Ronald Gordon Ziegler
For half a century, we have been subjected to at least inferences that the New Deal
succeeded in doing something about the Depression. At the very least, it was able to
alleviate some of the suffering which the alleged market failure of the capitalist system had
caused. While that may have some truth to it, even with it there was a great opportunity
cost involved. As an accelerated form of the increasing interventionism which had marked
the federal policies of the late 1920's, what the policies of the New Deal affected was not
only a prolonging, but a deepening of the Depression.
That is not to say that the New Deal did nothing constructive. It did have its benefits --
more than relief, these must include the REA and TVA (although whether government
was necessarily the best path to achieving these ends is arguable). Some might even still
express a sentiment that one of the positive achievements of the New Deal has been Social
Security. I say 'still' because that sentiment today is shared by far fewer folks than might
have held that view 25 years ago (especially before the Great Society). There are many
today who view the system as the same kind of ponsi scheme that wrecked such havoc in
Albania recently. While it may not be quite that bad, it is clearly a system full of problems
and basically in need of reform if it is to maintain its viability and make good on its
responsibilities.
One thing is certain. If I had been able to dedicate the funds which have been deducted
from my paychecks over the last thirty-five years, I could anticipate a very nice income
from them. It would also constitute a substantive inheritance for my children. As it stands,
there appears rather to be a real question as to whether I will even ever be able to get
anything in return. By the time I reach 'retirement' age, the system will be bankrupt. Of
course, the X Generation may be willing to pay substantially higher FICA and related
taxes so that baby boomers can get some return. It may be a hard sell, but members of
Congress are no less likely to want to see old boomers in walkers protesting outside their
offices on the nightly news then than now.
There are, of course, other possibilities. Were productivity to increase markedly over
the next two decades so that the work force was able to produce sufficient additional
wealth to afford the higher revenue requirements of the system, the crisis would be
resolved, but economic growth has been slowed by the weight of the albatross of the
burgeoning public sector, especially since 1965. Increased population leading to a larger
work force could also help end the dilemna. Despite fears of too large an immigrant
population, including a large illegal one which is a drain on public coffers (1), within a few
decades we are going to be facing a situation in which we will no longer be able to afford
the 'luxury' of unemployment, underemployment, or welfare (2). We will be suffering from
a population shortage. Some minor adjustments such as means-testing, raising the
retirement age, and allowing recipients to continue working at full salary while collecting
some benefits will do some good, but some major overhaul of the entire program is
undoubtedly in order as a better route.
One recent suggestion has involved allowing the government to invest social security
(and other related program) contributions in such areas as the stock market (though not
limited to it). The long course of the great bull market would indicate that such could reap
potentially huge returns which would help keep the systems solvent.
Of course, that would preclude government's practice since 1965 of borrowing the
surplus trust funds to finance the deficit. Its consequences would be more dire than that,
however. Not only can the market also go south, but it would lawfully do that as, in short
order, the government would move rapidly from being a large stockholder to the major
stockholder and to being the sole owner of corporate America. It would be a quick path to
full-blown socialism.
Suggestions of privatizing the system have been floated for years, contributing to and
being fueled by the performance of instruments such as IRA's and Keogh's. Allowing
market forces to work their 'mystery' on the system is probably the only way it can be
salvaged. The direction along which such restructuring of the system must take is clear.
The concept of investment of the revenue would appear to have some merit -- under
alternative conditions. One way to perhaps achieve the desired ends of added revenue on
proceeds of investment would be to have the money collected by government
administered for investment by private brokers -- to effectively put it in a 'blind trust.' This
might avoid the question of government control -- even ownership -- of the firms, which
would have such dilatory impact on their operation and profitability. In relatively short
order, however, the investment of levels of revenue of this magnitude would raise serious
questions as to the proper role of the government and/or its agents in running the
corporations invested in. Conceivably, this could enhance the power of middle
management, as on Chandler's thesis of corporate control (3). This is not an ideal world,
however, and power does tend to corrupt. Such a direction might be thoroughly
destructive of market forces (and the economy).
The same result might be achievable with slight modification of what has just been
posed through a privatization process which would promote and utilize market forces,
with preservation of the notion that people must be coerced into providing for their
'golden' years(4). Particularly given the excessive current tax rate rather, that is probably a
rational view. A primary stipulation involved in the restructuring would have to be a ten
year repayment of the revenue the government has taken (borrowed from) the trust funds.
As of 1998, this will total $650 billion. This repayment, however, should include a
payment of interest of 7 % per annum on the amount unpaid. Thus, over ten years, the
trust funds from previous monies held would total some $900 billion.
These prospects, along with subsequent contributions should be channeled by the
government into private investment funds. The reform would preserve the current
bureaucracy, at least for some period, and thus remove any wary possible opposition
grounded in any immediate 'threat' to its existence (although it would also continue the
undoubtedly too-heavy administrative costs at the same time). Contributions to the trust
funds between 1997 and 2002 when the income/outlay net of the current arrangement is
expected to zero out would amount to something on the order of another $150 billion (5).
Return on that, estimated at about 7 % per year, would add another $100 billion.
Therefore, as presently constituted, the trust funds would hold investments by 2003 of
over $ 1.15 trillion.
TABLE I -- ESTIMATED TRUST FUND RESOURCES BY 2003
From borrowed trust funds $ 900 b
excess new contributions 1996-2003 $ 150 b
return on contributions 1996-2003 $ 100 b
_____
Total in Trust Funds by 2003 $ 1.15 t
Even if, as expected, the income/dispersal reaches a net of zero at that juncture, there
would be over a trillion dollars on hand, and proceeds from these invested funds would
more than cover any short falls for years to come. Indeed, it is quite conceivable that the
return could exceed the estimated 7 % each year until then and after that. This would
extend the solvency of the current system well into the future, and probably beyond the
point at which population demographic changes would continue to be a problem (5). The
system would reasonably be expected to be permanently solvent as a result.
As the restructuring proceeds, other reforms to the system could be put into place.
Foremost among these should be a curtailing of the administrative network. This could be
effected largely by attrition, with the bureaucratic organization increasingly becoming one
of functioning as a watchdog over the increasingly private administration of benefit
payments. At the same time, as a more permanent solvency of the finances of the
insurance system develops, citizens could be extended an escalating level of choice,
allowing them to make greater determination of how their contributions are dedicated.
At some point along the way, the entire system could be further overhauled, making it
a virtually completely privatized structure, so that each person's account would become a
private matter between them and whatever investment mechanism they opted for. This
could occur even as the government maintains a role as overseer of mandatory
contributions into the publicly sponsored privatization.
The viability of the new hybrid system would largely rest on its competitive
performance vis-à-vis investment firm market performances compared to it. If it managed
a competitive showing, there would be little pressure or incentive for alternative
investment choices by citizens. Market forces would dominate the process. Thus, dangers
foreseen from an alternative restructuring allowing contributors to opt out for individual
investment would be abrogated unless the decisions of the administrators proved inept.
The privatization process would also remove any uneasiness over sudden changes in the
system since it would be phased in over at minimum two decades or so.
There is no guarantee, of course, that the return performance of investments would
average the seven percent estimated. It could be greater, but it could also be less. In order
to protect against such contingencies, an operation could be established whereby a system
insurance, styled perhaps on the FDIC, was established. Even this could be set up in a
privatized manner, with the federal government maintained as ultimate guarantor against
risk. All of this is at base a political concern, for plausibility of any such restructuring
largely rests on the possibility of winning its approval by the sundry political forces
arrayed with interest in it. There are persuasive arguments in support of a more general
privatization of the social insurance system, but there are also serious questions, and this
plan walks a path between them, even as it reduces the federal government's role.
Were the restructuring process to effect genuinely plausible gains above expectations, this
would enable the mandated contribution (tax) to be lowered, especially once the crisis
point is passed -- perhaps thirty years from now. It should be kept in mind that high tax
rates are the principal barriers to increased voluntary savings (6).
There exist at least two potential problems inherent in the plan proposed here, and
definite procedures need to be put in place to cope with them. The most reasonable
method of doing this might possibly be a powered system of structured Congressional
oversight.
Particularly in the initial stages of the reformation, but even long after that, a wary eye
must be kept that favoritism does not become involved in the dedication of revenues to
investments. Politics is politics, and there were serious abuses in the S & L debacle which
helped contribute to that crisis, but given the propensities of the Clinton Administration
for cronyism (7), it has to be of tremendous concern. Ancillary to this is concern that while
government has responsibilities to make policies operate under fair schema, the inclination
is going to occur towards predicating assignments on political correctness. The inherent
problem with that is compounded by the cost it could exact on returns on investment.
In the current environment, funds which include tobacco stocks, for example, might be
passed over even where they offer considerable advantage in yield. At the same time,
national security interests might dictate caution in other areas. We would scarcely be
advantaged by reaping better returns on investments which included serving the interests
of real or potential adversaries of the country to the detriment of our security. The idea of
'constructive engagement' is, of course, a matter of import here, but one which must be
weighed auspiciously.
This, in turn, gives rise to concern over governmental regulation which could be
attached to investment decisions. The interest of the country would be well served by
stipulation that investment would be precluded where extremes of policy were to ride
rough shod over the process. The process should not be structured ever as a method of
coercion toward political ends. A balanced approach is dictated. There should probably be
no question as to limiting dedication of revenue to funds which would promote racial
discrimination (such as not long ago investment in South African gold coins would have
been perceived) by firms but limiting investment to any on the basis of their record of
alleged failure on affirmative action or quotas would be another matter. Probably
investment in firms the principal purpose of which might be abortion should be avoided,
but that should not extend to, for example, prohibition of investment in health funds which
included hospitals which might perform some abortions. Investment in private education
should not be blocked by agency of public education. This restricting must be guarded
from becoming a principal agent of social engineering.
At the same time, there are areas for which this power of the purse could be utilized to
promote markets and productivity. As big a can of worms as this matter poses, a still
greater one could be the encumbrances of red tape which governmental action generally
has fostered. It should not be set up or permitted to be directed with any notions of
planning as its aim.
Solving the social security and larger social insurance quagmire is an important task,
and this proposal offers the prospect of going far in that direction. However, the prospect
of guaranteeing the viability of such entitlements of a social safety net must never be
allowed to misconstrue this as rights. And the objectives of rolling back a too pervasive
public sector must be guarded lest it be contorted into a vehicle of even greater federal
intervention.
FOOTNOTES
(1) Fears of assimilation problems sound surprisingly similar to such sentiments held by
more Waspish populations faced with even more substantive immigration than we have
now, principally made up of Germans and Irish 150 years ago.
(2) This reality is also an argument against the too wide practice of abortion.
(3) Alfred Chandler, The Visible Hand.
(4) Of course, the primary reason our nation's savings rate is so low is not over-
consumption, but over taxation -- were people not taxed out of half of their incomes, they
would save more.
(5) The current rather dismal outlook is grounded in the population ripple of the boomer
generation retirement.
(6) Profits are another, and such a movement toward privatization, coupled with
movement toward a balanced budget and reduction of the public sector complex burden,
would fuel their growth.
(7) Illegal campaign contributions, for example, apparently from China and Indonesia, may
have helped influence Clinton to set aside coal fields in Utah from development, making it
follow that the cleaner coal China would buy would come from Indonesia and not the U.S.
RECENT INCOME AND DISPERSALS OF FEDERAL SOCIAL INSURANCE
PROGRAMS
1995 1994 1993 1992
INCOME DISP INCOME DISP INCOME DISP INCOME DISP
Old Age
Survivors
Trust Fund 326 b 294 b 342 b 282 b 319 b 270 b 307 b 256 b
Disability
Ins. TF 70 b 41 b 34 b 38 b 32 b 35 b 31 b 31 b
Supplem.
Medical Ins TF 58 b 65 b 57 b 60 b 61 b 56 b 53 b 50 b
Hospital Insur
TF 115 b 115 b 106 b 103 b 97 b 92 b 93 b 82 b
____ ____ ____ ____ ____ ____ ____ ____
Totals 569 b 515 b 642 b 483 b 599 b 553 b 484 b 419 b
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