Friday, September 16, 2011

From Ponzi Scheme to Private Accounts

Charles Krauthammer has penned a thoughtful piece about the fate of Social Security with the refreshingly honest subtitle, "Of course it's a Ponzi scheme."

(The fact that even fellow Republicans lept to attack Texas Governor Perry for his stating of the obvious about Social Security really bugged me.  It said something revealing about the other candidates, about the lack of substance in their campaigns, that they, like the Democrats and their elite-media allies, are not really interested in serious discussion and debate, that instead they're mostly just looking for "gotcha" moments to use to try to discredit their strongest opposition. (By the way, let no one confuse this for support of the Perry candidacy.))

Anyway, back to Krauthammer, he offers four propositions, the last of which includes three measures he argues would effectively "save" Social Security from its looming insolvency: (1) Change the cost-of-living-increase formula, (2) means test recipients, and (3) raise the retirement age. 

All three measures are sound and would no doubt improve the program a great deal.  But, and this is important, it would remain a Ponzi scheme all the same.  Krauthammer's analysis is based on a faulty premise found in his second proposition: "The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory."

With all due respect to Dr. K, ths is not the crucial difference between the two.  In fact, there is really no difference at all which he makes clear in the first of his propositions: "In a Ponzi scheme...dividends don’t come from any profitable or productive activity — they consist entirely of money paid in by later participants." (my italics)

Importantly, it is in this very description that the real solution lies.  For Social Security to survive, it must be changed from a Ponzi scheme in which dividends consist entirely of money paid in by later participants into private savings accounts in which dividends come from profitable or productive activity.

That is, for it to survive it must be changed into somehting like an IRA or 401K in which each participant's contributions (i.e., taxes) are invested not in the future demography of the US population, but in the real stocks and bonds issued by real companies that produce real goods and services at a real profit.

Is this politically risky?  Ask former president George W. Bush.  But times have changed as has the  electorate's willingness to listen to real solutions. (No thanks to Democrats, by the way, who continue to demagogue the issue.)

So, if I may, here's a fifth proposition that now, under new circumstances, just might safely navigate the always politically perilous waters that surround the issue of Social Security:  (1) In the near term, offer an option to privatize individual Social Security accounts (in the long term this must, I repeat, must become the norm or it will remain a Ponzi scheme); (2) Continue to mandate a minimum monthly contribution (i.e., tax); (3) reduce the government's role to the still important one of underwriting private accounts to some minimum level.  That is, the government would operate for investment accounts as it does now for bank accounts throught the FDIC.

That the accounts become private, i.e., individual's can exercise control over them with full legal title, should please conservatives.  That the contributions remain mandatory and are insured to some minimum level should please liberals.

If you've got a better plan, let's hear it.

Meanwhile, it's Friday, thank God, enjoy the weekend 

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