The Mises Institute monthly, free with membership
March 1997
Volume 15, Number 3
They should have called it the Federal Advisory Panel for a Huge and Sneaky Tax
Increase and a Massive Increase in Corporate Welfare. That--and not
"privatization"--is the real upshot of what the advisory counsel to fix Social
Security recommended.
We're not talking here about minor subsidies and taxes, but a grand plot that would put
all of Wall Street on the dole, a doubling of the national debt, and the worlds biggest
tax increase, fastened on the American workers for the next 72 years. What's more, the
commission eschewed the only path to true reform, that is, cutting benefits across the
board. What's left are economic and moral outrages.
Tax increases are old hat, of course, and we've come to expect them from blue-ribbon
panels. The commissions only innovation is the idea that a portion of the "trust
fund" should be "privatized" by being put into common stocks. The panel
split three ways on precisely how much should be so channeled. The proposals are then
sprinkled with rhetoric about "high returns," "choice," "personal
accounts," and the like.
But here's the bottom line. It's not choice. It's forced savings, a plan to coercively
transfer billions from our wallets to elite corporations, making it by far the biggest
industrial welfare program ever contemplated by any government body. The Italian fascists
would have regarded it too socialistic.
Much is being made of the ideological split on the advisory council. One group wants
direct government investment and another wants people to shift their forced savings to
this or that stock. In either case, it amounts to the same thing. Wall Street is getting
subsidized with stolen money, and no amount of rhetoric about "choice" can
change that.
Why is that wrong? In a free enterprise system, people are supposed to decide for
themselves whether to consume, save, or invest. If the stock market benefits from those
choices, good for corporate America. But the stock market must compete for that money; it
can't depend on a fixed portion of peoples income via government. This is the most
efficient way of allocating resources because the system can respond to the ceaseless
changes of the market.
A new forced saving program will compete with existing voluntary savings, and
ironically reduce the amount people put away for retirement. Moreover, when government is
involved in the process, it also influences the direction of market competition.
Bureaucrats, not private investors, end up picking the corporate beneficiaries and,
therefore, corporate losers. No fire wall between the pension manager and the government
is thick enough to forestall that unhappy fate.
But doesn't the stock market pay more in returns than the government debt the
"trust fund" is currently invested in? It does, for now. But we are also living
through one of the most stupendous bull markets in American history. It's gone on so long
that people have forgotten what a bear market is.
The proposal now on the table could have only been dreamed up in the midst of a bull
market. If we were in a deep recession, the idea would have been considered the height of
irresponsibility. So lets not be shortsighted. Bear markets follow bull markets,
especially those propped up by a Federal Reserve dedicated to low-interest-rates _ber
alles.
There is no law of nature that says stocks must continually go up. For that reason, all
the predictions about how much more money people will earn under a newly
"privatized" system are neither here nor there. Nobody knows what the Dow will
be tomorrow or next year or in ten years. That's why the risk must be born exclusively by
investors themselves.
Who will bear the risk when a portion of Social Security revenue is deposited into the
mutual-fund industry? That is one of many great unknowns, but we can speculate. Back in
the thirties, the banking industry was declared so crucial to public prosperity that it
could not be allowed to fail. It was among the most costly policy errors ever made.
If this reform goes through, we can look forward to the day when the stock market
itself is considered to be too big to fail. We got a taste of this with the Mexican
bailout. The Treasury argued that its action was necessary because so many average
Americans had money in mutual funds invested in "developing markets." That was
supposed to justify Fed intervention and tossing $40 billion across the border.
Under this Social Security reform, the slightest slip in prices would invite the
Federal Reserve to go on a buying spree. Yes, the Fed can buy stocks legally,
and, yes, it can do this with money created out of thin air. A stock market
that's too-big-to-fail could be the catalyst for the biggest financial debacle in world
history.
If that weren't scandalous enough, the newest reform plot includes a vast increase in
front-loaded taxes as well. As Robert Samuelson suggests, the very existence of a trust
fund for this sheer welfare transfer suggests that taxes could be cut if Washington so
desired. There is no HUD or Pentagon "trust fund," and if there were, it would
be a scandal.
Instead, all three groups on the Advisory Council agreed taxes should go up,
with the size of the tax increase directly proportional to the amount the group wants to
funnel to the corporate class in this bogus brand of "privatization."
The reason is obvious. The present system works on a pay-as-you-go basis, with the
spare change spent on government debt. The more revenue that is diverted to stocks, the
less money there is to pay current recipients and the larger the unfunded liabilities
grow. Thus, the bigger and bigger tax increases necessary to make up the difference.
This financial logic creates the most bitter irony of the advisory panel's final
report. The more a plan promotes "privatization," the larger the tax increase
necessary to fund the supposed "transition."
This is plain as day in the final report. The supposed liberal approach (the one most
skeptical of the stock scheme) calls for a "payroll tax increase in 2045." The
moderate approach favors "an increase in employee's mandatory contribution" of
1.6 percent. The supposed "free market" approach calls for an "increased
tax" of "1.52 percent of payroll for 72 years" and increased federal
borrowing of $7 trillion.
Yikes. Has Washington political culture become so corrupt and so perfidious that the
largest tax and debt increase in history can be touted as "privatization" and
"free markets"? Indeed, as the New York Times pointed out, the panels
chairman hopes to use the "popular appeal" of the idea of privatization to
"transform the unpalatable tax increase into a politically acceptable forced
savings."
Is no lie too big for Washington? Apparently not. Even lifelong opponents of the income
tax are buckling under the Beltway pressure to back this bailout, arguing, Hillary style,
that we need a "temporary" (three quarters of a century) tax to forestall a
greater disaster. It hits hard: try $50 billion in the first year.
Nor is the supposed benefit that this plan will increase young people's faith in Social
Security a good thing. They will still need to save for their own future. The harsh
reality is this: the only path to solving the Social Security problem is steady progress
towards the program's elimination, through cuts in benefits across the board. This should
take place in tandem with cuts in the taxes being paid to prop up this
government-guaranteed Ponzi scheme. Extracting more wealth from the private sector to pay
off the liabilities merely reduces overall growth and prosperity.
Older Americans complain they've been taxed their whole lives, had their private
savings wiped out by inflation, and gained nothing in return for these violations. So why
should they now relinquish what they've been promised for generations? Crimes of the past
can't be reversed, but justice requires that something be done to address this reality.
True enough. That's why all Americans over the age of 65 ought to be exempt from all
taxes, including income taxes, capital-gains taxes, gift taxes, and taxes leveled on the
wealth they pass on after their death. If Washington expects to cut benefits, and they
should be cut across the board, it should be in exchange for sweeping tax relief. Its a
plan the AARP would oppose, but retirees would back.
People say the program can't be cut under any circumstances, much less be done away
with, but how can we know? No one in Washington, much less the president or the speaker of
the House, has yet to muster the courage necessary to tell the truth to the public. The
combination of honesty and fairness to taxpayers is worth more than the political class is
willing to offer.
Instead, we get the same lies from the usual suspects. This time, we're expected to
believe that the program can last forever, with higher and higher returns on into the
stratosphere, if we are only willing to give up a little bit more of our money and freedom
to back another government-business partnership.
That is the message of the Social Security panel to the American people, and we'd be
suckers to believe it.
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Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute
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