Friday, January 21, 2005

Social Security Reform Gets High Marx

by Brad Jensen - Breathing Room

There are a couple things about the Social Security reform plan that I haven't seen discussed at depth, so I thought I would bring them up.

Stock Price Increases

I've seen a lot of talk about the 'fee windfall' for stock management firms, which really doesn't seem like much of an issue. The accounts, as planned, are starting as index funds with a very low fee base, and the intense competition should keep those fees low. In any case, the fees involved are a very low percentage of the total fees earned by stock management companies.

However, having that many new buyers in the market, and the total amount of stock being bought, is going to increase the demand side of the supply/demand equation for stocks. That means that the average price of stocks is going to go up - increasing the value of stocks for everyone with a 401-K, IRA, or mutual fund.

Government Spending Decreases

Right now, the Payroll Tax (FICA) generates far more revenue than needed to pay current Social Security benefits for people currently collecting .

The government doesn't have any way to save that money without crashing the economy by taking it out of circulation, or buying real assets such as businesses and ending up with something that looks like socialism (in the sense they will own a major portion of the business in the USA), so they burn those dollars in the wind.

Not literally of course, but they spend those dollars on programs that don't create goods or services for people. Then they write an IOU for the dollars that they have spent, and call that the Social Security Trust Fund. This reminds me of the two idiots in the movie Dumb and Dumber, who discover they are carrying a suitcase full of cash. They start spending the cash, replacing it with IOUs, to the point that when they had it back to the owner, it is full of IOUs.

The part of the Payroll Tax that Bush wants to give people for private investment accounts, is the part that Congress has been spending like a drunken sailor for the last fifty years. That means that this revenue will be rechannelled into actual assets, and this is going to lift the economy like a Saturn-V rocket.

Saving Your 401-K

Everyone knows that the problem with Social Security is that at some time in the future, there won't be enough workers to take money from to pay the then-current benefits for the retirees. Some time ago, there were 9 workers working for every current beneficiary. At the present time (2005) there are three workers for every beneficiary. At some time in the future, that number may be so small, that the entire tax revenue from the workers would not be enough to pay the benefits.

Of course, there is only one thing they will be able to tax, and since it is the only thing, it will be done, no matter how outrageous or unbelievable it might seem today. They will tax the 401-Ks and IRAs of the people who have them, to pay for the benefits of those who don't have them.

It will be argued that the 401-K and IRA account holders have had a 'free ride' from taxes while the accounts have grown in value, and that they are recapturing first the taxes, then later when that is not enough, some of the 'growth' of those accounts.

It doesn't matter what politicians promise you today, this is what the politicians of the future will have to do, since it is the only source of revenue that they will be able to find that could be big enough to fund the benefits that have been promised.

The best defense against this, is private accounts so that everyone is an owner. Otherwise, it won't matter how much money you have in your 401-K or retirement account, since you will be outvoted by the workers who don't want their taxes to double, and the other retirees who don't want their benefits to disappear.

I'm reminded of that current TV commercial for a credit card company, where the horde of Vikings or Visigoths come storming through the mall, intent on pillaging the fellow pulling out his credit card to pay for something. Imagine the same thing every time you think about your IRA or 401-K, and you won't be far from the truth about what's going to happen when the tax-based Social Security scheme starts to run out of funding.

How Long Can You Tread Water?

I just read an article about curing Alzheimers disease. They've discovered that injecting antibodies that destroy the plaques in mice brains, result in a rapid reduction of the degenerative changes of Alzheimers. Of course it is going to be a while before that turns into a human therapy, if ever. But the writing is on the wall.

We are really still in the infancy of modern medicine. The recent sequencing of human DNA has put as at the place with respect to medicine, that we were at in the 1950s with respect to computers.

One of the things that the future holds for us, is the realization that aging is an adaptation. Organisms age and die because they have evolved to do so. The best strongest competitor for a member of a species is another member of the same species, so evolution (and the adaptive flexibility that brings) is most rapid and diverse among species where the older members of the species become weaker and die.

Control over our own DNA means that we will be at the point soon where we can decide to reduce the effects of aging. That means retirees will be living an extra 10, 20, 50, or even a hundred years. At some point in the future, lifespans will be measured in centuries. How soon will that be? No one knows, but betting against technological revolution is a losing game.

While this may sound science fictional and pie-in-the-sky to some, there is going to be a very real effect on life extension in the next 40 years, the time period being considered in the current reform. I haven't seen the predictions of life span for retirees at that time, but I'll bet it is far too low. Even five or ten years extra average lifespan for the beneficiaries will provoke another crisis. In that case, we are going to need even more revenue to pay for benefits.

It may be that the only real solution is asset-based Social Security payments, instead of tax based. That's the only way you can pay benefits for an indefinite period of time, if people start living much longer than they do today.

Workers of the World Unite

There's something sort of Marxist (or Marxian?) about this whole situation. It's rather strange to think that a nominally conservative Republican is fighting to create a system where the average worker will own the means of production - not through a mass movement, but as an individual. It is ironic that the unions and the liberals are fighting to prevent this natural evolution, partly out of a traditional antipathy to anything proposed by Republicans, and perhaps also out of a fear of loss of influence. When the average worker owns a large cross-section of American business, which they will with index funds, he or she will naturally want to preserve a more positive environment for business. In a word, he or she will become more conservative. With elections being decided by a few percentage points all across America, it is no wonder that the vested interests of the left are fighting against Social Security Reform.

In any case, they will lose.

They'll lose because the economic forces are pushing us in this direction, and sooner or later it will become obvious to the workers and future beneficiaries where their self-interest lies. The existence of computers and the low transaction costs of the information handling have made it possible for ownership to evolve in this way. The future needs for income require asset-based funding.

Marx was right in realizing that the economic and political power of the average person would continue to grow as history marches on. His vision was clouded by the limitations of information technology of his time, and the inability to support direct fractional ownership of capital.

The Social Security reform proposed by President Bush is a natural outgrowth of the Marxist evolution of the political economy.

As a conservative , nothing could please me more.

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