Jewish World Review Sept. 28, 2004 / 13 Tishrei, 5765

Thomas Sowell

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Privatizing social security | Would you sign a contract that enabled the other party to change the terms of that contract at will, while you could neither stop him nor make any changes of your own? Probably not. Yet that is exactly what happens when you pay money into Social Security.

No matter what you were promised or at what age you were supposed to get it, the government can always pass a new law that changes all of that. But you still have to pay into the system.

A private annuity plan run by an insurance company is legally required to pay you what was promised, when it was promised, and to maintain assets sufficient to redeem its promises.

One of the few issues on which Senator John Kerry has taken a stand and not changed it (yet) is Social Security. He has said: "I will not privatize Social Security."

This has long been the position of liberal Democrats, and John Kerry's voting record in the Senate makes him one of the very few Senators more liberal than Ted Kennedy. That is the ranking given by Americans for Democratic Action, a leading liberal organization that ought to know.

Why are liberals against letting people put part of their Social Security payments into private investments?

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Risk is one of their arguments. Al Gore incessantly repeated the phrase "a risky scheme" during the 2000 election campaign and risk still seems to be the big objection to letting people put their own money where they want.

Some liberals may actually believe that politicians know what is best for you better than you know yourself. That is, after all, the philosophy behind many other government programs.

Another reason for liberal opposition to private investment of Social Security payments is that it deprives them of control of billions of dollars that they have been spending from the Social Security trust fund for years. They can buy a lot of votes with all sorts of giveaway programs, financed by money taken from Social Security.

As for the risk of making private investments, that might be a real concern if people were putting their money into commodity speculation or other volatile markets. Most people have better sense and privatization could limit where Social Security premiums could be invested.

Although the stock market bounces up and down from day to day, people are not investing today in order to retire next week. They begin paying Social Security premiums when they first get a job and they retire decades later.

Stocks are far less risky in the long run than they are in the short run because the ups and downs balance out over a long period of time. It is virtually impossible to find any 40-year period in which the stock market has not paid a higher rate of return on your money than you get from Social Security.

There are some mutual funds that simply buy a mixture of the stocks that make up the Dow Jones average (or Standard & Poor's), so that their clients will have the kind of return on their investments that the stock market as a whole has. They don't make a killing but they don't get killed either.

How did Social Security get into its present mess in the first place? Because politicians made it the "risky scheme" that they now claim privatization would be.

The same political expediency which caused Social Security to be called "insurance," in order to get public support, guaranteed that it would be nothing of the sort. Unlike an insurance company, Social Security has never had enough money to pay for all the pensions it promised.

Instead, Social Security has been run like a pyramid scheme, where the first people to pay in get money back from the second wave of people who pay in, and the second wave get money back from the third wave, etc. This is so risky that pyramid schemes are illegal — except when the government does it.

They have gotten away with this thus far because the first generation covered by Social Security was an unusually small generation that was followed by the unusually large "baby boomer" generation. But when the baby boomers retire, the pyramid scheme will no longer bring in enough money to pay for their pensions.

Nothing is more risky than depending on politicians.

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JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, "Applied Economics: Thinking Beyond Stage One." (Click HERE to purchase. Sales help fund JWR.) To comment please click here.


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