The Problems of Social Security—Radical Reforms Needed: One generation already hurt. Will the next one also get mulcted? Time to consider the what was once thought impossible: Offer new retirement saving choices and start to unwind the Social Security by making it compete.

As we discussed in the previous segment, Social Security, America’s bedrock government retirement program, is on a collision course with mathematics. More people are collecting for longer periods than in previous generations. Fewer people are entering the workforce who will pay into the system.

The Social Security surpluses accrued in the 1970s through the 1990s, when the mathematics were better, were spent on other things by Republican and Democratic governments. These governments didn’t plan for the future; they were mainly concerned with paying higher benefits so they could win elections and weren’t thinking about the future.

But the future is now.

So, unless something dramatic is done, this flawed 83-year old system will run out of money in the next few decades, which could mean dramatic reductions in the program. That could ruin the retirement plans of millions of Americans.

Again, the basic problem is that in previous generations, governments have spent much of the surpluses on things other than Social Security. The result: Social Security, by the admission of its own trustees, is going to run out of cash in approximately 20 years.

Herewith GregoryBresiger.com. offers a few guiding principles for fixing this mess of a state system. And we begin with the idea that the best thing for this generation and for generations to come is as much privatization as possible; privatization that will ensure that the misappropriation—stealing? —of peoples’ retirement savings never takes place again because individuals take control of more and more of the assets.

Privatization of some or all of the system would provide more than justice. It would also have a strong positive effect on our economy—it would increase the savings, helping millions of individuals, whose greater pool of savings will generate more jobs. It would require the government to more clearly state how much it is actually running in the red each year.

*Principle One: People Must Get Every Promised Social Security Dollar

Promises to all retirees or would be retirees must be kept.

Over the course of many years, people have paid into this system with the expectation of a certain level of payment, which is listed in the annual statement everyone receives from Social Security. All promises must be kept, although critics of the idea are right to be skeptical that this will happen. Governments, both left and right, have pulled many sleazy Social Security deals in the past so why should we trust a government this time?

Fair point.

This is why we are proposing a radical reform program. It is one that would take power away from the government and give it to the taxpayers who enable this bad system. And no matter what kind of new program takes the place of this egregious Social Security system, it must be remembered that people were forced to buy this awful government retirement product for decades from the time they started working. Now they have a right, regardless of their circumstances, to get everything they were promised. No matter if one is rich or poor, you were forced into this lousy system—a system of retirement saving that uses, special, low yielding government bonds—so you should be paid what you were promised.

I argue for this principle for several reasons. Many people have made retirement plans based on receiving a certain level of Social Security. To tell them now that things have changed and they will receive less is a gross injustice.

And, given the problems of the system, it is now being suggested in some quarters that the answer to the woes of Social Security is to “means test it.” (The latter idea was offered by presidential candidate Chris Christy in the republican presidential primaries of 2016). That “means test it” phrase translates into this: If you have been thrifty and accumulated a lot of private savings, you might not get Social Security or get less than expected.

This is an outrageous idea; it constitutes a kind of legalized theft. It is nothing less than a penalty for the man or woman who has saved for retirement. Instead of penalizing this person, we should applaud him or her.

This person is not a burden on society. He or she, by saving, is adding to the nation’s capital stock. The bigger the capital stock, the lower the costs of capital. The latter is just another way of describing interest rates. The bigger the capital stock, the lower interest rates can naturally be. By natural, I mean honest interest rates, not the rates often dishonestly set by central bank officials, who, sometimes at the demand of those who head governments, keep rates unnaturally low, especially in election years such as what happened in 1972. When that happens, it is like a drunken spree that begins wonderfully, but ends up a horrific hangover that might go on for years.

This economic distortion results in disastrous economic events such as the crashes of 1929, 1987, 2001 and 2008 as well as the stagflation of the 1970s. The latter was the result of the central bank policies of Fed Chairman Arthur Burns and his boss, president Richard Nixon, who pushed for easy money policies. (For more on this, please see my story on this at: https://mises.org/library/disastrous-deal-1972

*Principle Two: Privatization and Voluntarism

Let people, especially young people, save for their retirement.

Are you willing to save for your retirement? Do you want to take your Social Security money and put it into qualified (tax advantaged) private retirement accounts that you, not the government, will control? By all means let these people do it themselves. They will be helping themselves and helping society at the same time. This is a principle illustrated by philosophers such as Samuel Smiles, William Graham Sumner and Adam Smith, among others.

If the system is to be continued in some form, then let new workers have the option of taking part of their Social Security “contributions” (sic) and putting them into private accounts that they will control. The government might limit the number of private choices—say a dozen or so investments choices including passively and actively managed equity and bond funds as well as some hard asset funds and cash—and then get out of the way. This part of the Social Security money would be in trust for the taxpayer. It would be the same as a qualified 401(k) and IRA retirement accounts. He or she couldn’t get at it without penalty before age 59.5.

All investment taxes would be delayed until retirement (By the way, I’d love to see a system in which there were no investment taxes period, but that is a subject for another column). For many young people, saving privately for retirement would constitute the first significant savings they ever had. As balances rose, many young people would become enthusiastic about saving and investing, especially given that the stock market’s long-term return is some nine percent per year while Social Security’s long-term return is some one to two percent. These people, the ones who also had private accounts over thirty, forty or fifty years, would go into retirement with much more than the small Social Security payments; they would have a significant stash of private savings that would be theirs. It would be controlled by them. It would not be governed by arcane Social Security rules or by pols who suddenly say, just before one is about to retire, that their savings are now to be penalized; that they will be “means tested” or taxed some more, even though one has already paid a Social Security tax for 40 or more years.

*Principle Three: “Let My People Go”

You don’t want to be part of Social Security but are willing to save for your retirement privately? You are willing to set up private savings plans to pay for retirement and health care. Can you prove that? Fine, now you can go your own way. Now you can escape the Social Security sentence, which doesn’t increase savings, but often builds dependence (I know people who are depending on Social Security for all or most of their retirement income. God help them. They depended on the government to take care of them).

*Principle Four: A Greatly Reduced Social Security

Yes, despite all the arguments one can make about the virtues of saving, of investing on a regular basis, of dollar cost averaging and the miracles of compounding over the long term, there will always be some people who will want Social Security as their primary retirement program no matter what. Fine, they should have it. I propose that Social Security continue in a reduced form for them and that it can only continue on this principle: Those who believe it is good, can continue to use it and get every promised cent. But those who don’t want it, and can show that they save on their own, should be left alone. For millions of Americans, they should be allowed to save for retirement on their own.

*Principle Five: Make Social Security Compete

Those who want to continue with Social Security should be allowed to do so but they should have opt out provisions or be allowed to put half of their retirement savings into Social Security and half into private accounts that they control. I would also say that, at the beginning of one’s working life, one decides among three options: Private, Social Security or half and half private and Social Security. At age 45, about half way through a person’s working life, the worker should have the choice of staying with Social Security or opting out. If the worker chooses the latter, the worker is given his contributions plus a five percent yearly return. Workers under these principles would have lots of options on how to accumulate retirement money.

Still, critics, defenders of the status quo, will say “you can’t do that. People won’t know how to invest or save.”

So will those who use some form of these private options do well or make mistakes? Will some recklessly invest while others will carefully put their money to work? As with all investors, it will be some part of both. So am I suddenly reversing course and making an argument against allowing people to invest their retirement savings?

No.

Ultimately, the case for privately invested retirement money comes down to this: It’s your money, not the government’s. The latter has shown, time and again, that it is among the worst money managers in the world; a manager that lets other people take and use your money. Then, when you are expecting to collect, the government tells people that the bank is running down and they’ll be getting less than expected.

Ultimately, I would rather take my own chances and make my own mistakes with my own money than allow governments, any government left or right, use my money in any way it sees fit. And given the problems of government, with its official some 21 trillion dollars or so of debt—it’s actually a lot more than that; our government likes to flim flam the real numbers—and with the red ink just getting bigger and bigger each year under both right wing and left-wing governments, I would rather control my own funds. I’d rather make my own mistakes than trust in the pols. But again, this plan would not force anyone out of Social Security. If you want to stick with it, please do. Just leave the rest of us alone.

Finally, the guiding principle of my unravelling Social Security idea is competition. This is something that most people recognize forces us to do better each day if we expect to win at anything and everything from baseball to business to peddling articles to websites or newspapers or anything else. I am not saying abolish Social Security tomorrow. I am merely saying that it should no longer be forced down the throats of millions of American workers today and tomorrow along with generations unborn.

Most of the latter will have never heard of its failures.

Why?

Social Security has a huge public relations machine that whoops it for this program along with lots of Congressional allies. A few of the latter actually understand the problems of this system, but are not going to take the political risk of pointing out the emperor’s nudity.

Social Security also has many allies in mainstream media who cannot conceive that there could be another way of saving for retirement other than a state mandated program. These are mostly reporters and editors who have bought into the main assumptions of the modern welfare state—more and more is always better and forget about costs. And anyone who challenges any of these assumptions is a primitive, whose arguments cannot even be entertained.

In an age in which organized religion has become passé for many media big shots, they look at the welfare state and Social Security as nothing less than a secular religion; a kind of God that hasn’t failed and is real for them.

So let the retirement saving competition begin between the state and the private sector. If you doubt that these principles make sense ask yourself this: Why are so many Social Security supporters so reluctant to allow even a little competition with their revered program? What do they fear?

I believe that any competition, no matter how small, would expose the weaknesses in an 83-old retirement program that is failing millions of Americans.

I believe in liberty, especially when we’re talking about my money and property. So should you.

One final note, for those who want to read more about the history of Social Security, please see my “Revolution of 1935” at Mises.org. https://mises.org/library/revolution-1935