Wednesday, February 21, 2007


I for one have lost all respect for the AARP. Their extensive campaign against Bush's proposals to tackle the problem of Social Security, coupled with incredibly cynical arguments from Democrats (led by Harry Reid, who had years before sought to allow Congressman to opt out of the Social Security system), doomed Bush's plan to failure. If you will recall, the Democrats and AARP accomplished this without proposing any alternatives. Now, with a Democratic Congress, the AARP seeks to reengage on the Social Security issue. People, the AARP are not your friends.

Since this is a new blog and I have not addressed this subject before, I am going to take the opportunity now. As a threshold matter, if a private individual ran Social Security, he would be put in jail for running a ponzi scheme. A ponzi scheme is a classic of white collar crime. It is where a person takes your money for investment but, instead, spends it, relying on future deposits to cover then current payouts. That is in essence what happens with Social Security. Our Social Security taxes first fund current payouts, then the remainder goes into the general fund to be spent by the government that year. Thus, Social Security, like a ponzi scheme, is doomed to fail.

Bush proposed to both fully fund Social Security and to allow a portion of those funds to be invested in the stock market or a bond fund. Such a plan is precisely what we need.

One, it would give everyone a stake in the economic growth of this nation -- i.e., the profitability of U.S. business. We do not have that now. We have poorly designed and often gross over regulation of businesses (i.e., Sarbanes-Oxley), we have attacks on profitable businesses (i.e., Walmart), we have a litigation system that at times resembles a lottery (punitive damage awards that can literally drive companies out of business), we have unions with far too much power to prevent changes in business models so as to insure profitability (i.e., American automobile manufacturers), we have Hillary Clinton threatening to nationalize at least a portion of our oil and gas industry as well as health care, and our taxation systems on corporations and capital gains are and will cause capital flight. If we all had a stake in the wealth of our nation, I have no doubt there would be much less "class warfare" and much more emphasis on increasing profitability and reasonableness in all of the areas listed above.

Two, the historic returns of the stock market are far greater then a calculated rate of return on total investments into Social Security. In attacking a private account plan for Social Security, Harry Reid put up a web site that showed a person investing in a stock plan with a lower payout than what they would have received through a straight Social Security account. If memory serves, I believe he calculated a much weaker economy in the future and a rate of return for stocks at 3%. Based on historic rates of return (over 10% annually since 1938 by my spreadsheet), that is just purely ridiculous and displays the ultimate in cynicism.

Now, gather around brothers and sisters . . . here is a little secret -- if our stockmarket is not performing above 3% over a ten year period, then our economy is in the tubes. Our ability to pay out Social Security at a higher rate of return will necessarily be impaired because our tax base will be insufficient. In other words, the government will have to print money or sell far more government bonds to China in order to fund the payout. The first is inflationary -- thus decreasing the value of the Social Security payout -- while the second is a massive increase in our national debt which will eventually come due.

The cost of funding the Bush program is high -- but we can bite the bullet now our later. Certainly for our progeny, the Bush program was and still is our best option. I for one would willingly submit to a temporarily higher tax burden in order to fund such a plan. What say you?.

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