Saturday, January 5, 2013

My 2 percent...I mean cents

I had a little interaction on Twitter the other day that got me thinking.  A dangerous thing as my brother might tell me.

I had posted to Twitter:
Ah, first paycheck of the year, first view of my higher taxes. And people say the government can't work fast.
The difference in my paycheck was just the ending of the so called "payroll tax holiday."

This garnered a decent number, for me, of favorites, retweets and even a few new followers.  It also drew one direct reply:
This was a two year tax holiday; would you like to have it made permanent? Why not lower the rate to 0%, and borrow 100%?
Implicit in this reply is that Social Security is a fact of reality that is not subject to change and that the only choice open to us is how we fund it.

This is a pretty common assumption, or at least not uncommon.  A quick search revealed any number of similar reactions a year ago when the payroll tax holiday was extended.  For example:
Investor's Business Daily (one of my favorite newspapers) said, "Result: cash for pizza now — and smaller Social Security checks later."
Truth Sandwich's headline read: "Raiding the Social Security Piggy Bank for Pizza Money"
CNS News reported, quoting Rep. Frank Wolf (R-VA), "Wolf called the payroll tax extension a "raid on Social Security, which is already going broke," and he noted that the money paid into the system now -- through payroll taxes -- pays benefits for existing retirees."

This was pretty much my reaction at the time.  I felt that if we have a Social Security system that is by all accounts already looking at trouble down the road it is foolish to knowingly take in less money.  For those that don't believe that Social Security is on shaky ground, here is a quote from Social Security Administration that they used to send out when they mailed statements to people:
"Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2037, the payroll taxes collected will be enough to pay only about 76 percent of scheduled benefits.”
There are a number of philosophical issues with a Social Security system.  The first is that it essentially requires that you work/live for the benefit of someone else.   To whatever extent you are living for someone else's benefit you are NOT living for your own.  Given that we are forced to live for others, as opposed to choosing to do it for your own reasons, we are not free.  As Ayn Rand put it, "Living for others is slavery -- and nothing else whatever -- and no names, ends or excuses can alter the fact."

Contrary to popular belief, the government is not saving and investing your contributions in order to give you income during your retirement.  Rather, money paid in today is used to pay benefits to those collecting them today.  In the past, more revenue was collected in payroll taxes than was needed to pay the current benefits and the surplus was used to fund other parts of the government in return for IOUs (Treasury bonds) which  were put in the "Trust Fund."  Now that payroll taxes are no longer covering current benefits, bonds from the "Trust Fund" need to be redeemed.  Which means the cash needed to pay shortfall is coming from general tax revenues further burdening current tax payers.  This latter problem will worsen as demographics catch up with us and there are fewer and fewer workers paying taxes to support retirees.  In the 1930s it was about 17 workers for 1 retiree and now it is approaching 2 to 1.

There have been a number of models for privatizing Social Security which would appear to remove the issue of requiring people to work for the sake of others.  Two of the more often mentioned systems are those of Chile and Galveston, Brazoria and Matagorda counties in Texas.

Chile converted their system from an untenable government run system to a privately invested system where the individuals can decide how their money is invested.  So far this seems to a lot of improvements over the government run system.  One interesting side effect is that savings rates are higher than before the private system which certainly helps long term growth.

The three counties in Texas took advantage of a since-closed loophole in the law and opted out of Social Security in 1981 and convert to a privately invested system.  These counties pool the contributions and then money management firms bid to manage this money with certain restrictions on guaranteeing rates of returns. Even the report from the Social Security Administration indicates that in many ways the private program is as good and often better than Social Security.  In the areas where it appears Social Security is better it is unclear whether the figures given for Social Security include the reduction in benefits that would appear to certain to occur around 2037 (the examples given in the report are for workers retiring in 2045).  Assuming the government doesn't increase payroll taxes by about 1/3, at current estimates, then benefits as noted above would be reduced by 24% making the private plan in these counties better in pretty much all areas.

The problem with both of the above alternatives is that they use government force to compel the workers involved to participate.  (Well, in the case of the counties in Texas, workers are compelled to either participate in the private plan or social security.)   While the government properly should have the monopoly on the use of force in a civilized society, this force should only be used in retaliation against those who initiation the use of force unlawfully.  The government should never be the initiator of force against the innocent.

When the government uses force to compel behavior, or prevent behavior that does not infringe on the rights of others, it effectively takes away our right to use our own mind and reason to decide what the best course of action for ourselves is.  When the government compels someone to save X% of their income towards retirement it precludes the person from using that money for something else.

Maybe the person would like to start their own business but because of such a law they would be unable to save the money needed to begin, or would be so delayed that the opportunity would disappear and the person's future be worse off as a consequence.  Maybe the person would decide to take a trip, buy a new computer or whatever and not bother with saving for the future.  Either way, man's most important right, the one he cannot truly live without, is the right to live his life as he sees fit based on his own reason.

Below is Yaron Brook of the Ayn Rand Institute discussing the entitlement problem in the United States.

So my feeling is the the ultimate answer is essentially the same as what Yaron speaks of in the video.  As I put it in response to the tweet quoted above:

or how about phasing out Social Security all together and let individuals plan for themselves?
After I started writing this post, I noticed I had a reply to my response.  I was a little surprised, but pleasantly so, given my preconception based on the initial reply:
That would be the best idea, since it isn't a "retirement plan" and is nothing more than an entitlement program.


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