Human Events | Star Parker | Nov. 2, 2007
The U.S Comptroller General and head of the GAO, Government Accountability Office, has described the entitlements crisis facing this country as a “tsunami” that approaches while we continue to party on the beach.
What GAO head David Walker is talking about are the massive upcoming obligations under Social Security and Medicare that we have no funds to meet. Tens of trillions of dollars of supposed commitments, promises made to us by our government, that today we have no clue how we’ll pay.
In those rare moments when our political “leaders” screw up sufficient courage to acknowledge this dark and ominous fiscal cloud hanging over us, the discussion is invariably technical. Proposed tax increases, cap increases, retirement age increases, benefit cuts, indexing — all geared to “save the system.”
But who has considered that, despite all the discussion about unfunded liabilities, what we really have on our hands is, at root and core, a moral crisis?
No one explains this better than my friend Jose Pinera. And no one has better credentials to talk about this problem.
Twenty seven years ago, in November 1980, Chile, Dr. Pinera’s home country, approved Social Security reform in which a tax-based, pay-as-you go government retirement system — essentially identical to what we have here — was replaced with an ownership based system of individually owned retirement accounts. Yes, in principle the kind of reform that President Bush proposed.
As the then youthful Minister of Labor and Social Security of Chile, Pinera was the godfather, mastermind, architect, navigator, and quarterback of the reform.
Key in execution was to allow every Chilean worker the dignity of choice.
They could choose to stay in the existing system, continue to pay payroll taxes, and qualify for government benefits at retirement, or they could get out and use those same funds to open and invest in their own personal retirement account.
Within months, 90 percent of the Chilean workforce opted out of the government system and into their own personal ownership regime.
The result has been more than just an enormously successful transformation of a failed government retirement system. Chile’s social security privatization — if I may use the word that politicians, even the conservative ones, choke on these days — has been a driving piston in Chile’s economic engine, now the most powerful in Latin America.
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Medicare program and the Medicaid program. All of these are distinct programs with completely different and separate financing structures and sources, and very different actuarial estimates of their solvency.
Um, not at all. All the fed revenues go into one big pot, and all expenses go out of same pot. Those line items on your paycheck (FICA, SS, Medicare) do not mean anything. If the fed gov is running a deficit then no program is “solvent” and if it is running a surplus then all programs are “solvent”. This talk of “borrowing” against the surplus is just a game – it does not mean anything.
Some want to make it so (remember the “lock box”) but I talking this way (as if the programs are somehow “separate” as far as “financing” goes – it’s all just taxes that go into the “general fund”) does not help sort out the truth of the matter…
But back to the article, I never really understood why President Bush did not gain more grassroots support to privatized SS accounts. I can understand the AARP (or is it more accurately described as the AA for liberal RP?), liberals, media, but what happened to the much talked about “right wing conspiracy”? Any ideas?
Chris,
Perhaps I should post the parable of the Good Samaritan here…just to help muddy the water and equate SS/Medicare / Medicaid with the Gospel…:)
Chris B. writes: “This is exactly why the gov’t wants to keep things exactly the way they are . . . ”
Since the article is about the Chilean retirement system I would note that even in Chile the retirement system is heavily regulated by the government, including selecting funds in which investments can be made and having mandatory contributions.
http://www.cato.org/testimony/ct-jr073101.html
In addition there is the general expectation that the government would have to kick in additional funds in the event that the investments didn’t do well. So this is not, strictly speaking, privatization, but a mix of privatization and governmental regulation. Also, in a developing country the value of investments can rise rapidly, and it is not clear how the Chilean model would work in a developed economy.
Nonetheless, I think that some version of the Chilean model might be possible here. But it is not clear how the transition to that from the current system would work. But I think it’s worth having that conversation. Whether that conversation will happen in the current political environment is a different question.
Jim writes: “subject to government regulations on the specific types of instruments and the overall mix of the portfolio.”
That is a reasonable compromise, as long as people are allowed to freely chose from a variety of funds and real competition is allowed and encouraged. I believe we already have good regulations and oversight of 401(K) and 403(b) type programs, so this would be a natural extension of that.
But it is not clear how the transition to that from the current system would work.
Bush tried to suggest a gradual transition that allowed individuals of certain age to switch to a new model, while also guaranteeing all existing benefits of older Americans who could not make the switch. I believe he suggested allowing only 2% or 4% of the SS funds to be managed by the individuals. Despite such minimal recommendations large number of Democrat demagogues, some union leaders, and the AARP viciously fought against it and derailed any hope of possible changes. So much for mature and reasoned debate on key topics of nationwide concern.
This is exactly why the gov’t wants to keep things exactly the way they are: “All the fed revenues go into one big pot, and all expenses go out of same pot.” They promote the lie that the Social Security system is a “retirement” account where you “contribute” towards a fictional fund that will guarantee you a payment when you retire.
By not allowing the people to fully control and decide what to do with their money the gov’t (a) insures there is zero accountability regarding the rate of return that money earns, (b) strips the people of all power to decide what to do with their money and to maximize the potential rate of return as a real hedge against inflation, (c) concentrates even more power in Washington, and (d) allows politicians to use those funds now and continue to spend us into deeper and deeper deficits while hiding the real deficit numbers which would make for more bad press.
Finally, such an entitlement program gives politicians huge amounts of power to leverage in order to scare and manipulate ever-increasing number of senior citizens and gives them even more control over our lives. After all, if you are retired and fully in control of your own SSN retirement account what could the gov’t possibly hold over your head and scare you with besides the “crisis du jour”? It’s a communist’s wet dream and all of us allow these hypocrites to continue to perpetuate this sham. Of course, the fact that sham hurts the poor and middle-class folks the most does not seem to bother Dean one bit. Funny ain’t it?