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Posts Tagged ‘Social Security Privatization’

The polling data I shared last month about confused young people was a bit of a downer, so let’s look at three different polls that are a bit more encouraging.

First, I’m glad to see that many Americans feel that government and politicians are their leading cause of daily stress.

Here’s some of what the Washington Post reported on this poll.

…much of that emotional response is completely justified. As if it weren’t enough that our politicians are actively working to harm the global economy and otherwise failing to do their jobs or even show up for work in general, they’re also stressing everyone out with the astonishing breadth and depth of their incompetence. And since high stress is linked to shorter life expectancy, they are also literally killing us with their incompetence. In other words, thanks, Obama (and everyone in Congress too).

My job is to connect the dots so that people understand that the only way to reduce stress is to make government smaller.

And, for what it’s worth, that’s the best way to make government at least semi-competent.

Our second batch of polling numbers come from Rasmussen. I’ve shared research and data on the negative impact of redistribution spending (as illustrated by this powerful chart), but I figured most Americans didn’t understand that such programs trap people in dependency.

I’m glad to read that I’m wrong. In an article entitled, “49% Believe Government Programs Increase Poverty in America,” Rasmussen reports the following.

Most Americans still believe current government anti-poverty programs have no impact on poverty in this country or actually increase it. A new Rasmussen Reports national telephone survey finds that a plurality (44%) of American Adults still think the government spends too much on poverty programs.

The Rasmussen folks also have this encouraging bit of public opinion research.

A new Rasmussen Reports national telephone survey finds that 67% of American Adults think there are too many in this country who are dependent on the government for financial aid, up slightly from 64% in September of last year.

Our third set of polling numbers come from the periodic Reason-Rupe poll.

I’ll share several pieces of data, but here are the numbers I find most encouraging. Apparently most people realize that pro-growth policy is the right approach, not class warfare and redistribution.

In terms of economic policies, 74 percent of Americans would like Congress to focus on policies to promote economic growth, while 20 percent favor policies to reduce income inequality.

I guess I’m also happy about these results, though I can’t help but think that there are some very confused folks in the Tea Party.

Fifty-five percent of Americans tell Reason-Rupe they have a favorable opinion of capitalism. Meanwhile, 36 percent of those surveyed, including 33 percent of independents and 26 percent of self-described Tea Party supporters, have a favorable opinion of socialism.

I don’t even think Obama’s a socialist, so these ostensibly anti-Obama folks apparently favor even more government than our statist President. Go figure.

Last but not least, I should like this result, but I’m actually disturbed since the margin is much smaller than it should be.

When asked about the size of government, 54 percent of Americans favor a smaller government providing fewer services. Forty-two percent favor a larger government providing more services.

P.S. Remember when I warned that the one downside to personal retirement accounts is that future politicians might steal the money?

Well, it’s happened again according to Reuters, this time in Russia.

Russia’s government has approved a plan to use contributions to employees’ privately-managed pension funds to plug budget holes for a second year running. The move was confirmed by Labour Minister Maxim Topilin on Tuesday in comments published on the ministry’s website. It has been heavily criticised by some officials and analysts, who say it will hurt the pensions industry and financial markets.

P.P.S. I was beginning to feel a bit more positive about the Tory-led government in the United Kingdom, particularly after reading about some well-designed welfare reform, significant corporate tax cuts, and postal service privatization.

Then I read something awful. And what could be worse than imposing a death tax on people who are still alive.

Savers could be forced to pay inheritance tax while they are still alive, under a new drive against tax avoidance planned by the Government. …Under plans put out for consultation, HM Revenue & Customs would have powers to subject people minimising inheritance tax to “accelerated payment” laws, meaning they would be forced to pay up front if officials suspect them of using new schemes to avoid tax. Experts have warned that under the rules, taxpayers will be treated as “guilty until proven innocent”. …there will be concerns that innocent people could be investigated and made to pay large sums before they are able to defend themselves. …Economists, tax experts and Tory MPs have called for reform of the tax, warning that it predominantly hits middle-class families.

Shame on David Cameron for allowing this to happen. But I’m not surprised given the government’s track record.

And what else would you expect from a government that brainwashes children to rat out their parents and also puts despicable Orwellian ads on subways and trains?

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With all the controversy over the failed and costly Obamacare program, it’s understandable that other entitlements aren’t getting much attention.

But that doesn’t mean there aren’t serious problems with Medicaid, Medicare, and Social Security.

Indeed, the annual Social Security Trustees Report was released a few days ago and the updated numbers for the government-run retirement program are rather sobering.

Thanks in part to sloppy journalism, many people only vaguely realize that Social Security is actuarially unsound.

In reality, the level of projected red ink is shocking. If you look at the report’s annual projections and then adjust them for inflation (so we get an idea of the size of the problem based on the value of today’s dollars), we can put together a very depressing chart.

How depressing is this chart? Well, cumulative deficits over the next 75 years will total an astounding $40 trillion. And keep in mind these are inflation-adjusted numbers. In nominal dollars, total red ink will be far more than $150 trillion.

That’s a lot of money even by Washington standards.

Just as worrisome, the trend is in the wrong direction. Last year, the cumulative inflation-adjusted shortfall was $36 trillion. The year before, the total amount of red ink was $30 trillion. And so on.

But regular readers know I’m not fixated on deficits and debt. I’m much more worried about the underlying problem of too much spending. So let’s look at the annual data showing how much payroll tax will be generated by Social Security and how much money will be paid out to beneficiaries.

As you can see, the problem is not inadequate tax revenue. Indeed, revenues will climb to record levels. The problem is that spending is projected to increase at an even faster rate.

Once again, don’t forget that these are inflation-adjusted numbers. In nominal dollars, the numbers are far bigger!

Why is the program becoming an ever-larger fiscal burden? The answer boils down to demographics. Simply stated, we will have more and more old people and fewer and fewer younger workers.

So if we do nothing, we’ll be Greece in 20 or 30 years.

That’s not a happy thought, so let’s close on a humorous note. Here’s a joke about how Social Security works, and you can enjoy some Social Security-themed cartoons here, here, and here.

P.S. I’m confident that few people will be surprised to learn that Obama’s supposed solution to this mess involves a huge tax increase.

P.P.S. The real solution is personal retirement accounts. I think Australia is the best role model, but Chile also is a big success.

P.P.S. The good news is that the American people are quite sympathetic to personal retirement accounts.

P.P.P.S. Statists try to scare people by claiming private investments are too risky, but one of my Cato colleagues showed that workers would be better off even if they retired after a stock market crash.

P.P.P.P.S. By the way, Social Security is a really bad deal for blacks and other minorities with lower-than-average life expectancies.

P.P.P.P.P.S. In the interests of fairness, I’ll admit the biggest weakness in the argument for personal accounts is that we might not be able to stop politicians from confiscating the money at some point in the future.

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I haven’t spent much time writing about Thomas Piketty’s inequality book for the simple reason that my goal is economic liberty, not equality.

That being said, I think that Piketty is fundamentally misguided even if the goal is helping the poor. Simply stated, long-run growth is the best way of reducing poverty and boosting living standards. Piketty, by contrast, focuses on redistribution – even though this would require punitive taxation, thus undermining growth and hurting the less fortunate.

This is very obvious when we look at economic performance in market-oriented nations and compare it to economic performance in countries where government plays a bigger role.

Most recently, I showed how Poland is out-pacing Ukraine.

I’ve compared South Korea and North Korea.

The data for Chile, Argentina, and Venezuela is very powerful.

I’ve shown how Singapore has eclipsed Jamaica.

And we can see that Hong Kong has caught up with the United States.

As I often remark in my speeches, I’d much rather be a poor person in a jurisdiction such as Hong Kong or Singapore rather than in a “compassionate” country such as France.

France might give me lots of handouts, but I’d remain poor. In a free-market society, by contrast, I could climb out of poverty.

Anyhow, let’s return to Piketty’s thesis about the rich benefiting from capital accumulation. All sorts of scholars have called into question his theoretical model and his empirical data, but I don’t even care if Piketty’s right. In a free society, the worst thing that happens is that the rich get richer faster than the poor get richer.

That’s why we should concentrate on what we can do to boost growth.

And there is one economic reform that is good for growth, but would be especially beneficial for lower-income people. Merrill Matthews of the Institute for Policy Innovation, in a column for Forbes, makes a powerful case for Social Security reform.

He starts with the essential insight that policy makers should focus on helping the poor, not penalizing success.

French economist Thomas Piketty wants to attack the issue of income inequality by redistributing the wealth of the highest earners. Wouldn’t a better solution be to increase the wealth of the lowest earners?

Merrill says we should make it easier for the overall population to become capitalists.

…instead of taxing that success even more than we already do, which discourages capital development and investment, Washington can help lower- and middle-income workers acquire capital so they too can partake in those higher returns.

He then points out that workers are forced to participate in a Social Security system that imposes very high taxes in exchange for rather meager benefits.

Eugene Steuerle and Caleb Quakenbush of the Urban Institute publish an annual estimate of how much workers at different income levels and marriage status pay into Social Security and Medicare and how much they can expect to receive in benefits. Their 2013 report estimates that a single male worker earning the average income of $44,800 (in 2013 dollars) turning 65 in 2015 can expect to receive $287,000 in Social Security benefits. However, that worker paid in $337,000, for a net loss of about $50,000. Both estimates assume a growth rate of 2 percent, which happens to match Piketty’s projection of long-term GDP growth. That disparity between contributions and benefits declines significantly for women, who tend to live longer. A single female worker would have paid in the same amount, $337,000, but could expect to receive $314,000.

Now we get to his proposed reform.

…what if workers were able to put that same amount of money—their 12.4 percent Social Security (FICA) tax; $5,555 in Stererle’s example—into a personal retirement account that could be invested in broad-based equities?

With personal retirement accounts, ordinary workers can generate big nest eggs.

Using an interest calculator, a $5,555 annual contribution over 40 years at 6 percent grows to about $970,000. Factor in that wealth and income inequality largely evaporates. …if the left is really concerned about income inequality, the best way to end it is wealth creation, not redistribution. Replacing Social Security’s financially struggling system with personal retirement accounts would create real wealth for millions of working Americans.

As you can imagine, I heartily concur. Here’s the video I narrated on the topic for the Center for Freedom and Prosperity.

By the way, if you think the stock market is too risky, particularly after the recent financial crisis, one of my Cato colleagues produced a thorough study showing that people who retired right after the market fell still would have been better off with personal accounts.

P.S. If you want to understand why class-warfare tax policy will backfire, another one of my colleagues dismantled the work of Piketty and others.

P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though I’m not sure we should laugh considering that tens of millions of Americans will suffer when the system no longer can afford to pay promised benefits.

P.P.P.S. Obama’s supposed solution would be an even bigger move in the wrong direction.

P.P.P.P.S. Last but definitely not least, watch Margaret Thatcher destroy the left’s position on income distribution.

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Over the years, I’ve shared many charts, graphs, and tables to help people understand that the welfare state is fundamentally unsustainable.

And, assuming there’s not genuine entitlement reform, many of these fiscal estimates show that the United States has a very perilous future.

According to the Bank for International Settlements, the United States is in worse shape than every nation other than Japan and the United Kingdom.

According to the Organization for Economic Cooperation and Development, the United States has a bigger long-run fiscal problem than all countries other than New Zealand and Japan.

And according to International Monetary Fund estimates of both future spending increases and the need for reform, no nation has a bigger problem than the United States.

So do all these numbers mean the United States is really in worse shape than basket cases such as Italy, Spain, Japan, France, and Greece?

Yes and no. I realize that answer makes me sound like a politician, but it is  hard to answer that question because America’s grim long-run numbers are largely a function of rapidly rising health care spending.

And if you assume that Medicare, Medicaid, and Obamacare are left unreformed, then the budgets for these programs will eat up an ever-larger share of our economy and we’ll eventually suffer a fiscal collapse.

However, if you assume that these programs at some point get reformed (and it better be the right kind of reform), then the long-run outlook is considerably less severe.

But notice that I wrote “less severe.” That’s because we still have a demographic issue. Any type of pay-as-you-go welfare state becomes increasingly expensive when there are more and more old people and fewer and fewer young workers.

This is why new projections from the Pew Research Center are so sobering. They show the change in age dependency ratio between now and 2050.

As you can see, we currently have about 50 young or old people for every 100 working-age people. By 2050, however, there will be 66 dependents for every 100 working-age people. And most of that added dependency will be caused by an aging population, not more children.

Age Dependency Ratio Pew

But here’s the good news. Compared to nations such as Spain and Japan, we’re in pretty good shape. Or, to be more accurate, we don’t face as deep of a problem. Indeed, it’s hard to see how those nations will survive.

Same with South Korea and Italy.

Even Germany has a very difficult future. Its welfare state may not be as bloated as some other nations in Europe, and the work ethic may be stronger than most other European countries, but as I already explained, any welfare state becomes unsustainable without new workers to pay taxes to support the dependent class.

In other words, demographics can be destiny. Look at this data on the nations with the lowest fertility rates. You’ll notice that Germans are not reproducing. And the same is true of the Japanese, Italians, and South Koreans (Spain is in 191st place, so they also aren’t having many kids).

Fertility Rate by Nation

I don’t know where this will lead, but it won’t be pretty. Simply stated, the welfare states in these nations will have to be reformed.

But how does that happen in countries where people have been told for decades that they have a “human right” to freebies from the government?

I fear that European nations are going to suffer some major dislocations. And as this Michael Ramirez cartoon suggests, the same problem could happen in America.

Let’s close with some optimism. You’ll notice that two of the four jurisdictions with the lowest fertility rates in the entire world are Hong Kong and Singapore. Yet there’s no major long-run fiscal crisis in those places.

Why? Because they have “pre-funded” retirement systems. In other words, they have personal retirement accounts instead of tax-and-transfer entitlement systems.

The moral of the story is that demographics can be destiny, but it doesn’t have to be.

Something to keep in mind next time there’s a discussion of Social Security reform.

P.S. Considering the high levels of pulchritude in Estonia, Latvia, and Lithuania, I’m mystified that there’s so little reproduction in those nations. Maybe I should volunteer to help out?

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As part of his State-of-the-Union speech, President Obama announced he was going to unilaterally create a new retirement savings account that supposedly would be available to all workers.

Employers would be mandated to facilitate these”MyRA” accounts, and the money collected would be invested in “guaranteed” government bonds.

There are some good features to the MyRA plan, most notably the fact that money in the accounts would be protected from double taxation. Workers would put after-tax money in the accounts, but there would be no additional layers of tax on any earnings, or when the money is withdrawn.

In other words, a MyRA would be akin to a back-ended (or Roth) IRA.

But there are some bad features, including the fact that taxpayers would be subsidizing the earnings, or interest, paid to account holders (though this would be a relatively benign form of government spending, at least compared to Obamacare, ethanol, etc, etc).

My biggest complaints, though, are the sins of omission, which I discuss in this interview for Blaze TV.

Simply stated, if Obama was concerned about low returns for savers, he should be directing his ire at the Federal Reserve, which has artificially pushed interest rates to very low levels as part of its easy-money policy.

But more importantly, MyRAs will be very inadequate for most workers with modest incomes. If the President really wanted to help ordinary people save for retirement, he would follow the successful example of more than 30 other nations and allow workers to shift their payroll taxes into personal retirement accounts.

This video explains why reform is so desirable.

Critics say it would be very expensive to make a transition to this modern system, and they’re right. If we let younger workers put their payroll taxes in a personal accounts, we’ll have to come up with a new source of revenue to finance benefits being paid to current retirees and older workers.

And we’re talking lots of money, as much as $7 trillion over the next few decades.

But that’s a lot less than the $36 trillion cash shortfall that we’ll have to somehow deal with if we maintain the current system.

In other words, we’re in a very deep hole. But if we shift to personal retirement accounts, the hole won’t be nearly as large.

P.S. The video mentions that Chile and Australia deserve special attention. Click here if you want to learn about Chile’s successful system and click here if you want to see how Australia’s “superannuation” system has been a big winner.

P.P.S. Some people already have asked me whether I was too Pollyannish in saying that there’s no risk for several decades that Washington will default. I could be wrong, of course, and I have shared BISOECD, and IMF data that reveals the United States has gigantic long-run fiscal challenges. But as I said in the interview, I think most other welfare states will collapse first, and that will lead to “flight capital” coming to America, which will help prop up our system.

P.P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate dark humor.

P.P.P.P.S. You probably don’t want to know how Obama would like to “fix” the Social Security shortfall.

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America desperately needs genuine entitlement reform to avoid a Greek-style fiscal future.

The biggest problems are the health entitlements such as Medicare, Medicaid, and Obamacare, but Social Security also has a huge long-run fiscal shortfall.

That’s why I’m a big fan of the very successful reforms in places such as Chile and Australia, where personal accounts are producing big benefits for workers. These systems also boost national economies since they generate higher savings rather than added unfunded liabilities.

And I’m very happy that we now have more than 30 nations with personal accounts, even tiny little jurisdictions such as the Faroe Islands.

But many statists object to reform, presumably because they don’t want workers to become capitalists. They apparently prefer to make people dependent on government.

Not all leftists take that narrow and cramped approach, however. Some academics at Boston College, for instance, produced some research showing some big benefits from Australia’s private Social Security system.

And new we have some remarkable admissions about how minorities are net losers from Social Security in a study from the left-leaning Urban Institute.

We use historical and projected data from 1970 to 2040 to measure the ratio of old age, survivors, and disability insurance (OASDI) benefits received to taxes paid by members of each race or ethnicity each year. This measure captures the transfers that occur in a given year from current workers to current beneficiaries of each group. We then examine benefit-tax ratios for each race or ethnicity into the future to determine how these redistributions will play out in the coming years. Our conclusion: When considered across many decades—historically, currently, and in the near future—Social Security redistributes from Hispanics, blacks, and other people of color to whites.

Why does the program have this perverse form of redistribution?

On average, blacks are more likely to be low income and short lived and are less likely to marry than whites. …Given this, one would expect forced annuitization and auxiliary benefits related to marriage and divorce to redistribute from blacks to whites.

And that’s exactly what the research found.

…whites have clearly received a disproportionate share of benefits relative to the taxes that they pay in at a point in time. Their benefit-to-tax ratio has been higher than that of blacks, Hispanics, and other ethnic groups for as long as the system has existed, while projections continue that trend at least for decades to come.

Here’s a chart from the study showing how different races have fared in terms of taxes paid and benefits received.

Social Security by Race - Urban Institute

In other words, if folks on the left really cared about minorities, they would be among the biggest advocates of genuine reform.

By the way, it’s also worth noting that Social Security is a bad deal for everyone. The Urban Institute study simply investigates who loses the most.

And the system is getting worse for every new generation.

Recent studies have also documented how different generations are treated within Social Security, with succeeding generations achieving successively lower “returns” on their contributions.

This helps explain why the evidence shows personal retirement accounts are superior – even for folks who would have retired at the peak of the recent financial crisis.

Here’s my video on why we should replace the bankrupt tax-and-transfer Social Security system with personal retirement accounts.

P.S. You can enjoy some Social Security cartoons herehere, and here. And we also have a Social Security joke, though it’s not overly funny when you realize it’s a depiction of reality.

P.P.S. Thanks to Social Security, I made a $16 trillion mistake in a TV debate. Fortunately, it didn’t really change the outcome since I was understating the fiscal shortfall of the current system.

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I’m currently in the Faroe Islands, a relatively unknown and semi-autonomous part of Denmark located in the North Atlantic. Sort of like Greenland, but too small to appear on most maps.Faroe Islands

I’m in this chilly archipelago for a speech to the annual meeting of the Faroese People’s Party. According to Wikipedia, “the party is supportive of the economic liberalism.” But liberal in this context is classical liberal, so they’re my kind of people.

I spoke on the economics of fiscal policy and talked about issues such as my Golden Rule and the Laffer Curve, but today’s post is about what I learned, not what I said.

The current government of the Faroe Islands, which includes the People’s Party, has modernized its Social Security regime with a system of personal retirement accounts. Starting next January, workers will begin setting aside some of their income to finance a comfortable retirement income. When fully implemented, workers will be putting 15 percent of their income in their accounts, creating a system that’s even larger than the private retirement models in Australia and Chile.

So why did Faroese politicians take this step? Well, unlike politicians in most nations, they looked at the long-run data, saw that they had an aging population, realized that a tax-and-transfer scheme no longer could work, and decided to reform now instead of waiting for the old system to collapse.

Here’s a chart put together by the Nordic Council. As you can see, the Faroe Islands were (and other jurisdictions are) heading to an intolerable and unsustainable situation of too few workers and too many retirees.

Faroe Islands Age-Dependency Ratio

By the way, the same situation exists in the United States.

Our population is aging, the Baby Boomers are going into retirement, and birth rates have dropped. Our long-run numbers aren’t as grim as some other nations, but our Social Security system is basically insolvent.

Indeed, Social Security’s long-run deficit is measured in trillions, not billions. According to the most recent Trustee’s Report, deficits over the next 75 years are expected to equal $36 trillion. And that’s after adjusting for inflation!

For what it’s worth, if a private insurance or pension company kept its books in the same was as Social Security, it would be forced into bankruptcy and its managers would be indicted for fraud..

But when politicians operate a Ponzi Scheme, we’re supposed to applaud them for compassion!

This is why it might be worth the cost if we sent the politicians in Washington on a junket (using their taxpayer-financed fleet of luxury jets) to Torshavn, the Faroese capital. They could eat some lamb and fish and learn what it’s like to responsibly address a problem before it becomes a crisis.

Or we could save the money and simply force them to watch my video on personal retirement accounts.

P.S. In you like gallows humor, you can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though it’s not overly funny when you realize it’s a depiction of reality.

P.P.S. You probably don’t want to know how Obama would like to “fix” the Social Security shortfall.

P.P.P.S. On Monday, I continue my tour of the North Atlantic with a speech in Iceland on the Laffer Curve. I don’t know if I’ll say anything memorable, but I’ll use the opportunity to learn more about some of that nation’s policies, including their very successful privatized fishery system. Iceland has some bad policies, of course, but it’s also worth noting that they wisely have rejected membership in the European Union, they’ve reduced the burden of government spending in recent years, and they also made the right decision when they decided (with help from an outraged electorate) to limit bailouts when their banks went bust. You won’t be surprised to learn, though, that the Paris-based OECD has been using American tax dollars to advocate bad fiscal policy in Iceland.

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