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Jewish World Review May 18, 2000 / 13 Iyar, 5760

Doug Bandow

Doug Bandow
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Protecting the next generation

http://www.jewishworldreview.com -- SOCIAL SECURITY is racing toward insolvency. Texas Gov. George W. Bush is inclined to allow workers to invest some of their tax payments. Vice President Al Gore is determined to respond with his usual demagoguery.

Social Security seemed like the perfect government program when it was created in 1935. For years, there were scores of workers for every retiree, keeping the tax burden low.

The myth of a "trust fund" made the system seem fiscally sound. And the fact that almost half of Americans died before collecting their first check meant politicians won votes without having to pay for their promises.

But, all good things come to an end. People now live 15 years longer; the number of elderly is rising, leaving barely two workers per retiree. The trust fund has been exposed as a fiction, with Social Security payments set to exceed collections by 2015, if not before.

The preferred political solution is to do nothing. After all, a President Al Gore would leave office before the financial deluge hits. He could collect his government pension, royalties on his memoirs and speaking fees while average Americans found their retirement cupboard to be bare.

The obvious answer is to allow workers to opt out of the government's pay-as-you-go Ponzi system. A private scheme that operated on the same principle - taking money from taxpayers to pay current retirees while making unsustainable promises to future retirees - would result in its administrators going to jail.

Instead of being forced to dump their money into Social Security's black hole, workers should be allowed to invest their money privately. They would receive a return ranging between three and six times that provided by Social Security.

Indeed, economist Martin Feldstein figures that the real rate of return on corporate capital averaged 9.3 percent annually over the last 75 years, which includes the Great Depression.

In contrast, analysts Peter Ferrara and Michael Tanner estimate that Americans entering the work force since 1985 will receive a return of at most 1.0 percent to 1.5 percent a year from Social Security - assuming, impossibly, that benefits aren't cut or taxes raised to keep the system afloat. And some new workers are already facing a negative return.

Gore prefers to smear his opponents than offer any solutions to the system's impending collapse. Bush's modest proposal to allow people to invest a couple of percent of their Social Security taxes is a "risky" plan that would leave people behind and threaten "the bankruptcy of Social Security."

Gore has some curious allies. For instance, conservative religious activist and former presidential candidate Gary Bauer opines: "No matter what the market does, why do we think the nation will be better off by forcing workers to put their money into stock rather than, say, spending it on rearing children?"

Exactly why it is better for the government to take their money rather than let them invest it he does not explain. Or why it is more child-friendly for them to end up with less retirement earnings - and no investment nest egg to pass on to their kids.

In fact, the rich don't need privatization. They, like Gore (and Bauer), will enjoy lavish pensions and buoyant investment portfolios. They won't be relying on Social Security for their retirement.

The widespread desire to provide for a better retirement future is evident in the dramatic increase in stock ownership in recent years. Today, 76 million Americans, accounting for 43 percent of the nation's households, own stocks or mutual funds.

Richard Nadler of the American Stockholders Association reports that between 1989 and 1995 alone, share ownership increased 106 percent among farmers and laborers and 80 percent among families earning less than $25,000 annually. Privatization, full or partial, would most benefit families that today have the least to invest.

Of course, any reform would guarantee benefits to those already relying on the system. Doing so while allowing workers to invest a portion of their taxes would obviously create some transition costs.

But these pale compared to the price of doing nothing: an $8 trillion unfunded liability. And there are lots of wasteful federal programs to kill. Congress could start cutting the sort of corporate welfare so beloved by the vice president: federal dollars for Anheuser Busch, Boeing, Gallo Wine, Sunkist, Westinghouse and many others.

Americans who are counting on Social Security for their retirement are in for a rude awakening. Unless policy-makers act, the system will be bankrupt and the young and old will be locked in an acrimonious generational war.

Only serious reform can prevent this ugly future. Come November, voters should remember Bush's courageous willingness to accept the challenge - and Gore's pusillanimous flight from responsibility.



JWR contributor Doug Bandow is a senior fellow at the Cato Institute. Comment by clicking here.

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