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Private Accounts?

December 1, 1998

When Clinton declared he would use budget surpluses to "fix" Social Security, the ruse was obvious. He was trying to forestall the only moral use of any surplus: cutting taxes. But a few days later, a very strange trend began to develop. Clinton's words were endorsed and echoed by D.C. conservatives and libertarians.

Beltway types began to say that, yes, all budget surpluses should be used to save Social Security, but in a very special way. Surpluses must not be used to fund "junk tax cuts" (in the words of William Niskanen, who also congratulated Clinton for "taking the lead on Social Security"), but to pay for a privatized entitlement program.

This would "guarantee," writes Martin Feldstein, an increase of "national saving," a collectivist and potentially coercive goal. This too is taken from Clinton, circa early 1995, when he announced that a broad tax cut was a bad idea because it would only give people more money to waste.

To understand this turn of events, with pro-market people demanding that FDR's redistribution scheme be saved, requires some background. It's been clear for decades that Social Security as we know it will not survive far into the next century. Today's taxpayers fund today's checks, with the bureaucracy taking its own large cut, and demographics are progressively exposing the shell game.

But let's be clear. It's never been an "insurance" program any more than medicaid or even food stamps. The program violently taxes some people in order to pay others. All the rest of the apparatus is an attempt to fool.

What to do? The program should be abolished as inefficient, immoral, violent, socially damaging, fraudulent, and incompatible with freedom. Polls agree. People now being taxed are angry at the self-evident rip-off, and say they would like to plan their own retirement without the government's help, thank you.

The government is faced with only two possibilities for reform: cut spending or raise taxes. The first option would make powerful lobbies mad. The second was made possible in 1982, thanks to cover provided by Alan Greenspan, but now public resistance to another tax increase is intense.

So along came the privatizers with what they claim is a third option. Social Security can be "saved" with a simple change in accounting. Let's call tax revenue "individual accounts" and ask people how it should be "invested." Tell them that they can "manage" their taxes to produce a higher "rate of return" than the present system. To underscore this idea, they propose we "calculate" how much higher a return we would have if government redirected our tax dollars.

But this exercise disguises the true nature of the operation. A sheer transfer program cannot be said to have a rate of return. Indeed, the net "return" on all coercive redistribution is negative, since there are always better uses for our dollars than handing them over to the government. The appropriate question is how much more prosperous we would be if we didn't pay the tax at all.

The privatizers, who freely admit they want to save the government's face, also promise that all present check cashers will receive every last dime they believe they are owed, while those being taxed now will receive huge payoffs. This miracle will be accomplished through diverting some taxes to the stock market. Wall Street, which came up with the idea in the first place, has bought policy guys left and right to provide intellectual credibility for the notion.

But note this crucial fact: the privatizers do not propose that people be allowed to decide how to use the money that has been extracted from them. Under these misnamed "private accounts," you cannot choose to consume the money. You cannot withdraw it, even with a penalty. It is not private because it is not yours. As Michael Tanner of the Cato Institute has admitted, "A privatized system would essentially be a mandatory savings program."

Thus, privatizers want people to continue to be taxed just as now, but for some of the tax money to flow to industry. In short, the privatizers propose to save the biggest redistribution racket in human history by cutting Wall Street in on the deal. In earlier years, anyone who had proposed forcibly extracting some percentage of Americans wages and funneling it into stocks-all in the name of boosting national savings--would have been called a national socialist or a fascist. Today, he is called a privatizer.

So it is no surprise to find the privatization movement joined at the hip with the Clinton administration in blocking tax cuts. Even worse, their plan would end up increasing taxes to both divert revenue and meet federal promises. That's why, as USA Today pointed out, many privatizers advocate "hefty new taxes to fund the transition." And the Wall Street Journal admits that all present "benefits must be protected through new taxes." (Jan. 8, 1997)

Note that new revenue is made necessary by the logic of the program itself. If present payers are not funding baby-boom retirements, someone has to so long as the liabilities are not repudiated. The transition problem cannot be ignored. It has recently become fashionable to say that the 75-year, $10 trillion transition to a mandatory private investment scheme would be funded through debt. But that presents its own problem: debt must eventually be paid through either inflation or taxes, and in the meantime, new debt crowds out private investment.

Strip away the rhetoric, then, and the privatization plan is a glorified Greenspan Commission: patching up a program based on extortion with ever-more extortion. The only difference is that this time, it is wrapped in the language of markets and investment.

A mandatory national savings program would invite the regulators into industry like never before. There would impossible-to-avoid political pressure to make the stock market like the banking system is today: too big to fail. As Amity Shlaes points out the Wall Street Journal (Dec. 7, 1998), even Phil Gramm is talking about "guarantees" to go along with his privatization.

FDR's national-socialist legacy should not be saved, and it cannot be reformed. There's only one honest way out of the mess. Get rid of it. Buy off the "liabilities" with tax cuts, tax the young no more, stop redistributing altogether, and let Americans really make their own decisions about what to do with their money. This is not a complicated solution. The only force stopping it is a lack of political will on all sides.

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Llewellyn H. Rockwell, Jr., is founder and president of the Ludwig von Mises Institute. Further Reading: "Symposium on Social Security," American Economic Review 86, no. 2 (May 1996).

Read Dale Steinreich's piece on false Social Security reforms.

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