Hostile Takeover: Resisting Centralized Government's Stranglehold on America (37 page)

Social Security was initially a great deal, so long as we willfully ignored the declining returns for future retirees. At the very beginning, in the 1940s, for the initial generation of retirees who had paid little into the system, it was almost entirely gravy. Over time, each generation of workers has gotten a worse return on “investment.” In fact, the real return for today’s workers is only about 1 to 2 percent, and the expected return for today’s children is expected to fall below 1 percent. For some individuals, particularly younger ones, it will be negative. For them, simply stuffing the money under the mattress is literally an attractive investment alternative.

That Social Security trust fund you’ve heard all about? It’s filled with IOUs, because every year Congress spends all the revenues that come in from the payroll tax, and any surplus besides. The trust fund is a fiction. But even if we accept its actuarial legitimacy, it’s still broke. The demographic problem I mentioned earlier, combined with the big benefit hikes of the ’70s, almost exhausted the trust fund in the mid-’70s and again in the early ’80s. The response? Raise taxes and cut benefits. But mostly raise taxes. Since the 1983 bipartisan “reform,” which combined an increase in the retirement age (from sixty-five to sixty-seven for people born after 1960) with a large and immediate payroll tax hike, the fund has run substantial cash surpluses. More money has come in than has been needed to pay benefits. Guess what Congress has done with these surpluses? That’s right, it has “borrowed” them to finance other government programs. But don’t worry, that money has been replaced by “completely reliable” government “bonds” that promise the borrowed money will be returned when needed, “with interest.” And where is the government going to get the money to pay back all those “bonds,” with “interest”? By taxing young people, or else debasing the value of the dollars in their paycheck through inflation.

As it happens, the cash surpluses ended last year, and now the Social Security “trust” fund is having to borrow back from the general fund by redeeming those “bonds.” Eventually, when those IOUs are all redeemed—and current projections put that date in the 2030s, but it could easily come sooner—the program will be legally unable to pay all promised benefits. To keep the system going as promised, retiree benefits will have to be cut by about a fourth and/or workers’ payroll taxes will have to be raised by about a third. But continued borrowing is the more likely path.

Remember how they told us our benefits would come to us “as a right” and that the current payroll tax level would be “the most we will ever pay”? Remember how they were going to safeguard our money in an account with our name on it, and guaranteed a minimum 3 percent rate of interest on our money? Is it any wonder young people nowadays are more likely to believe in UFOs than that Social Security will keep its promises and be available to them when they retire?

But there’s an even bigger problem with Social Security:
You don’t own it.
You pay a big chunk of your wages, paycheck after paycheck, over your whole working life, and then you die and they won’t let you pass your benefits on to your loved ones. If you die before you reach retirement, your spouse or kids get nothing. Oh, they may qualify for their own modest “survivor’s benefit,” plus 250 bucks to bury you with. But all that money you paid in, all those years? They’ll never see it.

Turns out the “intergenerational compact” is a recipe for intergenerational resentment and a massive wealth transfer from younger, less-wealthy Americans. The Millennial Generation, already saddled with inflated education debts and lousy job prospects, bears
this
growing financial burden as well. That, as the Twitter generation might put it, “#sucks.”

REAL RETIREMENT NEST EGGS

O
N PAPER, IT’S EASY TO MAKE
S
OCIAL
S
ECURITY SOLVENT OVER
seventy-five years, which is the traditional time horizon by which actuaries judge the program’s fiscal health. Just change the base benefit amount so it grows with inflation instead of wages, and bump up the eligibility age to seventy from the current sixty-seven. And if those fixes aren’t enough, there’s always means-testing, which means denying the benefit to wealthier folks, even though they “paid in,” too.

In other words, we could keep asking people to pay more in to fund someone else’s retirement, and then get less and less back out of the system when their turn comes.

If retirement security were just an accounting problem, the solutions would be that easy. But all these conventional Washington “reform” ideas would actually worsen the program’s rate of return. And, more important, none of them would give young people any personal control they could believe in.

Freedom offers a better way—one that doesn’t make unreliable promises, one that gives you, the individual who actually has to live your life, ownership and control of your own retirement. A “defined contribution” approach differs from the traditional, Bismarckian, top-down “defined benefit” approach in the same way that relying on somebody else differs from relying on yourself, or that an easily broken promise differs from real money in the bank. With a defined contribution, you have a real retirement account, and the money in it belongs to you. It’s your property. American employers have largely switched to defined contributions from old-fashioned pension schemes, and a number of countries around the world have done the same for their workers, with much success. Uncle Sam should follow suit.

What makes defined-contribution programs work, both actuarially and politically, is that they can produce better returns, thanks to the power of compound interest. Social Security offers around a 1 percent return, but the average rate of return from the stock market since 1926 has been at least 7 percent, even taking into account significant stock market declines such as those that famously occurred in 1929, 1987, and 2008. Defined contributions also provide something truly priceless: real ownership.
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Do you remember during the Republican presidential primary debates when Herman Cain talked about the “Chilean model”? No, he was not referring to the
Sports Illustrated Swimsuit Edition
, but to a remarkable example of freedom at work. Three decades ago, Chile embarked on a bold transformation of its public pensions. Today the Chilean system is the envy of the world, giving seniors far better benefits than its old, government-run system. Here’s how it works. Let’s say you’re a worker in Chile. Upon entering the workforce, you’re given an account into which you must contribute 10 to 20 percent of your income. These contributions are your property, not the government’s. The amount you opt to contribute determines the age at which you can retire. At retirement, your private fund is converted into an annuity offered by a private, government-regulated insurance company. You choose your insurance company and the kind of annuity plan you want. If you’re not satisfied with either, you can make a switch.

For those workers who were under the older, traditional pension system, they were given a choice to stay in that system or enter the new one. The biggest challenge for the reformers: every worker in the old system who switches to the new system creates a problem for the government, a “transition cost,” since that worker is now saving for himself instead for paying the benefits of a previous generation. But Chile financed these transitional costs by selling off state-owned enterprises. The program has been so successful that 93 percent of Chilean workers have switched to the new program.

The whole system is based on the principles of voluntary choice and personal ownership, and the positive effects have been remarkable. The new accounts offer benefits 40 to 50 percent higher than the traditional “social security” pensions. Disability and survivors benefits are 70 to 100 percent higher. Meanwhile, significant decreases in the payroll tax have contributed to the country’s low unemployment rate, which is under 5 percent. Savings rates have soared. Investment has gone up. Economic growth rates have more than doubled over the past ten years. And the reform has helped generate government budget surpluses without raising taxes, inflation, or interest rates. Does that sound like something we might want to try in America?

EVERYTHING’S BIGGER IN TEXAS

A
BOUT THE SAME TIME THE
C
HILEAN PENSION REFORMS WERE GETTING
under way, a telling experiment began in three U.S. counties that took advantage of an opportunity to opt out of Social Security in favor of offering their public employees personal retirement accounts. (The option has since been rescinded, and those three jurisdictions—Galveston, Matagorda, and Brazoria Counties, in Texas—are grandfathered.) Thirty years later, the verdict is in, and the experiment is a smashing success.

County workers under the “Galveston model” retire with more money and have better death and disability supplemental benefits than do retirees in traditional, defined-benefit Social Security. In fact, many of them end up with more than twice the money they’d get under Social Security. And more important, because it’s a defined contribution, that money is their
property
. No damn politician can take it away on a whim. When a worker enjoying this plan dies, his entire account belongs to his estate and can be passed along to his heirs.

The money in the account isn’t immediately spent and “credited” to a phony “trust fund” full of IOUs; it’s actually invested in safe instruments by a real financial institution under contract to the county. Not surprisingly, when it comes to returns, these investments invariably beat the pants off the old FDR, pay-as-you-go model.

And here’s the kicker: These three counties—unlike almost all others in the United States—face
no long-term unfunded pension liabilities
. How is that possible? Because of the model. Just like the rest of us, the employee under the Galveston plan contributes 6.2 percent of his income while the employer (the county) matches the contribution. But, as policy expert Merrill Matthews explains, “once the county makes its contribution, its financial obligation is done—that’s why
there are no long-term unfunded liabilities
.”
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Better benefits. Personal ownership. A more secure retirement. Zero public debt. Do we need more proof that freedom works better than government?

GET SMART

I
N THE FIRST CHAPTER,
I
MENTIONED THE
T
EA
P
ARTY
D
EBT
C
OMMISSION
, which has put forward a comprehensive plan to cut spending,
balance the budget in four years
, and stop the growth of the national debt. Among other reforms, the commission found that America could achieve all of those goals
and
fix Social Security by adopting the Chilean model, even after accounting for transition costs. The commission embraced a modified version of Rep. Jeff Flake’s Strengthening Medicare and Repaying Taxpayers (SMART) Act. This bold reform, first offered by the Arizona Republican in 2005, would allow young people to opt out of traditional Social Security into a personally owned and controlled account. In the Tea Party Budget variant of this idea, the accounts would be phased in. New workers born after 1981 would be allowed to invest half of their payroll taxes (7.65 percent of their wages) in a SMART account, which they could use to fund their retirement and health care costs in retirement. It would be their property, and, unlike the traditional program, they could pass it on to their heirs. (To get program costs back under control, the future growth of the guaranteed benefit amount under the traditional program would be slightly reduced for upper-income folks. But this change wouldn’t affect the accounts.) The accounts are purely optional. You could have one all your life, and then switch back to the traditional system on reaching retirement age, though you’d have to relinquish the money in your account at that point—something I suspect very few would do. As happened in Chile, the SMART accounts will offer better benefits and more financial security. And all of this, without eat-your-spinach reforms like means-testing or raising the retirement age.

One of the more Orwellian aspects of federal budgeting is the fact that more than $100 trillion in long-term unfunded liabilities is not on the accounting books, but the “cost” of taking those liabilities—young people—off the government’s obligations by allowing them to save for themselves with their own earnings is scored as a “cost.” And you wonder how Jon Corzine—Obama confidant, former Democratic senator and governor, former Goldman Sachs head, and now disgraced MF Global CEO—managed to misplace $1.2 billion in customer funds? He said, “I simply do not know where the money is, or why the accounts have not been reconciled to date.” Apparently he was used to government math.

SMART accounts would, over the first decade, have a net budgetary “cost” of about $500 billion, but in the long run would eliminate Social Security’s unfunded liability. That $500 billion “cost” would be “an excellent investment on a better system, and one that is fully paid for in this plan.”
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How can we fund the “transition” costs? By cutting federal spending and selling off certain government-owned assets.

BROKEN PROMISES

W
HEN IT WAS CREATED IN 1965,
M
EDICARE PROMISED OLDER
A
MERICANS
the peace of mind that comes from having guaranteed access to medical expense coverage. Seniors, it was alleged, were exhausting their savings due to high health expenses and finding it too expensive to afford private health insurance. This “crisis” would now be over. As President Johnson described it in 1965: