Mises Daily

Home | Library | Robbing Peter to Pay Peter

Robbing Peter to Pay Peter

January 26, 2005

I believe in forced savings. In fact, whenever my son comes into some money, usually through a gift from a relative, I force him to place a certain percentage into a savings account. In a few years, I will transfer this money into an investment account of some sort.

He has come to accept the process, though this has not always been the case. He's eight years old, and as Keynes might say, his marginal propensity to save is low. By taking him to the bank and depositing his occasional birthday or Christmas checks, I hope to teach him the virtue of thrift. As he matures and develops lower time preferences, the act of forced savings will become moot. When that day comes, he will save on his own.

But for now, I force him to save. It works for us. It wouldn't work for everybody. The state is not our parent. It doesn't have our best interests at heart. It can't be trusted to tell us how to manage our money. And this is the crux of the problem I have with the Social Security privatization scheme now being pushed by the Bush administration.

Since its creation in 1935, Social Security has been a transfer program. During this time, American workers have been taxed, directly (through FICA taxes) and indirectly (through employer matching requirements), greatly adding to the loot already going to the Treasury via other tax and non-tax methods. Today, 40 percent of the federal budget goes toward transfer programs.

For politicians who require increased tax revenues as a requirement to maintain and increase their power, Social Security has been a godsend. It has allowed them more money to transfer to the politically important groups that keep them in power. Since Social Security taxes paid into the Treasury have always exceeded Social Security transfers paid out, surplus payroll taxes have allowed the entrenchment of the political class. As readers of the late journalist John Attarian know, this was Franklin Roosevelt's intent from the very beginning.

But this is all ending as baby boomers get ready to retire. When they stop working and those required payroll "contributions" dry up, the political stimulus made possible by FDR's program will come to an end. Discretionary spending will shrink when would-be pork spending gets diverted to finance liabilities that are projected to be in the tens of trillions of dollars. The spending restraints forced on Congress when Social Security ceases to be a fiscal cash cow could mean the end of Washington as we know it.   

The result is a crisis all right—for the politicians whose job security is now threatened, and for those groups in society who have become dependent on other people's money in order to survive.

Seen in this context, privatization is a desperate plan to reduce future liabilities by diverting some of them to the market. It takes your income by force, and suggests that workers invest a portion of their wages into personal savings accounts to finance their retirement. While FDR's forced-giving scheme involved robbing Peter to pay Paul, GWB's forced-saving scheme involves robbing Peter to pay . . . Peter.  

There is much not to like about this proposal. One doesn't deal with a failed socialist experiment by replacing it with a new one. One deals with it by repealing it. Otherwise, we validate the New Dealers' myth that individuals are incapable of planning for their own retirement and that private institutions are incapable of aiding those who are unable to help themselves.

Instead, we are left with another example of the chasm between the Bush Administration's freedom-loving rhetoric and its freedom-hating policies. An administration that truly believed such rhetoric would be lowering payroll taxes and allowing workers to spend as much or as little of their now un-confiscated funds on retirement instruments as they see fit.

What's more, privatization proponents ignore the fact that bear markets can last a long time. When markets go down, will politicians legislate stock index floors—effectively socializing the stock market—in response to political pressure from those concerned about retirement?  Or will bear markets lead politicians to resurrect a new Social Security-like program to help out those who did not fare well with the forced saving scheme, thus defeating the purpose of the program? 

Austrian economics teaches that eventualities like this are likely, if only because there is never a government program that doesn't result in unforeseen events that require further expansion of the State into the private sphere. Government interventions in market forces create problems that beget future interventions, a tendency pointed out by Ludwig von Mises in 1927 . Indeed, this is the primary pattern of State growth.

It doesn't help matters that the various privatization plans being touted today have virtually no precedent in the history of the State. Chile's much-vaunted forced savings program funnels money through government-approved pension firms that ostensibly compete with each other for the conscripted capital (and have already achieved too-big-to-fail status in that very young country). The Nazis forced some firms to buy government bonds. Neither example bodes well for a U.S. foray into forced savings.

A capital market that becomes dependent on seizing money by force—and there are tens and hundreds of billions at stake here—is one that delivers distorted price and investment signals. It means a diversion of resources from where they would be more valuable (consumption, insurance, education, health, or whatever) to where they are less valued. The state will guarantee these investments at some level, introducing a moral hazard to the capital markets.

Even the political consequences could be felt as Wall Street looks to the state less as a threat and more as a benefactor. Just as the elderly once wisely eschewed statist politics due to the wisdom of age, and yet now clamor for ever more wealth transfers, so Wall Street could find itself ever more hooked into the statist apparatus of coercion and compulsion. How ironic, too, that after years of hysteria about the lack of accountability of corporations, that the state would impose itself so directly between the interests of corporations and the individual interests of investors.

As with the first catastrophic decision to implement Social Security, its reform could yield unexpectedly bad consequences for generations to come. Such is the nature of a reform agenda that depends on spreading and not reducing the coercion inherent in the system.

Nonetheless, forced savings is not always a bad idea. It is a practice I impose on my son several times a year. But what might work well for one time and place may not work in others. It is the fatal conceit, inherent in socialism, to take what might be a good idea for one person and force it on the rest of society, with the help of the government's monopoly on the right to use force.

Policies that depend on this monopoly—whether they are Social Security plans hatched in the 1930s or privatization plans today—all share a socialist core. The goal of a free society demands that onerous, centrally-managed systems are not replaced with new, more modern-sounding ones, but repealed outright.

My son deserves better.


 Christopher Westley teaches economics at Jacksonville State University. See his Mises.org Daily Articles Archive. Send him MAIL. Comment on this article on the blog.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute