Unexpected Praise for Australia’s Private Social Security System

As part of my “Question of the Week” series, I said that Australia probably would be the best option if the United States suffered some sort of Greek-style fiscal meltdown that led to a societal collapse.*

One reason I’m so bullish on Australia is that the nation has a privatized Social Security system called “Superannuation,” with workers setting aside 9 percent of their income in personal retirement accounts (rising to 12 percent by 2020).

Established almost 30 years ago, and made virtually universal about 20 years ago, this system is far superior to the actuarially bankrupt Social Security system in the United States.

Probably the most sobering comparison is to look at a chart of how much private wealth has been created in Superannuation accounts and then look at a chart of the debt that we face for Social Security.

To be blunt, the Aussies are kicking our butts. Their system gets stronger every day and our system generates more red ink every day.

And their system is earning praise from unexpected places. The Center for Retirement Research at Boston College, led by a former Clinton Administration official, is not a right-wing bastion. So it’s noteworthy when it publishes a study praising Superannuation.

Australia’s retirement income system is regarded by some as among the best in the world. It has achieved high individual saving rates and broad coverage at reasonably low cost to the government.

Since I wrote my dissertation on Australia’s system, I can say with confidence that the author is not exaggerating. It’s a very good role model, for reasons I’ve previously discussed.

Here’s more from the Boston College study.

The program requires employers to contribute 9 percent of earnings, rising to 12 percent by 2020, to a tax-advantaged retirement plan for each employee age 18 to 70 who earns more than a specified minimum amount. …Over 90 percent of employed Australians have savings in a Superannuation account, and the total assets in these accounts now exceed Australia’s Gross Domestic Product. …Australia has been extremely effective in achieving key goals of any retirement income system. …Its Superannuation Guarantee program has generated high and rising levels of saving by essentially the entire active workforce.

The study does include some criticisms, some of which are warranted. The system can be gamed by those who want to take advantage of the safety net retirement system maintained by the government.

Australia’s means-tested Age Pension creates incentives to reduce one’s “means” in order to collect a higher means-tested benefit. This can be done by spending down one’s savings and/or investing these savings in assets excluded from the Age Pension means test. What makes this situation especially problematic is that workers can currently access their Superannuation savings at age 55, ten years before becoming eligible for Age Pension benefits at 65. This ability creates an incentive to retire early, live on these savings until eligible for an Age Pension, and collect a higher benefit, sometimes referred to as “double dipping.”

Though I admit dealing with this issue may require a bit of paternalism. Should individuals be forced to turn their retirement accounts into an income stream (called annuitization) once they reach retirement age?

I’m torn on this issue. Paternalists sometimes do have good ideas, but shouldn’t people have the freedom to make their own decisions, even if they make mistakes? But does the answer to that question change when mistakes mean that those people will be taking money from taxpayers?

Fortunately, I don’t need to be wishy-washy on the other criticism in the study.

Australia’s system does have shortcomings. It is heavily dependent on defined contribution plans and is vulnerable to weaknesses in such programs.

I strongly disagree. A “defined contribution” account is something to applaud, not a shortcoming.

The author presumably is worried that a “DC” account leaves a worker vulnerable to the ups and downs of the market, whereas a “defined benefit” account promises a specific payment and removes that uncertainty. Sounds great, but the problem with “DB” accounts is that they almost inevitably seem to promise more than they can deliver. And that seems to be the case whether they’re supposedly based on real savings (like company retirement plans or pension funds for state and local bureaucrats) or based on pay-as-you-go taxation (like Social Security).

*Since I’m somewhat optimistic that America can be saved, I’m not recommending you head Down Under just yet.

P.S. I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and Australia’s system is sort of like universal 401(k)s.

P.P.S. There’s much to admire about Australia, but its government is plenty capable of boneheaded policy. Heck, the government even provides workers’ compensation payments to people who get injured while having sex after work hours, simply because they were on a business-related trip. Talk about double dipping!

P.P.P.S. Here’s my video explaining why we should implement personal retirement accounts in the United States.

P.P.P.S. The death tax has been abolished in Australia, so there’s more to admire than just personal retirement accounts.

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Question of the Week: If You Could Reform only One Major Entitlement Program, Which One Would You Pick?

This is a tough question.

I obviously want comprehensive reform of all entitlement programs, so selecting just one is a bit of a challenge. Sort of like being asked to pick your favorite kid.

Would I reform Social Security? That’s a logical choice. It’s the biggest program in the federal budget, so it’s presumably the biggest problem.

And it sure would be nice to have personal retirement accounts, just like Australia, Chile, and other nations that have modernized their systems.

But Medicare and Medicaid are growing faster than Social Security and the Congressional Budget Office projects that those two entitlements eventually will become a bigger burden on taxpayers than Social Security.

And since our goal should be to minimize the long-run burden of government spending, that suggests that it’s more important to reform the healthcare entitlements.

But which program should be fixed first?

There’s certainly a strong case to deal with Medicare. The health program for the elderly already is very expensive and it’s going to become even more of a budget buster because of demographic changes.

Moreover, shifting to a “premium support” system would be good for seniors since they would have the ability to pick a plan best suited to their needs. Basically the same type of system now available to members of Congress.

All things considered, though, I would deal first with Medicaid. There are three reasons why I would target the health program designed to supposedly help the poor?

1. Medicaid is hugely expensive today and will become even more costly over time.
2. The block-grant reform proposal is a good first step for restoring federalism.
3. Obamacare can be partly repealed by block-granting the exchange subsidies as part of Medicaid reform.

For more information, here’s my video explaining how to reform the program.

I’m not going to cry – or even complain – if politicians instead decide to fix Medicare or Social Security. Just so long as they’re taking steps in the right direction, I’ll be happy.

What I don’t want to see, however, is a gimmicky plan such as Simpson-Bowles that merely papers over the underlying problems for a couple of years. The wrong type of entitlement reform is probably worse than doing nothing.

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Yes, We Should “Reform” Payroll Taxes, but only if that Means Personal Retirement Accounts

Washington is filled with debate and discussion about the economic burden of the federal income tax, which collected $1.13 trillion in FY2012 ($1.37 trillion if you include the corporate income tax).

Yet politicians rarely consider the economic impact of payroll taxes, even though these levies totaled $.85 trillion during the same fiscal year.

Yes, we had a gimmicky payroll tax holiday for the past few years. And it’s true that Obama has signaled that he wants to increase the payroll tax burden at some point to prop up the Social Security system.

But there’s rarely, if ever, a discussion of wholesale reform.

That’s actually a good thing. Compared to the income tax, the payroll tax does far less damage. And it’s not just because it collects less money. On a per-dollar-raised basis, the payroll tax is considerably less destructive than the income tax.

Why? Because it’s actually a form of flat tax.

• It has only one tax rate. There’s a 12.4 percent tax for Social Security and a 2.9 percent tax for Medicare, which means a flat tax of 15.3 percent.
• There’s almost no double taxation. The payroll tax applies to wage and salary income, as well as personal earnings from business activities (sometimes known as “Schedule C” income). But dividends, interest, and capital gains are generally spared – other than the 3.8 percent Obamacare surtax.
• There are no loopholes or deductions for politically connected interest groups.

And because of these three features, the tax is remarkably simple and doesn’t even require a tax form unless taxpayers have Schedule C income.

None of this, by the way, means the payroll tax is a good or desirable levy.

• It takes for too much money from the American people and is far and away the biggest tax paid by the majority of American workers.
• Those revenues are used for two programs – Social Security and Medicare – that are actuarially bankrupt and contributing to the nation’s long-run fiscal collapse.
• The 15.3 percent tax undermines work incentives by driving a wedge between pre-tax income and post-tax consumption.
• And the tax is very non-transparent, particularly since many taxpayers don’t even realize that the “F.I.C.A.” tax on their pay stub only reflects 50 percent of their payroll tax burden. In a hidden form of pre-withholding, employers pay an equal amount to the government on behalf of their workers – funds that otherwise would be part of worker compensation.

In other words, the payroll tax is a bad imposition. That being said, it still does considerably less damage, on a per-dollar-collected basis, than the income tax.

With that in mind, I’m puzzled that some folks want to keep the income tax and get rid of the payroll tax.

My friends at the Heritage Foundation, for instance, have a tax reform proposal that would fold the payroll tax into the income tax. Since they’re also proposing to turn the income tax into a form of flat tax, with one rate and no double taxation, the overall proposal clearly is a big improvement over today’s tax system. But all of the improvement is because of reforms to the income tax.

The Washington Examiner has an even stranger position. The paper recently editorialized in favor of abolishing the Social Security portion of the payroll tax and expanding the income tax.

The payroll tax — 12.4 percent, split between workers and their employers to help finance Social Security – is one of the worst taxes on the books for several reasons. A basic economic principle is that when the government taxes something, the nation gets less of it. Because the payroll tax makes it more expensive and administratively burdensome for businesses to hire workers, it’s a drag on employment. Also, even the employer’s share of the tax is effectively passed on to workers in the form of lower salaries and benefits.

There’s nothing overtly wrong with the above passage. The tax does all those bad things. But the income tax does all those things as well, but in an even more destructive fashion.

The editorial addresses a couple of potential objections, starting with the notion that the payroll tax is a revenue dedicated to social Security.

There are two main objections to scrapping the payroll tax. The first is the theoretical idea that payroll taxes are a dedicated revenue stream for Social Security. In practice, it just isn’t true. All government expenditures ultimately come from the same place. Payroll taxes help subsidize other government functions, and the government will use other tax revenue and borrowing to pay for Social Security when revenues are short.

They’re right that all taxes basically get dumped into the same pile of money and that the relationship between payroll taxes and Social Security benefits is imprecise.

But since my argument has nothing to do with this issue, I don’t think it matters.

Here’s the part of the editorial that doesn’t make sense.

The other objection is the massive revenue hit to the federal government. In 2010 (the last year before the recent payroll tax holiday), social insurance taxes raised $865 billion in revenue, according to the Congressional Budget Office. But there are a number of ways to recoup that revenue. As stated above, eliminating the payroll tax would make it easier to get rid of a lot of credits, loopholes and deductions. Also, if lower-income Americans aren’t paying payroll taxes, they can pay a bit more in income taxes. This would also deal with a conservative complaint that the income tax system needs to be reformed so everybody has at least some skin in the game.

This passage has a policy mistake and a political mistake.

The policy mistake is that the proposed swap almost surely would make the overall tax code more hostile to growth. The Examiner is proposing to get rid of an $865 billion tax that does a modest amount of damage per dollar collected, and somehow make up for that foregone revenue by collecting an additional $865 billion from the income tax system – which we know does a very large amount of damage per dollar collected.

To be sure, it’s possible to collect that extra money by eliminating distortions such as the state and local tax deduction or the healthcare exclusion. Compared to raising marginal tax rates, those are much-preferred ways of generating more revenue. But even in a best-case scenario – with politicians miraculously trying to collect an extra $865 billion without making the income tax system even worse, it’s hard to envision a better fiscal regime if we swap the payroll tax for a bigger income tax.

The political mistake is the assumption that more people will have “skin in the game” if the income tax is expanded. That’s almost surely not true. The poor don’t pay income tax, but the payroll tax grabs 15.3 percent of every penny earned by low-income households. And since very few taxpayers pay attention to which tax is shrinking their paychecks, it doesn’t really matter whether the “skin” is a payroll tax or an income tax.

Since the Examiner isn’t proposing a specific plan, there’s no way of making a definitive statement, but it’s 99 percent likely that eliminating the Social Security payroll tax would result in low-income households paying even less money to Washington. I think everybody should send less to Washington, but I don’t think shifting a greater share of the tax burden onto the middle class and the rich is the right way of achieving that goal.

I have one final objection, and this applies to both the Heritage Foundation plan and the Examiner proposal.

Notwithstanding everything I just wrote, I actually agree with them that we should eliminate the Social Security payroll tax. But we should get rid of the tax as part of a transition to a system of personal retirement accounts.

This is a reform that has been successfully implemented in about 30 nations and it also should happen in the United States. But an integral feature of this reform is that workers would be allowed to shift their payroll taxes into personal accounts. Needless to say, that’s not possible if the payroll tax has disappeared.

This video explains why genuine Social Security reform is so desirable.

And let’s not forget that the Medicare portion of the payroll tax could and should be part of a broader agenda of entitlement reform. But that’s also less likely if the payroll tax is folded into the income tax.

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Social Security’s $30 Trillion Fiscal Time Bomb

I don’t give the issue much attention on this blog, but I’m very interested in Social Security reform. I wrote my dissertation on Australia’s very successful system of personal retirement accounts, for instance, and I narrated this video on Social Security reform in the United States.

So I was very interested to see that the Associated Press put out a story warning about the dismal state of the program’s finances.

Here’s some of what the AP reported.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government. Those days are over. Since 2010, Social Security has been paying out more in benefits than it collects in taxes… The projected shortfall in 2033 is $623 billion, according to the trustees’ latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security’s number crunchers because it covers the retirement years of just about everyone working today. Add up 75 years’ worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that’s $30.5 trillion in 2012 dollars, or eight times the size of this year’s entire federal budget.

First of all, kudos to the AP. I criticized them for a sloppy and biased report on poverty last month, so it behooves me to mention that their story on Social Security is mostly fair and accurate.

My only complaint is that the story does include some analysis of the Social Security Trust Fund, even though that supposed Fund is nothing but a pile of IOUs – money that one part of the government promises to give to another part of the government.

But let’s set that aside. Another interesting tidbit from the story is this quote from one of the kleptocrats at the American Association of Retired Persons. Note that he implicitly rules out any changes other than those that enable the government to “pay the benefits we promised.”  But that shouldn’t be a surprise. AARP is part of the left-wing coalition.

“I’m not suggesting we need to wait 20 years but we do have time to make changes to Social Security so that we can pay the benefits we promised,” said David Certner, AARP’s legislative policy director. “Let’s face it. Relative to a lot of other things right now, Social Security is in pretty good shape.”

But I will say that Mr. Certner is sort of correct about Social Security being in better shape than Medicare and Medicaid. But that’s like saying the guy with lung cancer who is 75 lbs overweight is in better shape than the two guys with brain tumors who are both 150 lbs overweight.

If you have to engage in fiscal triage, it would be smart to first address Medicare and Medicaid, but Social Security also needs reform. And not the kind of statist reform the folks at AARP would like to see.

By the way, you probably won’t be surprised to learn that President Obama’s approach is similar to the left-wingers at AARP. Here’s a video I narrated about his preferred policy.

It seems that the question doesn’t matter with this administration. The answer is always to impose more class-warfare tax policy.

P.S. If you need to be cheered up after reading this post, here’s a good cartoon showing the difference between Social Security and a Ponzi scheme, and here’s another cartoon showing what inspired Bernie Madoff to steal so much money.

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Australia vs. the United States: Two Charts that Tell You Everything You Need to Know about Social Security Reform

There are two serious problems with America’s Social Security system. Almost everyone knows about the first problem, which is that the system is bankrupt, with huge unfunded liabilities of about $30 trillion.

The other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are particularly disadvantaged, as are African-Americans because of lower life expectancy.

These are critical issues, but perhaps looking at a couple of charts is the best way to illustrate why the Social Security system is inadequate.

Let’s start by looking at some numbers from Australia, where workers set aside 9 percent of their income in personal retirement accounts.

This system, which was made universal by the Labor Party beginning in the 1980s, has turned every Australian worker into a capitalist and generated private wealth of nearly 100 percent of GDP. Here’s a chart, based on data from the Australian Prudential Regulation Authority.

Now let’s look at one of the key numbers generated by America’s tax-and-transfer entitlement system. Here’s a chart showing the projected annual cash-flow deficits for the Social Security system, based on the just-released Trustees’ Report.

By the way, the chart shows inflation-adjusted 2012 dollars. The numbers would look far worse if I used the nominal numbers.

The two charts aren’t analogous, of course, but that’s because there’s nothing to compare. The Social Security system has no savings. Indeed, it discourages people from setting aside income.

And Australia’s superannuation system doesn’t have anything akin to America’s unfunded liabilities. The closest thing to an analogy would be the safety net provision guaranteeing a basic pension to people with limited savings (presumably because of a spotty employment record).

So now ask yourself whether Australia should copy America or America should copy Australia? Seems like a no-brainer.

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Two Social Security Cartoons

Since we recently learned Social Security is even more financially decrepit than previously estimated, let’s cheer ourselves up with a couple of cartoons.

This first one is a pretty good assessment of what’s going to happen in a few years if we don’t see reform. Think about what’s happening in Europe, if you don’t have a good imagination.

This cartoon covers the same topic, but looks at how an aging population is going to create unsustainable fiscal demands.

There are solutions, of course, but don’t hold your breath waiting for them to be implemented.

Incidentally, you may recognize the artistic style in the second cartoon. It’s by Ramirez. Here are links to some of his other cartoons that I found especially worthwhile: Here, here, here, here, here, here, here, here, and here.

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Two Big Mistakes Journalists Make When Writing about Social Security’s Dismal Finances

The Social Security Board just released its Trustee’s Report, and it’s generated the usual hand wringing about the program’s long-term demise – much of which is perfectly appropriate for reasons I’ve already discussed.

But I’m usually unhappy about the press treatment of this issue.

Here’s some of what Stephen Ohlemacher and Ricardo Alonso-Zaldivar wrote for the Associated Press.

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians’ reluctance to take painful action to fix the huge retirement and disability program. The trust funds that support Social Security will run dry in 2033 – three years earlier than previously projected – the government said Monday. …Unless Congress acts – and forcefully – payments to millions of Americans could be cut. …Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans. Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers’ wages. It is paid by both employers and workers.

There are two flaws with what’s written in this story. One is a sin of commission, failing to expose the government’s dishonest accounting. The other is a sin of omission, analyzing the issue solely through the lens of government finances.

1. The sin of commission is that the story assumes the Social Security Trust Fund is real, when it is nothing but a collection of IOUs. When extra Social Security taxes are collected, the Treasury keeps those monies and spends them on other programs. In exchange, it engages in a bookkeeping exercise and credits the Social Security Trust Fund with some government bonds.

When one part of the government owes another part of the government some money, it is a wash. There’s no pile of assets to finance benefits. Those bonds simply represent a claim on future taxpayers.

This is why politicians can play dishonest games, such as approving a payroll tax holiday and declaring – by waving a magic wand – that this won’t affect the amount of IOUs in the Trust Fund. Just in case you think I’m joking, the AP story notes that “Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program’s finances are being made whole through increased government borrowing.”

Needless to say, that’s phoniness on top of phoniness. I guess the next step is for politicians to enact legislation adding several zeroes to all the existing IOUs. They can then declare that Social Security is solvent. Problem solved…other than the itsy-bitsy problem that there’s still no money.

2. The sin of omission in the story is that it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

My video on Social Security reform explains that personal retirement accounts are the only way to simultaneously deal with government finances and household finances in a constructive fashion.

Sadly, neither Obama nor Romney seem interested in this type of pro-growth reform.

By the way, I don’t mean to pick on the Associated Press. The report excerpted above simply happened to be the first one I read. You ‘ll find the same myopic analysis in the Wall Street Journal and Bloomberg, to cite just two of many examples.

In closing, Social Security reform is actually the least important of the entitlement reforms. The long-term fiscal problems caused by Medicare and Medicaid are much larger. This three-part video series looks at the reforms that could address all three programs.

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Even with a Volatile Stock Market, Personal Retirement Accounts Are Better and Safer than Social Security

Early last year, the Center for Freedom and Prosperity released this video, narrated by yours truly, making the case that the United States and other nations should shift from a tax-and-transfer entitlement scheme to a system of personal retirement accounts.

Some left wingers criticized the idea, saying the big drop in the stock market in 2008-2009 is proof that personal retirement accounts are too risky.

You won’t be surprised to learn, though, that they are wrong. It is true that retirement income fluctuates with a system of personal accounts, but that simply means that it is difficult to predict how much more income one would enjoy when compared to being stuck with Social Security.

Here is the key section from a just-released paper authored by my Cato colleague, Mike Tanner.

Despite recent declines in the stock market, a worker who had invested privately over the past 40 years would have still earned an average yearly return of 6.85 percent investing in the S&P 500, 3.46 percent from corporate bonds, and 2.44 percent from government bonds. If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.

Some people doubtlessly will still be skeptical of personal accounts, thinking to themselves that a check from the government might be meager, but at least it’s guaranteed.

But that is a very foolish assumption. When the welfare state begins to collapse and it becomes apparent that higher taxes simply make a bad situation even worse, politicians will have no choice but to renege on unaffordable promises. Just look at what’s happening in Greece and elsewhere in Europe.

And as this chart from Mike’s paper illustrates, American politicians have dug a huge hole. Relying on the empty promises of Washington politicians will be far more risky than personal retirement accounts.

The chart shows big funding shortfalls, particularly once the baby boomers have retired. Most people, though, aren’t familiar with concepts such as “percent of taxable payroll.”

So let’s make it simple. If we look at all of the future deficits, adjust them for inflation so we can make an apples-to-apples comparison, and then add them up, the Social Security shortfall is close to $30 trillion.

We know that personal accounts work. Nations such as Australia, Chile, and Sweden have reaped big benefits by making the shift.

I’m not surprised that left-wing journalists want to trap American workers in a bad system. But I am disappointed that a lot of Republican politicians feel the same way.

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The Wrong Kind of Entitlement Reform Could Be Worse than No Entitlement Reform

I have a new article for National Review about the fallout from the Supercommittee.

Among the points I make are:

o We were lucky to dodge a tax hike.

o There’s still a threat of a tax hike if big-government Republicans side with the so-called rational left in favor of a tax-increase proposal, such as Gang of Six, Simpson-Bowles, and Domenici-Rivlin.

o The sequester is a good outcome.

o Republicans who accept a tax hike to get entitlement cuts will wind up with bad policy that crowds out needed reforms.

I want to focus on this last point because it is critically important, but doesn’t get much attention. Here’s what I wrote for NRO.

…many Republicans (regardless of the no-tax-hike pledge) are susceptible to a deal so long as something is being done to address entitlement costs and so long as the tax hikes are not based on class-warfare ideology. …the real challenge for fiscal conservatives is figuring out how to adopt something akin to the Ryan budget. That means no tax increases, genuine spending cuts, and real entitlement reforms (i.e., not the policies promoted by the rational Left, such as unsustainable price controls or back-door tax hikes via means testing). Sadly, there is no way for such a budget to be enacted in 2011 or 2012. And it may not happen in the four years after that. That would be both frustrating and worrisome — particularly since every year of delay brings us closer to European-style fiscal chaos. But for fiscal conservatives there is no possible compromise with either the hard Left or the rational Left. Both of those camps want bigger government. Both want higher taxes. And both oppose real entitlement reform.

To elaborate, not all entitlement reform is created equal. As I explained in this set of videos, good reform means putting individuals back in charge and restoring market forces. It means personal retirement accounts for Social Security. It means vouchers for Medicare. And it means block-granting Medicaid back to the states.

To the Washington establishment, however, entitlement reform means price controls such as the infamous “doc fix.” The problem with this approach is that price controls are notoriously ineffective and politically unsustainable.

The political elite also thinks that means-testing is entitlement reform. But this policy basically means that people who save and invest during their working years wind up losing eligibility. This approach isn’t as bad as price controls, but it does impose high implicit marginal tax rates on those who save and invest, which almost certainly will have a negative impact on capital formation.

I realize that giving advice to the GOP is about as useful as sticking my arm into a garbage disposal, but the lesson of all this is that there’s no point in trying to strike a deal with Obama or congressional Democrats. Simply stated, there is no way they would agree to good policies.

Moreover, any agreement would be interpreted as a “solution” and therefore kill any chance of real reform in 2013.

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The Less-than-Thrilled Case for Extending the Payroll Tax Holiday

When I think about taxes, my first instinct is to rip up the corrupt internal revenue code and implement a simple and fair flat tax.

When I think about Social Security, my first instinct is to copy dozens of other nations and implement personal retirement accounts.

Unfortunately, the political system rarely generates opportunities to enact big reforms that actually solve problems and increase freedom. Instead, we’re stuck with proposals that make things modestly better or modestly worse.

So you can imagine my sense of dissatisfaction that I’m getting peppered with questions about whether the one-year 2-percentage point payroll tax holiday should be extended.

But it’s more complicated than that. The Democrats in the Senate want to make the temporary tax cut even bigger and “offset” that tax cut with some soak-the-rich tax increases. Republicans, meanwhile, are frozen like deer in the headlights. They understandably don’t like the Democrat plan, but they seem reluctant to support anything else, not even a “clean” extension of the current policy.

Here are a handful of observations.

* The Democrat’s proposal for a one-year payroll tax cut financed by a permanent income tax hike on investors, entrepreneurs, and small business owners would be a big net negative for US job creation and competitiveness.

* A “clean” extension of the payroll tax holiday would modestly improve incentives for work, but the temporary nature of the tax cut substantially weakens pro-growth effects.

* Ideally, the extension of the tax holiday should be financed by reducing the growth of federal spending.

* There are other tax cuts, such as permanent reductions in marginal income tax rates and/or permanent reductions in the double taxation of saving and investment, that would have a better impact on the economy.

* There are other tax cuts, such as expanded credits, deductions, preferences, exemptions, and shelters, that have no positive impact on the economy.

* A payroll tax holiday does not undermine Social Security since the Trust Fund is nothing but a big pile of IOUs.

* The best incremental reform would be a permanent reduction in the payroll tax, with the money channeled to personal retirement accounts. This would lower the tax burden of work while reducing the long-run burden of entitlement spending.

* This discussion of payroll taxes and incremental reform should not distract us from the enormously important issue of genuinely fixing entitlement programs, something that is needed to save America from Greek-style fiscal collapse at some point in the future.

So what does all this mean? Simply stated, there are many other fiscal reforms that I prefer, but a temporary extension of the payroll tax holiday is better than nothing – assuming, of course, it is not poisoned by accompanying class-warfare tax hikes.

Last but not least, let me close with a political observation. I’ve commented several times about Republicans being the “stupid party.” Well, if GOPers paint themselves into a corner such that they can be accused of supporting tax cuts for the “rich” while opposing tax cuts for workers, that will set a new record for being tone-deaf and brain-dead.

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Everything You Need to Know about Entitlement Reform

Most people have a vague understanding that America has a huge long-run fiscal problem.

They’re right, though they probably don’t realize the seriousness of that looming crisis.

Here’s what you need to know: America’s fiscal crisis is actually a spending crisis, and that spending crisis is driven by entitlements.

More specifically, the vast majority of the problem is the result of Medicaid, Medicare, and Social Security, programs that are poorly designed and unsustainable.

America needs to fix these programs…or eventually become another Greece.

Fortunately, all of the problems can be solved, as these three videos demonstrate.

The first video explains how to fix Medicaid.

The second video shows how to fix Medicare.

And the final video shows how to fix Social Security.

Regular readers know I’m fairly gloomy about the future of liberty, but this is one area where there is a glimmer of hope.

The Chairman of the House Budget Committee actually put together a plan that addresses the two biggest problems (Medicare and Medicaid) and the House of Representatives actually adopted the proposal.

The Senate didn’t act, of course, and Obama would veto any good legislation anyhow, so I don’t want to be crazy optimistic. Depending on how things play out politically in the next six years, I’ll say there’s actually a 20 percent chance to save America.

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Social Security Is Not a Ponzi Scheme

I was wrong yesterday when I said Social Security was akin to a Ponzi scheme.

It’s worse, as aptly demonstrated in this cartoon.

And let’s not forget the famous Bernie Madoff cartoon.

(h/t: Steve Horwitz)

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Social Security Demagoguery from Mitt Romney and Michele Bachmann: Economically Wrong, Politically Wrong

Governor Rick Perry of Texas is being attacked by two rivals in the GOP presidential race. His sin, if you can believe it, is that he told the truth (as acknowledged by everyone from Paul Krugman to Milton Friedman) about Social Security being a Ponzi scheme.

Here’s an excerpt from Philip Klein’s column in the Examiner, looking at how Mitt Romney is criticizing Perry.

Mitt Romney doubled down on his attack against Texas Gov. Rick Perry this afternoon, warning in an interview with Sean Hannity that his critique of Social Security amounted to “terrible politics” that would cost Republicans the election. Romney’s decision to pile on suggests that he’s willing to play the “granny card” against Perry if it will help him get elected, a tactic more becoming of the likes of DNC chairwoman Debbie Wasserman Schultz than a potential Republican nominee.

And here’s a Byron York column from the Examiner looking at how Michele Bachmann is taking the same approach.

…another Republican rival, Michele Bachmann, is preparing to hit Perry on the same issue. “Bernie Madoff deals with Ponzi schemes, not the grandparents of America,” says a Bachmann adviser.  “Clearly she feels differently about the value of Social Security than Gov. Perry does.  She believes Social Security needs to be saved, that it’s an important safety net for Americans who have paid into it all their lives.” … “She strongly disagrees with his position on that…”

Shame on Romney and Bachmann. With an inflation-adjusted long-run shortfall of about $28 trillion, Social Security is a Ponzi scheme on steroids.

But as I explain in this video, that’s just part of the problem. The program also is a terrible deal for workers, particularly young people and minorities.

Here’s what’s so frustrating. Romney and Bachmann almost certainly understand that Social Security is actuarially bankrupt. And they probably realize that personal retirement accounts are the only long-run answer.

But they’re letting political ambition lure them into saying things that they know are not true. Why? Because they think Perry will lose votes and they can improve their respective chances of getting the GOP nomination.

Sounds like a smart approach, assuming truth and morality don’t matter.

But here’s what’s so ironic. The Romney and Bachmann strategy is only astute if Social Security is sacrosanct and personal accounts are political poison.

But as I noted last year, the American public supports personal accounts by a hefty margin. And former President Bush won two elections while supporting Social Security reform. And election-day polls confirmed that voters supported personal accounts.

I’m not a political scientist, so maybe something has changed, but I wouldn’t be surprised if Perry benefited from the left-wing demagoguery being utilized by Romney and Bachmann.

P.S. This does not mean Perry has the right answer. As far as I know, he hasn’t endorsed personal accounts. But at least he’s telling the truth about Social Security being unsustainable.

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Bloomberg’s Flawed Response to Social Security Shortfall: Americans Should Pay More and Get Less

The editors at Bloomberg have decided that condemning younger workers to a more dismal future is the best way to deal with the Social Security program’s giant long-run shortfall.

They want workers to pay higher taxes to prop up the bankrupt system. And, in exchange for those higher taxes, they want to give people less retirement income. Here’s what they wrote in their editorial.

Social Security’s finances need shoring up. But there is nothing wrong with the program that Congress couldn’t fix in a week. Gradually raising the retirement age to 69, changing the formula for cost-of-living increases, and raising the cap on wages subject to the payroll tax would close most of Social Security’s funding gap for the next 75 years. Such changes would rely about 60 percent on tax increases and 40 percent on benefit cuts, and would mainly affect the wealthiest Americans by asking them to pay more and get less in return.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits. The folks at Bloomberg want to double down on that approach and make a bad system even worse.

And they want higher payroll taxes on investors, entrepreneurs, small business owners, and other “rich” people. Apparently, some people think it is a good idea to copy European fiscal policy at the exact moment that Europe’s welfare states are collapsing.

Not surprisingly, the editors at Bloomberg reject personal retirement accounts. I am 100 percent confident that they personally benefit from IRAs and 401(k)s, but I guess peasants like us are unworthy.

We don’t think private accounts should be among them. If workers divert some of their payroll taxes to an investment account, that would decrease the flow of money into Social Security and deprive retirees of benefits of equal value. Bad investment choices, or bear markets that lower returns on stocks and bonds, could add to their woes. In other words, private accounts would only make matters worse.

This is remarkable. They actually think that personal retirement accounts are more risky that the empty promises of politicians – even though the system has close to $30 trillion of unfunded promises (in inflation-adjusted dollars!), and even though we see in Europe that very bad things happen when the welfare state collapses.

This video explains why personal retirement accounts are a good idea, including an explanation of how we could transition to a new account and a discussion of how 30 nations already have adopted this pro-growth reform.

So here’s the choice we face. The Bloomberg editors want higher taxes and bigger government – an approach that dooms American to European-style stagnation (and that’s the optimistic scenario). Or we can go with personal retirement accounts – an approach that is working all over the world, while simultaneously boosting growth and creating more retirement security.

Seems like the right choice is rather obvious.

By the way, I can’t resist one last dig at the Bloomberg crowd. Their editorial is titled “Social Security Is No Ponzi Scheme,” yet nowhere in the column do they justify this absurd assertion. At least they should be honest and admit the current system is a pay-as-you-go racket that relies on taxes paid by young workers to finance benefits for old retirees.

And I also can’t resist linking to this cartoon, which makes the obvious connection between Bernie Madoff’s Ponzi scheme and the one the government imposes on us.

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Crikey, Australia’s a Good Role Model

Welcome Instapundit readers. Notwithstanding my next-to-last paragraph full of caveats, some people are saying I’m too soft on the Aussies. This previous post should disabuse people of that notion.

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The Economist magazine has a couple of good articles about Australia’s increasingly enviable economic status. Here’s a blurb from the first article, which outlines the pro-market reforms that enabled today’s prosperity.

Only a dozen economies are bigger, and only six nations are richer—of which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevitable. Twenty-five years ago Paul Keating, the country’s treasurer (finance minister), declared that if Australia failed to reform it would become a banana republic. Barely five years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last. …With the popular, politically astute Mr Hawke presiding, and the coruscating, aggressive Mr Keating doing most of the pushing, this Labor government floated the Australian dollar, deregulated the financial system, abolished import quotas and cut tariffs. The reforms were continued by Mr Keating when he took over as prime minister in 1991, and then by the Liberal-led (which in Australia means conservative-led) coalition government of John Howard and his treasurer, Peter Costello, after 1996. …By 2003 the effective rate of protection in manufacturing had fallen from about 35% in the 1970s to 5%. Foreign banks had been allowed to compete. Airlines, shipping and telecoms had been deregulated. The labour market had been largely freed, with centralised wage-fixing replaced by enterprise bargaining. State-owned firms had been privatised. …the double taxation of dividends ended. Corporate and income taxes had both been cut.

This chart (click for a larger image), from Economic Freedom of the World, presents a more rigorous look at this period. It shows how Australia’s economic freedom ranking had dropped to as low at 19 (out of 72 nations measured) and now is up to 8 (out of 114 nations measured). This is akin to moving from the 74th percentile to the 94th percentile.

There is also an accompanying article about Australia’s private Social Security system. Called superannuation, these personal accounts have generated tremendous results.

…most Australian workers, over 8m in total, now have a private nest-egg for their old age. No tax is paid when members withdraw from their fund; they can take all they want as a lump sum, subject to a limit, or buy an annuity. Aussies are now a nation of capitalists. At the same time the state pension system, and therefore the taxpayer, is being progressively relieved of most of the burden of retirement provision, since eligibility for the state pension depends on both assets and income. As supers take over, the provision for old folks’ incomes will be almost entirely based on defined contributions, not defined benefits. So Australia is in the happy position of not having to worry too much about the pension implications of an ageing population… The supers…have created a pool of capital in Australia that might not otherwise have existed. Collectively worth about $1.3 trillion—much the same as GDP—they have made Australia the world’s fourth-largest market for pension savings.

Australia is not exactly Hong Kong. Marginal tax rates are still far too high. The burden of government spending is lower than in the United States, but is still far too onerous. Nonetheless, the Aussies have made impressive strides in reducing the overall size, scope, and level of government interference and intervention. And this has translated into much better economic performance.

This video uses the Economic Freedom of the World index to explain why comprehensive free market reforms (like Australia) generate the best results.

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I Don’t Care if You Wear Diapers as a 30-Year Old, but Don’t Ask Me to Subsidize Your Lifestyle

I wrote yesterday about the shocking case of a millionaire collecting food stamps. Today, I have an equally disgusting story of government waste.

The Social Security program is actuarially bankrupt, with unfunded liabilities of several trillion dollars. Our topic today deals with the disability portion of Social Security, which is in especially poor shape, with untold numbers of people faking illness in order to scam permanent payments – beginning in some cases decades before retirement age.

I’ve actually shared jokes about this phenomenon (see here and here), but this is no laughing matter.

The latest outrage is a 30-year old man who pretends to be an infant, and his roommate, who pretends to be his mother. I don’t care that he wears diapers and she changes them. I don’t care that he weighs 350 pounds. I wouldn’t care if I found out that they have sex with turtles and eat horse manure. As a libertarian, I genuinely believe people should be free to do anything that doesn’t infringe on the rights of others.

But I care very much that they are scamming taxpayers. In a typical display of government incompetence, both of them have convinced the Social Security Administration to give them disability payments.

Here are some of the key details from the Washington Times expose, including an effort by Senator Coburn to end the ripoff.

Sen. Tom Coburn, Oklahoma Republican and the Senate’s top waste-watcher, asked the agency’s inspector general to look into 30-year-old Stanley Thornton Jr. and his roommate, Sandra Dias, who acts as his “mother,” saying it’s not clear why they are collecting Supplemental Security Income (SSI) benefits instead of working. “Given that Mr. Thornton is able to determine what is appropriate attire and actions in public, drive himself to complete errands, design and custom-make baby furniture to support a 350-pound adult and run an Internet support group, it is possible that he has been improperly collecting disability benefits for a period of time,” Mr. Coburn wrote in a letter Monday to Inspector General Patrick P. O’Carroll Jr.

The sorry excuse for a human being, otherwise known as Mr. Thornton, responded to Senator Coburn’s letter with a perverse form of moral blackmail.

In an email response to The Washington Times, Mr. Thornton threatened to kill himself if his Social Security payments are taken away, and said the television episode showing him doing woodwork oversold his abilities. “You wanna test how damn serious I am about leaving this world, screw with my check that pays for this apartment and food. Try it. See how serious I am. I don’t care,” the California man said. “I have no problem killing myself. Take away the last thing keeping me here, and see what happens. Next time you see me on the news, it will be me in a body bag.”

My immediate reaction is not very charitable, involving a combination of the f-word with “go” and “yourself.” As I calm down and think about it, I hope that both of these people have friends and family who can help them return to normal life.

But I also know that Mr. Thornton and his partner should no longer be allowed to mooch off taxpayers.

P.S. Senator Coburn also should demand that the SSA track down the bureaucrat(s) that approved the disability payments and have him/her/them fired.

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The Wrong Way to Create Personal Social Security Retirement Accounts

I was excited when I saw that Professor Martin Feldstein of Harvard University had a column in yesterday’s Wall Street Journal entitled, “Private Accounts Can Save Social Security.” This is great, I thought, another person advocating the kind of pro-growth, pro-freedom reform which has taken hold in about 30 nations all over the world.

Imagine my disappointment, then, when I read the column and discovered that Feldstein had unfurled the white flag. Instead of genuine reform, which would allow workers to shift their payroll taxes into personal retirement accounts, he wants everyone to remain trapped in the current system and then require individuals to pay extra into some sort of retirement account.

Social Security taxes are not to be invested in the stock market… Here’s how such a system might work. Each individual would designate a broad-based mutual fund from a large list of funds approved by the government. The designation could be done on the individual’s annual tax return and could be changed once a year. Employers and the self-employed would send an additional few percent of wages to the Social Security Administration each month in addition to the current payroll tax. The Social Security Administration would then forward those dollars to the mutual fund chosen by the individual. …The automatic extra payroll deduction could start with a less disruptive 1% or 2% and grow as high as 5%. Since every individual would have the option of requesting a refund of that payroll deduction on the following year’s income-tax form, the extra saving is strictly voluntary.

The only good news is that Feldstein would allow workers to recapture the money they are forced to put in these new accounts, so technically this is not an Obamacare-style mandate. Or, perhaps the right description is that it is a mandate, but with an escape hatch.

The right approach is to let workers shift their payroll taxes into a personal account. This video describes why this type of reform is the right approach.

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Obama’s Embraces another Class Warfare Proposal – “Tax the Rich” Is the Universal Cure!

Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the programs giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine.

Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year. …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners. …most of the increase could be paid by the middle class or modestly affluent—i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

This video from the Center for Freedom and Prosperity, narrated by yours truly, elaborates on why this is the wrong approach.

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George W. Cameron Wants to Repeal Partial Social Security Privatization in the United Kingdom

People periodically ask me why I’m so down on David Cameron, the Prime Minster of the United Kingdom. I’ve already pointed out that his pre-election agenda was big government. And I’ve pointed out that his post-election record is more spending.

(and you can read more of my whining and complaining here, here, here, here, and here)

But now I’m really disgusted, because the United Kingdom’s version of  George W. Bush is now reversing one of the few pro-market aspects of British policy.

The Wall Street Journal Europe is appropriately disappointed.

On Tuesday Iain Duncan Smith announced a sweeping reform of the U.K.’s state-pension system. In the name of simplification, the Work and Pensions Secretary plans to raise the basic pension, eliminate the current multitiered system—and pay for it all by rolling back the personal retirement accounts that were first introduced by the Thatcher Government in 1987. Pension systems across the developed world are being stretched to the breaking point as populations gray and governments face ballooning public debts. Britain today is in the privileged position of possessing on top of its public savings system an extensive private one, relatively insulated from the government’s increasingly uncertain ability to deliver on its pension liabilities. Pity, then, that Mr. Duncan Smith’s reforms serve in the long run mostly to entrench the unsustainable elements of the British system and trash the desirable ones.

Addendum: Jose Pinera reminds me that George W. Bush actually proposed personal retirement accounts in 2005, one of the few positive actions of his eight-year reign. So Cameron’s actions may put him even further to the left than Bush on economic policy, a rather challenging achievement.

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How Appropriate: Politicians and Statists Celebrate Charles Ponzi’s Birthday by Demanding No Changes to Social Security

Yesterday was the 129th anniversary of Charles Ponzi’s birthday. Normal people don’t celebrate the birth of con artists, but a tediously left-wing columnist at the Washington Post, Eugene Robinson, must be a big admirer of Charles Ponzi, because he seems very happy that people don’t want to “cut” entitlements.

According to the NBC/Wall Street Journal poll, three-quarters of Americans would oppose significant cuts in Medicare or Social Security.

The poll was dishonest, of course, since it was based on the Washington’s dishonest definition of budget cuts. In reality, the reforms that are being proposed would reduce the growth of spending. And I suspect that voters, if asked whether it is reasonable to have Medicare grow 5 percent each year rather than 7 percent each year, would provide more rational answers.

Heck, we already have good polling data showing that people support Social Security reform.

But public opinion is not the key issue. The bigger topic is whether anybody should be celebrating a government program that is actuarially bankrupt, particularly when it hurts minorities, penalizes job creation, and discourages savings.

But that’s just what some politicians are doing.

I’ve already posted a very funny cartoon about Bernie Madoff and Social Security, but hopefully this video has more substantive arguments for reform.

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How to Fix the Entitlement Problem

One of my presentations at CPAC addressed America’s long-term entitlement crisis. I was part of a panel organized by the National Taxpayers Union, and I discussed how to solve the long-run fiscal problems caused by Social Security, Medicare, and Medicaid.

The lighting and focus leave something to be desired, but hopefully my message is crisp and clear.

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Obama’s State-of-the-Union Speech: Maybe New Rhetoric, Definitely Old Ideas

I’m disappointed, but not surprised, to read in the Washington Post that President Obama has decided against any changes to restrain Social Security spending. He’ll still probably subject us to pious and insincere rhetoric about fighting red ink in tonight’s State-of-the-Union address, but it is very revealing that the President is rejecting even the recommendations of his hand-picked Commission.

More than two months after his deficit commission first laid out a plan for reining in the national debt, President Obama has yet to embrace any of its controversial provisions – and he is unlikely to break that silence Tuesday night. …the president’s decision not to lay out his own vision for reducing the national debt has infuriated balanced-budget advocates, who fear that a bipartisan consensus for action fostered last month by Obama’s commission could wither without presidential leadership. …Liberals…applauded the decision, arguing that Social Security cuts are neither necessary to reduce current deficits nor a wise move politically.

I won’t be surprised, though, if Obama proposes in his budget to increase the Social Security payroll tax burden. That’s an idea he endorsed during the 2008 campaign.

The right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this month.

But the President’s reluctance to touch Social Security is only part of the story. The White House actually intends to push for more government spending. Only they won’t phrase it that way. The President will claim the new spending is an “investment.” But Senator Durbin of Illinois committed a gaffe and admitted this is just a repeat of the failed stimulus.

“It’s part of a stimulus. but we’re sensitive to the deficit,” Durbin said on “Fox News Sunday” when asked by host Chris Wallace about the president’s expected plans to call for more spending for infrastructure, education, research in his State of the Union address Tuesday night to a joint session of Congress.

I’m not sure why people are talking about a new, centrist-oriented Obama. Recycling big-government proposals is hardly a sign of fiscal restraint. And ducking-and-running on entitlements hardly seems to indicate a new era of fiscal responsibility.

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The Case for Social Security Personal Accounts

There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.

Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.

Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.

President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.

Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even  Sweden, which the left usually wants to mimic,  has partially privatized its Social Security system.

It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.

Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.

That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.

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Want to Know How Social Security Works?

A picture says a thousand words, and this Gary Varvel cartoon definitely exposes the government’s Ponzi system.

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Obama’s Proposed Payroll Tax Increase Is a Growing Threat

Back during the presidential campaign, Barack Obama proposed several tax increases. Some of those tax hikes, such as the proposed higher income tax rates on investors, entrepreneurs, small business owners, and other “rich” taxpayers, have received a lot of public attention.

But it’s also important to guard against stealth tax hikes, and Obama’s proposal to increase Social Security’s “taxable wage base” is a dangerous example. The video below explains the details of this scheme to subject more income to the Social Security payroll tax – and thus substantially increase marginal tax rates and penalize economic growth.

This issue has not received much attention in the past two years, and Obama hasn’t bothered to include anything specific in his budgets, but this may be about to change. The Chairmen of the President’s Fiscal Commission just put out a report endorsing a big increase in the scope of the payroll tax. And this was followed just today by a similar proposal for a steep tax hike from the Domenici-Rivlin Debt Reduction Task Force (as if copying Greek fiscal policy will lead to less red ink, but that’s another blog post).

As discussed in the video, this would be an unfortunate development. Bad tax policy. Bad economic policy. Bad entitlement policy. Bad Social Security policy.

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France Increases Retirement Age to 62, Solves 1.94 Percent of Its Fiscal Problem

I’m just making up the 1.94 percent number, but the International Herald Tribune reported last year that unfunded liabilities in France are nearly 550 percent of GDP. The news reports don’t include any estimates of what Sarkozy’s reform will mean, but I would be surprised if it had a big impact on France’s long-run fiscal nightmare. But, as the old saying goes, a journey of a thousand miles begins with a first step, and Sarkozy has pushed through the reforms notwithstanding protests and riots from left-wing unions and brain-dead students (who don’t seem to realize that they’ll pay even higher taxes if entitlements aren’t reformed).

Under pressure from the government, the French Senate voted Friday to raise the retirement age from 60 to 62, a victory for President Nicolas Sarkozy after days of street rage, acrimonious debate and strikes that dried up the supply of gasoline across the country. The vote all but sealed passage of the highly unpopular measure, but it was unlikely to end the increasingly radicalized protests. The coming days promised more work stoppages and demonstrations by those who feel changing the retirement age threatens a French birthright. …Leftist critics called the move a denial of democracy by an increasingly confrontational president. “No, you haven’t finished with retirement. You haven’t finished with the French,” said Socialist Sen. Jean-Pierre Bel, alluding to an apparently unflagging determination by unions, now joined by students, to keep protests alive — even through the upcoming week of school holidays.

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More than Two-to-One Support for Personal Retirement Accounts

I am pleasantly shocked to see that a healthy majority of respondents favor partial privatization of Social Security. I knew support was reasonably strong several years ago, but I feared that the financial crisis would have made Americans more leery of financial markets. I also wondered whether the idea was discredited by its association with the Bush Administration. But a new Pew survey shows very good results, so maybe Republicans will feel more comfortable about developing a “secret plan” for Social Security reform.

…a majority favors a proposal to allow some private investments in Social Security… The latest Pew Research/National Journal Congressional Connection poll, sponsored by SHRM, conducted Sept. 9-12 among 1,001 adults, finds that 58% favor a proposal that would allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets; 28% oppose this proposal. Majorities across all age groups — except for those ages 65 and older — favor this proposal. …Support for the general concept is comparable to support for a similar plan advocated by former President George W. Bush in 2004. As he sought reelection in the fall of 2004, 58% of registered voters that September favored allowing younger workers to invest a portion of their Social Security; 26% said they opposed this change. However, after Bush won reelection and debate about the proposal began, support weakened. By March 2005, the public was largely split (44% favor, 40% oppose) and the proposal was not enacted.

P.S. The same poll shows that people are not sympathetic, however, to reforming Medicare, however, so the Social Security silver cloud does have a dark lining.

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French Workers Protest against Reality

I sometimes joke that the French are the world’s most statist people. I have no idea if that is actually true, but the latest protests in France certainly are a good piece of evidence. French workers (especially government bureaucrats) are protesting a plan to increase the retirement age from 60 to 62. They apparently think marching in the street will magically change demographic reality. I discuss this issue in a new Cato Institute Podcast.

Incidentally, my comments are not favorable to Sarkozy. I point out that his pension proposal is just a tiny step in the right direction, and that any positive impact is undermined by concomitant class-warfare tax increases.

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A Basic – but Critical – Economics Lesson from Walter Williams

Just because something is free, that doesn’t mean there is no cost. This is the core message of Walter Williams’ column, which uses the example of “employer-paid” Social Security taxes to explain how politicians specialize in giving us very expensive things for “free.” 

Scarcity means there’s no free lunch. Having more of one thing requires having less of another. You might say, “Williams, that’s where you’re wrong. Someone gave me this newspaper and I’m reading your column for free!” Not true. If you weren’t spending time reading my column, you might have spent the time reading something else, chatting with your wife or children, or going out for a jog. You’re reading my column for a zero price but you’re not doing so at zero cost. You have to sacrifice something. There are zero-price services such as “free libraries,” “free public schools,” “free transportation” and free whatever. It doesn’t mean that costs are not being borne by somebody. The vision of getting something for nothing, or getting something that someone else has to pay for, explains why so many Americans are duped by politicians. A congressional hoax that’s flourished for seven decades is the Social Security hoax that half of the Social Security tax (6.2 percent) is paid by employers, the other half (6.2 percent) paid by employees. The law says that if you are self-employed, you get to pay both halves. The fact of the matter is whether you’re self-employed or not, you pay both halves of the Social Security tax that totals 12.4 percent. Let’s look at it. Suppose you hire me and our agreed-upon weekly salary is $500. From that $500, you’re going to deduct $31 as my share of the Social Security tax and you’re going to add $31 as the so-called employer’s share, sending a total of $62 to the IRS. Here’s the question: What is the weekly cost for you to hire me? I hope you answered $531. …The reason why Congress created the fiction of the employer share was to deceive us into thinking that we’re paying fewer taxes than we in fact are.

Reminds me of P.J. O’Rourke’s famous line about, “If you think health care is expensive now, wait until you see what it costs when it’s free.”

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Chile’s Private Social Security System a Big Success

Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work. A former World Bank expert has the details in a new report from the National Center for Policy Analysis.

American workers live longer each decade but they continue to retire early. They often begin receiving Social Security benefits, quit working and stop contributing to national output well before age 65. Reversing these trends must be an important objective when designing long-term reforms to balance revenues and expenditures on elderly entitlements. Chile faced similar problems prior to 1981. It had a traditional pay-as-you-go defined benefit system, like Social Security in the United States. Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately. Labor force participation dropped dramatically when workers became eligible for pensions. This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system. All new workers were required to join the defined contribution system while existing workers had a choice. Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account. Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return. Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement. The new system increased incentives for older workers to postpone retirement and continue working. The response was dramatic….Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly: The proportion who received benefits before age 65 decreased by about 8 percentage points. The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter. The proportion who started receiving benefits by their 50s was cut in half. Postponing the commencement of benefits could be due to market returns on additional contributions, which made workers more willing to continue working in order to save more money for retirement. Or it could be due to tighter preconditions on early retirement, which required more individuals to continue working until age 65. Tighter preconditions seem to dominate, as the percentage of individuals who receive benefits after 65 has not changed. More older workers kept working following the reform, after controlling for other factors: Labor force participation rates for individuals in their 50s rose 12 percentage points. Labor force rates rose 13 percentage points for those aged 65-70. Individuals aged 60-64 increased their labor force participation the most – by 19 percentage points. The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts: Participation rates rose by 15 percentage points for pension recipients in their late 60s. Rates rose by 28 percentage points for those in their 50s and early 60s. Among all pension recipients under age 70, the proportion who continued working more than doubled.

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