Tuesday, October 26, 2010

Investing Social Security Funds arises from the Dead (Just in time for Halloween?)

Today I was listening to the radio and a story came up stating that Andy Stern, former President of SEIU (the state employees union), suggested that in order to keep Social Security solvent, a portion should be "invested" into the stock market.  So I looked for the story and sure enough it is found on the Huffington Post here.  (Okay the article is from the end of June, but I heard it today, hence the Halloween reference.)

As mentioned in the article, this idea was once proposed in the Clinton Administration.  This idea was bad then and it is bad now.  Fortunately in May 1999, I wrote an article on the dangers of "investing" Social Security funds into the stock market.  That article, "A Socialist Stock Market?" is found here.

Here are a few paragraphs...

Murray Rothbard once asked Ludwig von Mises at what point on the spectrum of statism can a country be designated as "socialist." To his surprise, Mises said that there was, indeed, a clear-cut delineation: the stock market.

Mises said, "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."

A corollary to this idea is that if the government is allowed to "invest" in the stock market, then the economy can no longer be called market-based. President Clinton has proposed a plan to use up to one-fourth of new Social Security funds to buy shares in our stock markets. The danger of this plan may not be as obvious as his previous health-care plan, but they are just as serious. The justification for this argument is that the Social Security system is unstable and will face financial strains in about 2014 and will be exhausted by 2032. There are a few options that the Washington elite have deemed as "solutions." Most of these ideas are politically unpalatable. The first is an increase in taxes. Over time, the needs of the Social Security fund will be so high that it will stifle the entire economy. There have been some projections showing FICA taxes as high as 82 percent in forty years.

The second option is to reduce the "benefits" being paid out by the fund. This action is also politically unacceptable. The third alternative is to somehow increase the rate of return on the current surpluses to cover the future. The thinking in the Clinton administration is simplistic at best. The plan assumes (wagers) that the stock market will continue to increase (forever) at rates high enough to meet the projected needs.

The fundamental problem that the Clinton administration ignores is that the Social Security program is based on what is called a Ponzi Game or a pyramid scheme. You have probably seen this if you've ever received a chain letter that states, "Send money to the first five people on the list, remove the first person's name, and place yours at the bottom." In other words, the first people in the program (those at the top of the pyramid) are currently getting money from the new people enrolling (those who are at the lower stages of the pyramid).

Social Security works in the same way. Those who are retired are receiving money from those who are currently working. As long as the base of the pyramid is expanding at a geometric rate, the system will continue to function. However, U.S. demographics show that after the baby-boom generation, the base of the pyramid shrinks. It is mathematically impossible to continue the Social Security program indefinitely.

The best solution is to phase out the Social Security program by taking two steps.

The rest of the article is found here: http://mises.org/freemarket_detail.aspx?control=27.


Financial Facade said...

If only our elected officials would use basic common sense and a little reasoning from time to time, But I think that may be to much wishful thinking on my part.

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