Jewish World Review July 30, 2001 /10 Menachem-Av, 5761

Thomas Sowell

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Social Security vs. privatization

http://www.jewishworldreview.com -- ACCORDING to the unanimous preliminary report of the special commission appointed to look into Social Security, the amount of money coming into the system will be insufficient to pay out what was promised by 2016. By 2030, the choice will be to reduce Social Security benefits by about one-fourth or raise payroll taxes by about one-third.

Liberal Democrats, who have always been the biggest supporters of Social Security, have attacked the commission's conclusions. Congressman Richard Gephardt, for example, has denounced the report as "scare tactics" and said that the Social Security system faces no problems until its trust fund runs out in 2038.

When the money going out exceeds the money coming in, you are in trouble -- and that happens in 2016. Those who try to push the fatal date off to 2038 are counting the money that Social Security has in its so-called trust fund. However, the so-called trust fund exists only as a legal technicality, not as an economic reality.

When your FICA taxes get to Washington, they are spent -- right then and there. What preserves the illusion of a "trust fund" is that the Social Security system is given government bonds in exchange for the money that Congress takes and spends. But, no matter what kind of accounting sleight-of-hand you use, you cannot spend and save the same money.

Those bonds in the Social Security "trust fund" represent no tangible assets -- not houses, not factories, not cars, not trains. They are promises that can be kept only by taxing future taxpayers.

What if the bonds in the Social Security "trust fund" had never existed? Economically, the situation would be exactly what it is now. After 2016, the government would have to either raise additional taxes or lower the benefits. The bonds serve only to fool the gullible or the uninformed.

The crucial difference between a 100 percent government-run retirement system like Social Security and one in which individuals can invest at least part of their own retirement money in the market is that the market represents real things. Private investment creates the enterprises and industries which generate real wealth, not just paper promises.

When you own a share of a company that is building houses, cars or computers, then your money is creating a larger real wealth -- for the country and yourself -- than if Washington politicians were spending your FICA taxes as fast as they reach the Beltway.

Representative Barbara Lee of Oakland, Calif., is typical of Congressional Democrats in opposing the idea that younger workers should be allowed to invest part of their retirement money in the market, rather than in Social Security. She said: "Social Security is an insurance program, it's not an investment program. And no way should we want workers to have their benefits put at risk and put them at the whims of the stock market."

This is classic liberalism, starting with an utter ignorance or total disregard of economics. An "insurance program" is not something different from "an investment program." Real insurance companies invest the premiums they receive, precisely in order to have the money available to be able to pay off annuities or insurance claims when they become due.

But Representative Lee is half right: Social Security is not an investment program. People like Representative Lee can spend the Social Security money as fast as it gets to Washington, without investing anything to pay off future retirees. An insurance company executive who did that could find himself behind the walls of a federal prison. Barbara Lee, however, is only likely to find herself re-elected, as a reward for handing out goodies with the money that workers think is being put aside for their pensions.

You can see why liberal Congressmen don't want to see any of the trillions of dollars in Social Security pass out of their control. You can also see the arrogance of liberals who say that they don't want "workers to have their benefits put at risk." Nobody is going to invest those workers' money in the private sector except those workers themselves.

If workers prefer to invest in mutual funds to taking their chances with a Social Security system that may never pay them back what they paid in, who are liberals to tell them that they don't have a right to do that with their own money? The so-called "whims of the stock market" are nothing compared to the whims of politicians.

JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, Basic Economics: A Citizen's Guide to the Economy.

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