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Wednesday, January 19, 2005

The Social Security Trust Fund is a Savings Account?

Liberals are blowing a very cheap brand of smoke in your eyes.

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Lou Dobbs’s nightly program on CNN (Communist Network Nonsense) understandably pushes the socialist viewpoint on most economic and political issues.  In his January 18th program, on the subject of proposed changes in Social Security, Mr. Dobbs interviewed Alicia Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management. She was a member of the President’s Council of Economic Advisers (1995-97) and Assistant Secretary of the Treasury for Economic Policy (1993-95).

I propose to criticize Ms. Munnell’s characterization of the Social Security Trust Fund as beneficial savings for taxpayers who otherwise might not have saved money for their retirement.  Given her impressive credentials, criticizing her may be a hazardous exercise.  Nonetheless, I feel obliged to undertake it.

First, Ms. Munnell is undoubtedly correct that most Americans today are so habituated to maxing their spending on credit cards that, absent mandatory tax payments into Social Security, they would have saved little if anything.  Paradoxically, Social Security is itself a major reason for the high consumption expenditures and low personal savings rates.  After seventy years of hearing that Social Security is a guaranteed mechanism that functions in the manner of an insurance policy, most people understandably have accepted the government’s assertion.  They believe that government is forcing them to save for the future. 

I haven’t done the research, but I expect that one will find an inverse correlation between the rate of Social Security taxes and the amount of private savings.  That is, the higher the taxes, the lower the rate of personal savings.

The insuperable difficulty, as countless observers have observed, is that the benefits current taxpayers expect to receive in the future depend entirely upon future full-time workers’ ability and willingness to pay ever-higher Social Security taxes, or upon an almost unlimited ability of the Federal government to increase the Federal debt.  With the rapidly rising ratio of retirees to young workers and high medical costs, neither is a prudent basis for long-range planning.

Second, characterizing Social Security as savings, from the standpoint of individual taxpayers, is totally false and therefore malicious.  Social Security taxes paid by people actively in the work force are not savings; they are simply transfer payments.  The government takes your money and redistributes it to others in accordance with socialistic planning: from each according to ability, to each according to need. 

Social Security tax receipts are immediately spent on benefits paid to retirees, disabled persons, and others eligible to receive benefits payments.  Any tax revenues left over are immediately spent on other current government programs. 

The government replaces actual cash coming into the Social Security Trust Fund with IOUs called non-marketable Treasury debt.  The so-called Trust Fund is nothing but a set of bookkeeping entries, with no financial substance.  Hearing that will, of course, horrify liberal-socialists. 

How can anyone question the “full faith and credit” of the United States?  Well, take a look at the currently declining value of the dollar against other currencies.  Among other things, foreign exchange traders are spooked by the combination of ballooning Federal deficits, rapidly growing Federal debt, and the vast amount of unfunded liabilities of the Social Security system that equals or exceeds the total of acknowledged Federal debt outstanding.

Liberals insist that there is no crisis in the Social Security system.  Call it what you will, President Bush is onto something of huge importance.  Better to fix a small leak in the dam today than spend a fortune after the dam breaks and floods the valley below.

Think of it this way: you cash your pay check and put the proceeds into the kitchen cookie jar in order to accumulate a fund for your eventual retirement.  Later, you want to buy groceries, so you take the cash out of the cookie jar and replace it with an IOU.  If that process is repeated for a a very long time, you will retire to find a cookie jar full of IOUs and no cash.  That is precisely the way the so-called Social Security Trust Fund works.

Now Ms. Munnell will solemnly assure you that such is not the case, because the Social Security Trust Fund is full, not of IOUs, but of interest-bearing Treasury notes and bonds.  OK, but take the next step.  How will the government convert those Treasury securities into cash in the future to pay your benefits, for which you have been paying taxes for many years? 

The only possible answers are noted above: young workers at that time must be willing to pay a huge percentage of their wages as Social Security taxes, or the Federal government must be able to increase the total Federal debt by an amount large enough to pay benefits to you and the ever-increasing numbers of elderly and disabled, who live longer lives each year and therefore collect an ever-mounting total wad of Social Security benefits.  Cashing the unfunded liabilities of the Social Security system today would roughly double the total Federal debt outstanding.

The Social Security Trust Fund, in short, is simply the world’s largest Ponzi scheme.  Borrow from Peter to pay Paul, and hope that you can con John or Sam into giving you money in the future to repay Peter, after you’ve spent everything you borrowed and have no real means of repayment.

But, again the liberals will howl.  How can I say that?  Hasn’t the Federal government always honored its financial promises?  The answer, in fact, is no. 

In 1933, Federal debt and most private corporate debt contained clauses promising to pay principal at maturity in dollars or the market value in gold.  When President Franklin Roosevelt began imposing socialistic planning on the economy, one of his first acts was arbitrarily to repudiate the gold clauses and to make private ownership of monetary gold a crime. 

The purpose was to facilitate price inflation, which socialist planners believed would stimulate economic activity and help to pull us out of the Depression.  We got the inflation, but not the economic recovery.

As Federal debt matured after 1933, bondholders received paper dollars worth very much less than the hard cash they had loaned the government before 1933.  This too amounted to a transfer payment, taking money from bondholders and passing it along, primarily to unionized labor.

Let’s revert to the question of whether the Social Security Trust Fund constitutes savings.  Answering that requires a closer look at what is savings.  From the viewpoint of the economy as a whole, there is no savings if you refrain from spending some of your income on goodies, but hand it over to someone else who does.  This, as noted, is simply a government transfer process that shifts consumption from one group to another, from workers to retirees and the disabled.

Real savings results when you put money aside in an account with a financial fiduciary, such as a bank, a life insurance company, a pension fund, or a mutual fund.  The difference is that those fiduciaries invest your savings by lending to or buying equity securities of private companies that will be judged by the marketplace on the rate of profit they generate by employing your savings.  If those private companies fritter away too much of your invested savings on huge executive salaries and bonuses, corporate jets, and other luxuries, fiduciaries will cease to invest or lend to them.  But, if they use your savings to fund new products and equipment to produce more goods faster and more cheaply, then the whole economy grows, more people are employed, and you have a greater array of of goods and services available to buy.  Moreover, as business productivity increases by virtue of new investments in production processes, businesses can afford to raise your paycheck, giving you the wherewithal to consume more of the increased supply of goods and services.

Contrast this to what liberals call government “investment.”  Some portions of Federal spending are truly essential, for example, for national defense.  President Eisenhower’s Federal interstate highway program in the 1950s was both a defense program to expedite and facilitate movement of military personnel, equipment, and supplies in the event of a Soviet attack, and it was the means for militarily strategic dispersement of industry into new geographic areas and for reducing the costs of transporting raw materials and finished goods via trucks.

Apart from such things, Federal spending is aimed at maximum inefficiency and waste, not at increasing the productivity of workers.  Members of Congress get elected by delivering pork-barrel projects to their home districts.  The larger the program expenditures, and the longer the programs endure, the better for the member of Congress, because more pork is delivered to his district and more of his constituents have jobs paying the Davis-Bacon maximum wage rates.

As a consequence, Federal expenditures are not economically productive.  They are, in fact, net drags on the economy, because the taxes to pay for them increase business costs and reduce business competitiveness with imported goods. From your standpoint as a taxpayer, they are, again, merely transfer payments: your money to somebody else’s pocket.

Again the liberals will howl.  Since the New Deal and the introduction of Keynesian economic theories, liberals KNOW that increasing the numbers of jobs is strictly a function of consumer spending.  The principal function of the Federal government, since the New Deal, has been to create as nearly as possible full employment.  Doesn’t more government spending give consumers more money to spend, thereby causing businesses to hire more workers?

Well, no.  Look again at the fact that government can only effect transfer payments.  Every penny given to consumers via government spending had to have been taken from some other consumers via taxes or sale of government debt securities.  Moreover, in ratio to its vast expenses, government produces very little of economic value that most people would willingly buy in the free marketplace. 

The only sure result is an increase in the rate of inflation, because some of the government expenditures will have been funded by the Federal Reserve’s simply “creating” more money that banks and other financial intermediaries use to buy the necessary Treasury securities.

Bottom line, there is no reason to trust the Trust Fund, and it is anything but savings.

Posted by Thomas E. Brewton on 01/19 at 01:24 AM
Economics • (0) Comments
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