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Willisms

« Gratuitous Marketing Pitch | WILLisms.com | Crisis, and opportunity. »

Social Security, the National Ponzi Scheme.

WILLisms.com supports a Social Security program that:

1. is economically healthy, financially solvent, fiscally responsible, and sustainable;
2. provides Americans a basic guarantee of retirement security;
3. gives the best possible benefit to retirees;
4. puts the U.S. market economy at an advantage; and
5. provides some level of options, choices, and personal ownership.
6. protects the link between individual contributions and benefits, between personal effort and reward.

WILLisms.com understands that Social Security is a 20th-century program in need of reform to meet the challenges of a 21st-century economy. It is imperative to act now, while we still can, to rescue the retirement security of the WILLisms.com generation and beyond.

Social Security resembles a Ponzi scheme in its design, a type of pyramid scheme named for Charles Ponzi, who duped thousands of Americans in 1921. Ponzi schemes operate under the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme eventually collapses.

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In 1950, there were 16 workers paying Social Security taxes for every retiree receiving benefits. According to the 2003 Social Security Board of Trustees Report, today, that number has fallen closer to 3, and it will fall even further, to only 2 workers per retiree, within the next two decades.

Indeed, over the years, even as payroll taxes have risen from 2% in 1949 to 12.4% today, the retirement age has been raised, the amount of income taxable by Social Security has been raised, and other superficial adjustments have been made, the system remains in jeopardy.

When Social Security was born, FDR and others assumed that Americans would always exponentially add to its population, thus ever-larger subsequent generations would be able to support smaller, older generations. Because of increased availability of birth control, women becoming more career-oriented, and other societal shifts in the meantime, there simply are not enough younger workers to adequately pay the benefits of the retirees. Compounding the effects of the Social Security pyramid scheme are the profound breakthroughs in medical technology that have allowed millions of Americans to live far beyond retirement age.

If Social Security were a private program, there is little doubt that the U.S. Securities and Exchange Commission would be investigating its accounting practices. If the Social Security Administration were a corporation, zealous Attorneys General such as Eliot Spitzer would have filed charges long ago in courtrooms around the country.

The U.S. Supreme Court ruled in Flemming V. Nestor, 363 U.S. 603, 610–11 (1960), that Americans have no legal right to Social Security benefits. Social Security benefits are not guaranteed by the Constitution; Congress can slash benefits, raise the retirement age, impose means testing, and disqualify people from receiving their Social Security checks. Although critics of Social Security reform claim that privatization is a risk, the current insolvency of the system is the true risk.

WILLisms.com understands that for Social Security to remain an important part of American retirement security, structural reforms are necessary.

The Cato Institute has a detailed plan called "The 6.2 Percent Solution: A Plan for Reforming Social Security," which would provide workers ownership of, and control over, their retirement funds. The plan draws lessons from Chile's successful Social Security reform, implemented in 1981.

You can use The Cato Institute's Social Security Benefit Calculator to determine how the plan would affect you.

For example, a woman, 26 years of age, making $70,000, can currently expect an estimated annual benefit of $28,593 (in 2004 dollars), beginning in the year 2046. This assumes benefits are not cut or the retirement age is not raised by then.

Under the Cato plan, that same woman, in 2046, would own an account with $1,029,312 in 2004 dollars, and choose an annuity of $85,704. This assumes the average rate of return on a 60-40 Stock-Bond portfolio (5.27 percent) minus transactions cost (0.30 percent).

"Privatization" is kind of a dirty word in politics, because seniors (stoked by the alarmist rhetoric of Democrats) fear they will not receive their retirement checks under a privatized system. For the United States to compete effectively in the 21st-century global economy, Social Security reform is a must.

President Bush still must make the case for Social Security reform, convincing even skeptics in his own party, as Democrats have already launched an intense public relations campaign on the issue, arguing first that there is no problem and therefore no need of reform, and second, that market-based reforms are too risky. Democrats plan to stake everything they have on blocking Social Security reform. What a tragedy, for Democrats, to have become the party of obstruction, the party of strict adherence to early-20th-century programs, the party against reform, the party of the status quo.

Hopefully, Democrats fail to block Social Security reform, and that failure leads them to drastically rethink their ideology and ideas. Some Republicans, as well, have signalled a certain desire for timid reforms, or no reforms at all, and some Democrats are hoping for a split in the GOP on the issue, but as Brandon Miniter points out, "the theory of a coming split in the party is likely more of a myth than a reality, a myth meant to scare President Bush out of pushing for serious reform."

Miniter notes:

"Undoubtedly a few Republicans will break ranks. But if there is going to be a mass defection, look for it on the Democratic side of the aisle. Nothing moves politicians like pressure from their own constituents. After President Bush fires up his campaign machinery, look for more than a handful of Democrats to start looking for a compromise."

WILLisms.com will address Social Security reform, the policy and the politics, in greater depth in the coming weeks.

Posted by Will Franklin · 24 January 2005 11:54 AM

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