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Planned Economies Do Not Work – Part 1

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With good reason, the economy is the number one issue on voters’ minds this presidential election cycle. After all, currently, unemployment and prices are both rising and the things we own, like houses, are worth less with each passing day. Of course, the two major party nominees for president are offering their remedies for combating the most critical economic difficulties afflicting our nation. Both John McCain and Barack Obama are offering essentially the same pabulum that is offered up every four years by Republicans and Democrats seeking the presidency. They would tinker with the tax code, adjust federal spending, fix social security, cure the health care crisis, lower oil prices, and ease the burden on homeowners. What’s amazing is that in all these years and with all the resources at their disposal, Republicans and Democrats have not learned that planned economies do not work.

Let’s take social security for instance. In the first place, I am still looking for a constitutional justification for the federal government to be in the business of retirement annuities. That aside, social security is nothing more than a Ponzi Scheme. In 1919, Charles Ponzi persuaded investors to send him money with the guarantee that he could double or even triple their investment by speculating in international postal reply coupons. However, his plan simply was to pay off previous investors with the money received from current investors. When he could no longer persuade new investors to send him money the well ran dry causing many to lose the money they sent him. Ponzi was caught, jailed for several years and eventually deported back to his native Italy for his fraud. Social Security is essentially the same scheme. It relies on an ample pool of current workers/contributors to pay off those that contributed previously during their working lives. In 1950 there were 16 workers for every retired person. Today there are 3.3 workers for every retired person. It is only a matter of time until the system meets the same fate as Ponzi’s and collapses.

Of course, neither McCain nor Obama are calling for an end to social security. They prefer to fix the system instead. To cover the expected long-term shortfall of the system (expected to be in the trillions of dollars), McCain wants to cut benefits rather than raise taxes. How can he do that? Isn’t there a contractual agreement between the social security trust fund and retirees about how much they get paid each month? The answer is no. Retirees are at the mercy of politicians for their monthly payments unlike private annuity programs and furthermore, there really is no such thing as a social security trust fund since those same politicians have been raiding it for years in an attempt to meet current expenses of the general federal budget.

On the other hand, Barack Obama, doesn’t favor increasing the retirement age or cutting benefits. Instead, he would increase the amount of payroll tax that very high-income workers pay by subjecting more of their income to the payroll tax. Therefore, his solution is to throw more money at the problem. Given the lousy economy he will inherit if elected president, this policy will only cause more economic hardship.

What we really need from McCain and Obama is a free market approach not an endorsement of continuing government planning in regards to retirement accounts. They should be proposing that Social Security be phased out as quickly as we can dismantle our worldwide military empire, sell most federal lands, and abolish all federal government departments that do not meet constitutional muster. With the money saved by these liquidations, current and some future recipients of social security can be paid off. With no social security tax to pay, younger folks would realize about a 6% income increase which they could save for retirement in a real investment with real returns. Businesses would realize the same 6% savings which can be passed along to stockholders many of which would be saving for their retirement.

By ending government central planning in retirement accounts, we would never again be subject to the same tired proposals every four years to perpetuate a system that if done by a private citizen would get them jail time. Economic central planning, whether it was/is the Soviet Union, Maoist China or Social Security, has proven unworkable. McCain and Obama should practice “straight talk” and give America “Change We Can Believe In” when it comes to Social Security. Whichever candidate is elected president should send Social Security to the same scrap heap containing the broken promises of the Soviet Union and Maoist China.

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About Kenn Jacobine

  • http://www.republicofdave.com Dave Nalle

    Good article, Kenn. Nice to see someone proposing libertarian policies without insisting that only Ron Paul can implement them.

    You do miss one thing, though. McCain actually has a pretty strong record on favoring social security privatization.

    According to the NYT, in 2000 he proposed a partial privatization plan which was much more ambitious than what Bush eventually offered:

    McCain will present today his first comprehensive plan for apportioning the spoils of the nation’s current prosperity, calling for. a program to shore up Social Security through the establishment of individual retirement accounts. McCain also specifically allocates money to help Medicare, which like Social Security faces a financial shortfall as the population ages. He calls for workers to have the option of investing at least 20% of their Social Security payroll taxes in private accounts.

    He said that what the country needed was “bold, genuine reform that allows workers to invest some of their Social Security savings, privately, in higher yielding accounts…Promoting investment in America by every American worker would give lower-income Americans the ownership they deserve in the country we share, as well as grow their Social Security more rapidly.”

    So there’s at least some hope from that quarter. A hell of a lot better than Obama’s plan to just raise taxes.

    Dave

  • RussellK

    “You do miss one thing, though. McCain actually has a pretty strong record on favoring social security privatization.”
    -Dave

    The article does not promote the creation of government managed IRA accounts, so no, McCain does not have a strong record on social security privatization.

    “What we really need from McCain and Obama is a free market approach not an endorsement of continuing government planning in regards to retirement accounts”
    -Ken

    I see nothing “private” about being forced into a program that is managed by the government and enforced through government coercion. McCain likes socialism, he just doesn’t advertise as much. Sorry, there are only so many ways socialism can be spun. I do not understand why it is so difficult for some people to see through century old government propaganda.

  • RussellK

    Great article BTW!

  • http://www.republicofdave.com Dave Nalle

    While McCain has supported managed IRAs, he has also supported the creation of private accounts. The quotes I provided referred specifically to private accounts, not managed IRAs.

    Basically he seems in favor of anything he might be able to get passed which would take some money out of the hands of government and put it back in the hands of the people, and that’s a very good thing.

    McCain is not a socialist, he’s a pragmatist. He’s willing to take any progress he can actually make happen in the hopes it will lead to incremental advancement towards greater goals.

    Dave

  • RussellK

    “While McCain has supported managed IRAs, he has also supported the creation of private accounts. The quotes I provided referred specifically to private accounts, not managed IRAs.”

    I believe you are wrong. Please provide a source where McCain claims he supports private IRA’s?

    To support private IRA’s over the current system implies government involvment and enforcement, because if the government wasnt involved or government managment wasnt planned, McCain could just say “I want you to keep your money and do what you want with it.”

    From his website:
    John McCain Will Reform Social Security. He will fight to save the future of Social Security while meeting our obligations to the retirees of today and the future without raising taxes. John McCain supports supplementing the current Social Security system with personal accounts – but not as a substitute for addressing benefit promises that cannot be kept. He will reach across the aisle, but if the Democrats do not act, he will. John McCain will not leave office without fixing the problems that threatens our future prosperity.

    In other words, “You can have a private account if you want, but because I wont raise taxes anywhere else and old people still need their government money, you still will have a social security tax.”

  • RussellK

    Or more accurately, provide a link where McCain states he supports private accounts with no other government involvement.

  • Doug Hunter

    The point of Social Security is to provide for those that are mot smart enough or productive enough workers to set aside for their own retirement in addition to their everyday needs. Privatizing the program will not help these people therefore it ain’t gonna happen.

  • Doug Hunter

    The really irritating thing is, is that I’m 92% certain they’ll end up ‘saving’ the program by implementing wealth and income qualifications. They’ll punish people such as myself who decided against the 4000sqft house and new car every 2 years and instead put money away for my own retirement.

    That is the only answer, it’s just a matter of when. They will cut off benefits for anyone who has their own retirement, period.

  • pleasexcuetheinterruption

    The really irritating thing is, is that I’m 92% certain they’ll end up ‘saving’ the program by implementing wealth and income qualifications. They’ll punish people such as myself who decided against the 4000sqft house and new car every 2 years and instead put money away for my own retirement.

    That is the only answer, it’s just a matter of when. They will cut off benefits for anyone who has their own retirement, period.

    Or they could do away with the entire system altogether, increase taxes on the rich, and continue paying the same benefits. Time to stop pretending SS is actually distinct from the rest of government.

  • http://www.republicofdave.com Dave Nalle

    Russell, look at McCain’s page at ontheissues.com.

    He has very clearly both endorsed taking 20% out of peoples SS contributions and letting them invest it privately, and also endorsed letting the self-employed get a tax deduction for their SS tax, which I think is an excellent idea.

    And yes, he has also suggested IRAs and other less radical programs, but you’re not seeing the full extent of his willingness to look for solutions to the SS problem.

    Dave

  • Doug Hunter

    “Time to stop pretending SS is actually distinct from the rest of government.”

    True, SS itself isn’t in that bad of shape but you throw in medicare and you see that we’re screwed. Oh well, that is far down the road for me, we’ll see what happens. I still feel certain a benefit reduction will be the final solution either taken from medicare or SS or both.

  • bliffle

    Ponzi scheme, eh?

    Of course, one could argue that EVERY investment scheme ever promoted is a “Ponzi Scheme”. After all, the promoter asks people to invest their money in Ponzis plan to do something that will cause other people to pay even more money for that same stock. Perhaps based on sales of some ‘product’, which may in fact just be more promises. Perhaps based on the notion that there exists an even bigger fool than you who will pay even more money for that same stock.

    Isn’t the whole “Google” stock history a big Ponzi scheme?

  • bliffle

    Of course the problem is that SS is a successful program. It actually delivers benefit to actual people on a regular basis. With a low overhead cost.

    Best leave SS alone.

    If one were to privatize SS we would face the fate that has befallen so many privatized pension program: bankruptcy and impoverished retirees.

    Do you think there’s any money left in the PBGC treasury to support a bankrupt SS?

    And SS will certainly go broke if it is privatized. It is in the best interests of the operators to cash in the assets and distribute those assets to themselves. They will have the means to do so and there are no criminal disincentives to prohibit it.

    If you want to pick on a Managed Economy that is a flagrant failure and in immediate need of reform, how about Oil or Agriculture or Warfare? All of those are Corporate Statist Managed Economies and all of them are failing and putting the USA at risk.

    In particular, the Oil Economy has become a parody of a Managed Private Economy as we shovel $13billion more in public subsidies into a Managed Economy whose prices continue to rise without any apparent brake, and which requires our participation in a $1-3trillion war to maintain the facade of a Free Market Economy.

    The Oil, Agriculture and Warfare economies are Potemkin Economies, erected to put on a show of Free Enterprise while accomplishing none of the competitive aims of an Enterprise economy.

    Or, better yet, there’s a dude who around here who’s invented a Perpetual Motion Financial Machine that should solve all or problems, and even more!

  • Baronius

    Good chat so far. I’ve got nothing meaningful to add.

  • Mooja

    Doug is right. The government always seems to punish those who are responsible and reward those who are not. Each year I see my estimated SS payouts going down with my contributions going up. I’ve know since I was 18 years old that I would retire some day. If I don’t take advantage of that then I wouldn’t expect anyone to be forced to pay for my lazyness/ignorance. SS needs to be eliminated. The way to do that is to slowly but steadily cut back benefits until it is no longer something to be relied upon. Then it can be removed completly.

  • Alessandro

    #14: I was just thinking the same thing.

    Then again, any type of privatization talk is bound to pique me ears.

    Nice article.

  • Noel Trotsky

    Hi Kenn,

    Interesting article and well written in an entertaining style. While I admit that open markets are highly efficient in finding price / production solutions, I think your proposal to dump Social Security is short-sighted.

    Social Security programs around the world have been implemented to provide a bare minimum for older citizens. It surely isn’t a ‘luxury’ program that voters would even consider getting rid of completely. I don’t see Pensioners riding around in luxury cars very often…in fact I see them on the bus with me all the time!

    People clearly do not think about retirement enough and prepare for it. Some people don’t even think about tommorrow, let alone 30 years from now! I think government should take care of it’s people, as well as not make promises it can’t keep. How about the government automatically deducting a % from all of your wages, banking that and not dipping into it, then slowly giving it back to people at the age of 65, plus interest of course!

    I imagine you don’t like big government, but you could call it a “Guaranteed Investment Plan” or GIP for short. Or you can watch a generation of people reach old age with no savings until the children of today starting taking retirement seriosly.

  • Kenn Jacobine

    Noel,

    If the government has to be involved then I would prefer an account that the politicians can’t steal from to pay for their pet projects.

    As it is right now, ss only does give retirees the bare minimum to retire on. What really concerns me is that there aren’t nearly enough workers to keep the system afloat. And With upwards of $50 trillion in unfunded obligations (Baby Boomers) in the future and the current spending spree in Washington ($12 trillion more to stimulate economy) plus our existing debt of $11 trillion we are talking about some serious numbers that are going to cause inflation. Inflation because the Fed will have to print more dollars and of course this inflation will cause general price increases which will dig into ss benefits even more. It seems to me that instead of gov’t causing prices to go up and savings to be eroded, instead Washington needs to get its fiscal and monetary house in order first to ensure a stable standard of living for all of us. Then we can debate a proper, non-government run retirement scheme for future Americans. Perhaps resembling the GIP.