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Mises Daily: Wednesday, December 08, 2004 by

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The movement to privatize Social Security (fully or partially) may be the most ideologically duplicitous and fiscally irresponsible I've seen in my lifetime. It was proposed by Clinton and now by Bush. Whether it dies in the next few months or generates some monstrosity of a bill to be voted on, don't believe that there is anything in the works that is going to bring you more freedom.

Those of us who have followed this movement for years, from its initial treatments in the pages of the American Economic Review, to the op-ed bromides characteristic of every election year, can only marvel at what is unfolding before our eyes. It is as inevitable and predictable as a volcano, but it still hurts to see the city below wiped out.

Social Security is as economically and morally objectionable as any other form of forced redistribution, from public housing to corporate subsidies to warfare, but made worse by the subterfuge that it is an insurance program of some sort. Once we get that clear in our minds, how to deal with it becomes clearer as well. It needs to be zeroed out and replaced by laissez-faire, precisely as saving for later years has always occurred in the whole of human history.

There are more resources available than ever before to make this work, from the simplest to the most complex financial tools, and more personal wealth available for most everyone to live out their old age in comfort. In fact, Social Security hardly figures into the retirement plans of most young people today, as well it shouldn't.

More people than ever have a good reason to support the idea of letting it die or killing it. There are many ways to do this, with either big or small steps. Let people opt out completely. Cut payroll taxes. Raise the retirement age. Means test benefits. Establish a cut off for paying liabilities and end the program. Make the program part of federal budgeting so the charade will stop. Above all, tell the truth (as Hans Sennholz says). All of this would be fine. But this is not what is being discussed, despite all the talk of freedom and choice.

In the abstract, the idea of private accounts replacing a government boondoggle sounds good, even great. Other countries have done it; why not here? Actually, other national conversions did not have anywhere near the liability problem the US has; Chile, for example, had its inflated away. Why not let the power of free enterprise work on behalf of all of us as we get old? Sounds great, but that is not what's being proposed.

Look a bit closer and you see a big problem, namely that the current program is not merely a government-run retirement scheme that can be converted to a private system. It is a transfer program from working people to retired people. All that nonsense about how much the government owes you, how much the system has accumulated for you to enjoy later on, is an accounting fiction.

When people stop paying in, people will stop receiving. It is as simple as that.

In other words, there is no there to privatize. What is actually being talked about is the creation of a new national program of forced savings, complete with a guaranteed minimum income. It is to be created out of whole cloth using the revenue that would usually be funneled to retirees. Not that anyone is going to be denied what they believe is theirs. The money will continue to flow to older Americans but not come from present revenue. It will come from new funds. And where are these funds going to come from? Among those who favor privatization, there are two camps: the left-wing suggests more taxes and the right-wing suggests more debt.

That's your choice. And we are not talking about petty amounts here. Even for a small diversion of funds, the numbers are in the trillions, at least 1 or 2 or perhaps 3. Those figures are so large as to be nearly meaningless to us, and that is precisely the way Washington looks at it: why not just run up the debt for ever and ever amen? Why not continue to spend insane amounts of money and tell people that it doesn't need to be paid?

The proponents say it is worth running up this level of debt because it will save money later. But you know what? In the entire history of government finance and government programs, I doubt that there is a single one that didn't claim to save money in the long run. We have to "invest" now in education in order to save money later on x, y, and z. We must nationalize the health care system now so that we can save money later that will otherwise be spent on ballooning costs. We must go to war now to prevent a worse war later.

This is the staple rhetoric of all government programs from time immemorial. There is no more reason to believe George Bush than there was to believe Hillary Clinton when she made the same claim about her health program. Nor does it make any sense to say that vast amounts of real debt now, saves money over hypothetical debt in the future. When a robber comes to your door and says he wants your television and stereo now so that he won't have to take your car and kid next week, you might comply, but you shouldn't believe he is doing you a favor.

There are many puzzles to this bizarre forced-saving program, not the least of which is why it is that so many people who claim to be for free markets are backing it. Perhaps this can be chalked up to the usual pandering of Washington think tanks. But I don't believe that this explains all of it. There seems to be a genuine intellectual error at the root here, stemming from a failure to believe that a genuine free market can actually provide for people in their old age.

Herein we see the cultural problem that government programs create. Once the system is in place, people have some internal sense that the world would fall apart without it. If the government made all our shoes and clocks, we might have a hard time imagining it could be any other way. Post-socialist governments of the old Soviet empire had a hard time understanding how society could work if people were allowed to move their residencies without government permissions.

The urgent task that genuine market thinkers need to take on is to help people imagine a pre-FDR world in which individuals prepare for their own futures, without government forcing them to or stealing from others in order to enact a central plan.

But, you say, that's not politically viable. Maybe not. But it makes a lot more sense than the creation of a new forced savings program to sit on top of the old forced intergenerational wealth transfer. This idea should be rejected out of hand, as it would be if people told the truth. For example, let's say a politician said the following:

The nation's public housing program is unstable and needs to be secured for the future. So let us force all taxpayers who are currently paying for public housing to put aside some of those taxes for an individual housing fund, to be administered and looked after by the government and to be used only on a timetable established by the Department of Housing and Urban Development, to be applied only to government-approved houses built by approved contractors. You can move in when the government says you can. In this way, everyone will have housing and our nation's public housing stock will be secure for the future. No one will be denied public housing during the transition; it will be funded by debt.

Now, I submit that most people would smell a rat. After all, if we are going to get rid of public housing, then get rid of it. Stop building it. Stop paying for it. Let the free market handle housing. That this is the answer would be clear to anyone. But the solution above ropes more of the housing demand and supply into the quasi-public sector and thereby increases the degree of government imposition. (By the way, if such a proposal to create housing accounts were really made, I guarantee that the housing contractors would be involved at some level, just as the large brokerage houses are hip-deep in this Social Security privatization business.)

One excuse given is that Social Security needs to be reformed and this is the only politically viable way to do it. But consider the following: if it is politically possible to fund current recipients out of something other than current receipts, why not just let people keep their own money? Why not just cut? Why not permit an expansion of tax-free savings accounts? Or best of all, why not let people use the money for whatever purpose they want? If we are willing to tolerate vast debt incurred in order to pay off current recipients, then why not just let people opt out of the system completely?

It is a disastrous decision to create an additional forced savings program that is wholly unnecessary, and will bring about vast distortions in the stock market and could very well lead to the biggest bailout in the history of the world. If the debt mongers were at least setting some current payers free from a tax burden, you could see a case for it. But to replace the current terrible system with a new system that financially destabilizes the current one plus adds a bad system on top, is a very grim prospect.

No, I'm not making the perfect the enemy of the good. If it is possible to cut the payroll tax, fine. Do it. Spending should be cut too. That is not what is going on here. Current workers will still be taxed to pay into the old system, plus they will be taxed to pay into a new system, plus they will be taxed in other ways to pay for the shortfall created during the "transition period" (estimates range from 10 to 75 years).

Meanwhile some GOP political figures have proposed actual taxes as a means of transition, thereby harkening back to the original faux-privatization idea. This very well may turn out to be the "fiscally responsible" solution that is adopted. David Brooks notes that the White House has hinted that it might support a transition premium. And Carolyn Weaver of the American Enterprise Institute has long supported a "temporary" payroll tax increase of 1.5 percent.

Whether young workers can be bamboozled into supporting a higher "premium" to get a "private account" depends entirely on how effective the White House propaganda machine is and how far its intellectual backers are willing to sell out before they finally admit that they have made a pact with the devil.

And let me say a few words about this much-vaunted transition period. A limited program is supposed to last 10 years, as if anyone in DC plans that long in advance. Ten years ago, Gingrich was riding high with his Contract with America. Who even remembers that today?

As for the long-term conversion, it is supposed to last a minimum of forty years. In the whole of recorded history, no government anywhere has planned forty years in advance. Forty is the difference between the election of Wilson and Eisenhower, between the Civil War and the end of the Gilded Age, between Nixon's impeachment and nine years from now! Can you think of a single government program that was born in 1964 that bears any resemblance to what it looked like in legislation? Further, can you name a single government program in history that claimed to be saving money that in fact did so after forty years?

So when the White House spokesman announces that he wants to borrow a few trillion to finance a new program that "will be a savings over the current system," look out. When it proves not to be, the people who put the system in place will be long gone.

A final prediction follows. Those of us who have followed this debate for 20 years have always known that once it came down to the reality of the financial costs of the transition—a subject the privatization people have struggled to avoid—this whole scheme would unravel. Young people won't pay the premiums. And not even the most reckless of lawmakers is prepared to blast a $2 trillion hole in the budget based on some far-flung 40-year plan.

Once this faux-privatization idea is out of the way, we can get back to doing what believers in a free society should be doing: working toward getting government not more involved in society, but toward creating the intellectual conditions that enable people to imagine a world where government leaves the choice over how to use resources to individuals.

If more choice is the goal, let people drop out of the system. Don't create another coercive system and tell people they are being liberated.

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Llewellyn H. Rockwell, Jr. (Rockwell@mises.org) is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com. See his Mises.org archive. Post comments on the blog.