return, and other savings instruments. Social Security typically returns 1 percent to 2 percent, but even that small return can only be sustained by substantial tax hikes in the future—which is how it has been sustained to date, with over 20 tax hikes.

While some stocks will fail in a market economy, the entire stock market will not.

The real risk is staying with the current system, which depends on the willingness of future generations to pay continually higher taxes. Personal Retirement Accounts (PRAs), instead of relying on politicians and the tax dollars of others, put the responsibility, power, and money, under the ownership of the individual—where it belongs.

“All private stocks carry some risk. As an alternative, what if we just forced all workers to put 13percent of their incomes in fed bonds at a fixed rate of interest? There would be a constant deficit and the returns would be less than what private industry can offer, but it might be more stable. Any thoughts?” Charles Hosford Freeman from Portland, Oregon

Regarding risk, see above. As for putting all the money into government bonds, that has its own problems. As Charles points out, government bonds are government debt. The amount of money involved in PRAs would be too much debt for even the US government to take on. If just half of the 280,000,000 Americans save $500,000, which is only half of what renowned economist Robert Genetski says we would have in his book “Nation of Millionaires” if we were allowed PRAs, that would be $70,000,000,000 of debt for the government to bear. Plus it would deprive the private sector of the economy of the benefits of a higher savings rate.

“I think [Personal Retirement Accounts (PRAs)] would also be a boost for the economy as it would infuse more money into the system.” Daniel Lechliter, Oxnard, California

Daniel brings up a point that just isn’t made often enough. Under the current system, where Social Security money is just shuffled from taxpayer to retiree, no money is saved—not even in the so-called “trust fund,” which has nothing but government I.O.U.s in it. With PRAs, however, a pool of trillions of dollars would be created as people put money in their accounts. This money would be put in stocks, providing the capital for U.S. companies to continue to increase our standards of living; it would be put into bonds to finance government expenditures; it would be put in banks, which would loan it out to entrepreneurs, builders, and homeowners.

Wealth is to the economy what wood is to fire—the more you put in, the bigger it gets. PRAs would be a forest of wealth

“The Democrat solution is to take the cap off FICA taxes so that it essentially becomes a welfare program with no wealth building provisions.” Thomas Hauck, Pittsboro, North Carolina

Thomas nails this one—raising the FICA caps is a dangerous proposal, indeed. Currently, only income under a certain amount ($87,000 this year) is charged the Social Security portion of the FICA tax. This is the cap, the “maximum taxable income.” To go along with this, there is also a maximum level of benefit that someone can receive. The two are related—how much you get is based on how much you put in. This is because Social Security was not meant to be a welfare program where there was no correlation between contribution and benefit. Removing the cap, which has been in place since the system started, would change the very nature of the system—it would become another way for the government to “redistribute” hard-earned money.

And it would be the largest tax hike in the history of the United States.

“[PRAs are] the obvious answer. The painful part that keeps many from supporting such change is the people who fall in between the two systems – 25 years with Social Security taking their cut and only 20+/- years with the savings account. I don’t have that solution, but investment without gov’t fingers in the pot is the answer.” Nancy Marshall, Wilmington, North Carolina

Nancy is right that we need to get the government’s fingers out of our retirement savings pot. Most proposals for PRAs, which would free us from government run retirements, have a solution for what to do with those who fall in between the two systems: they don’t let them fall. The government has required these workers to contribute to Social Security for half their working lives, promising them a payment upon retirement, and the government should be required to make that payment. This group would receive both a check from the government based on how long and how much they had put into the system, and would also have their own PRAs. Their PRAs would be smaller than those who were able to save longer, and their government checks would be smaller than those who spent a lifetime putting into the government system, but the two combined would provide for a better retirement than that afforded by continuing with the government-only system.

“If our Congress would stop considering the Social Security funds as “excess funds” we would have the funds available for all future retirees ,especially since most families have two members earning incomes. The funds should strictly earmarked for “Social Security” and never touch it for anything else.” Sara Waggonner from Tyler, Texas

There was a lot of talk about this during the last presidential election, particularly from Al Gore and his infamous “lockbox”. As most readers know, the government takes the surplus Social Security dollars and spends it on whatever it wants. The problem is, the government has to spend the extra Social Security money. Because the government is the supplier of the currency, it can’t save its own money. This would effectively be a contraction of the money supply, which would have economy-wide consequences—interest rates would be affected, as would prices and employment. While the American government can’t save its own money, the American people can save it—and we need to be allowed to through PRAs.

“At 74 years old, there is little I can do. I would work and vote for any candidate/s who would work to make the system private and also be willing to abide by the same retirement the rest of do.” –Dee Williams from Sun City Center, FL

Dee, as a 74 year-old, you are part of the group that can do the most to make PRAs a reality. Retirees are the best voters this country has. If those currently collecting Social Security put their unbeatable voting strength behind personal accounts, politicians would quiver, and we’d have PRAs tomorrow!