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A Proposal Regarding Social Security
Social security should be privatized. You heard that right—I, a leftist who scored -5 on the economic section of the political compass and writes to a leftist site, support privatizing social security (the lack of capitals is deliberate—I think social security should be privatized everywhere, regardless of the name used or the country it is used in). More precisely, I think that all benefits except those that are need-based should be eliminated; that is, benefits to seniors should simply be another form of a safety net, like pre-Welfare Reform welfare, and the government will take steps to insure private savings accounts.
Many conservatives and libertarians like to tell horror stories of Social Security not having enough funds to continue beyond 2016 or 2017, given decreasing natural growth and increasing life expectancy. This is unsubstantiated scaremongering, for two reasons: one, 2016-7 is when Social Security is expected to start running deficits, but the accumulated surplus will continue sustaining it, and two, it is very hard to anticipate birth rates, immigration, and life expectancy over a long period of time, especially given that assuming the current trends continue, Social Security will probably last till at least the 2070s. Therefore, my proposal is not a solution to an impending doom; rather, it is an attempt to drastically reduce the size of government with little reduction in benefits, especially in the medium and long run, and increasing equality while doing so. It does not attempt to cure a disease, to use an analogy, but to simply increase life expectancy.
Under the current system, most workers pay two direct taxes—an income tax and a social security tax. This works broadly the same way in almost all countries with even the most rudimentary social services. The income tax funds the day-to-day services of government: defense, education, health care, and so on; the social security tax funds social security and sometimes a few other welfare measures (e.g. Medicare in the United States). Still, the system is akin to a person who has money in two pockets of his trousers, but cannot transfer money from one pocket to the other, and can only draw money from the right pocket with the right hand and from the left pocket with the left hand. Just the existence of a separate tax is a waste, as there is a separate tax agency, eliminating which will save money; on the other hand, increasing income tax costs very little money if at all in administrative costs. Further, the social security tax is generally more regressive than the income tax, being capped at some amount. In other words, integrating social security with the rest of the budget and integrating the social security tax with income tax will result in a more progressive tax and hence more equality.
This in itself does not amount to privatization. At this stage, all that has changed is that social security has been assimilated into the rest of the budget, and the tax has been assimilated into income tax. To use the United States as an example, the official Social Security site boasts, “The administrative costs are… less than one cent [emphasis in original] of every Social Security tax dollar collected.” The Social Security fund constitutes about 7% of the United States’ GDP, or 700 billion dollars per year; this is a save of 7 billion dollars annually, in other words, which means 500,000 living wages. In the name of honesty, though, I will say that I have no idea how much the transition from a system of two budgets—social security and general—will cost, and whether this stage alone will be worth this initial investment.
To see why this makes sense, let us look at regular welfare, that is social expenditure from the regular budget—nobody is saying that paying welfare to everybody regardless of need is “communism,” “class warfare,” or “punishing success,” and nobody is proposing that food stamps be distributed proportionally to the amount of money the recipient has made. Why need retirement benefits be any different from unemployment benefits or food stamps in that respect? Even if benefits increase with previous income, why need they be proportional? People with enough wealth to sustain themselves do not need retirement benefits from the government any more than people with enough wealth need unemployment benefits. As long as the amount of money paid is high enough for seniors to live on them, there is little sense in distributing non-need-based benefits.
I can already hear leftists scream, “Don’t touch Social Security! This is class warfare against the poor!” This will not hurt the poor, and in fact doing this may increase the amount paid to people who really need it. Those who will suffer the most are the middle-class, and if this is not done right then middle-class people with savings in particular. But then again, we can apply the welfare test: is it considered bad that poor people get food stamps and middle-class people do not? Is there anyone who seriously supports handing out unemployment benefits to the employed? Does anyone consider it unfair that public housing is given first to the poor and only then to the middle class (if not by direct discrimination, then certainly by building public housing in inner cities)? But the poor will not suffer here—only some portions of the middle-class will, and I frankly do not see anything wrong with that, just like if welfare were given to all citizens in the labor force, I would support eliminating it to people who did not need it.
This is still not real privatization. This does eliminate social security as we know it, but this proposal expands welfare accordingly to accommodate the needs of seniors. The second stage in essence is about turning social security into regular welfare, that is a system that is almost entirely if not entirely need-based (almost entirely, because sometimes unemployment benefits are not need-based). The same people who will rally against this proposal are almost in all cases the same people who cry out against corporate welfare; if corporations do not deserve government money, then why do people who have enough money to support themselves do?
The third and final stage is not privatization, either, but when one looks at the whole proposal, it will look like privatization. This stage is all about savings—using some measures to encourage saving some money for retirement, and also for emergencies. Nowadays, every person can open a savings account in a bank, or, alternatively, just put some money in a bank without any specific designation, with the intention of leaving it there for emergencies or for retirements. Eliminating non-need-based benefits will of course encourage saving in the medium and long run and minimize the damage in the short run.
However, the money in the savings account will not be completely safe, as inflation, banks’ collapsing, and recessions do wonders to erase people’s savings accounts; this is especially true in less stable economies, where banks and even governments sell bonds with 10%+ interest rates. This is where the government comes in: the government, of course, is far more stable than banks, except in countries that are so anarchic and instable and where welfare is impossible anyway, and thus can bail out people’s savings in cases of calamities. For example, a law can be passed, whereby if a bank meets certain conditions, such as a sufficiently high liquidity ratio, the government insures savings account in such a way that if the bank goes bankrupt, then it must first pay its debts to people whose savings are invested in it, and if it cannot do even that, then it will pay what it can and the government will pay the rest. If this is not enough, then the government can even take more drastic measures such as exempting the first ten percent of saving or ten thousand dollars per year, whichever is smaller, from the income tax.
This can be viewed as privatization of non-need-based social security. Yet, this differs from most privatization schemes in several crucial aspects. First, “non-need-based” is a strong qualifier, and while it not only probably covers most of social security, but also as time passes people will have more savings and need less money in benefits, the number of seniors who will have to choose between food and medicine will not expand—in fact, chances are that it will shrink considerably. Second, by shifting the base of the benefits from income over one’s lifetime to need, those who need the most aid will get more. Third, as all savings accounts are governmentally insured, the only threat to this privatized form of social security is inflation, but funds devalue regardless of whether they are public or private.
I know that there are going to be many objections to this from people of all political orientations, so I am going to preempt some in the remainder of this article.
Even you admit that social security is still going strong; why destroy it, then? As I said above, this is not meant to cure a disease, but to improve life expectancy in general. The “if it ain’t broken, don’t mend it” saying is just that—a saying, which in this case does not apply. When done right—that is, with proper safety nets to ensure that poor people who actually have to live on social security payments are not hurt.
The benefits of this program will not be seen for many decades, and therefore there is no point in sacrificing the next twenty or thirty years for a reward afterward that is not even needed. First, the short-term sacrifice is very small; in fact, the retention of need-based benefits and even more than that, the caveat that some non-need-based benefits can remain albeit with serious cuts, are specifically designed to minimize short-term risks. On the other hand, the long run this proposal works to improve is not the elusive concept of long run that is never reached that one encounters in socialism and conservatism, but a very concrete thing. First, there can be improvement almost right away, as the cuts in administrative costs and benefits to people of the middle and upper classes free government money to various schemes, from tax cuts to budget balancing to more social services. Second, we will reach the long run gradually, as more and more people save, and as the proportion of retirees who need benefits falls; hence, it will be easy to check, for example seven years after the proposal is initiated, whether it actually works.
The giving of aid solely on the basis of need discourages saving. This is as true as the proposition that welfare discourages work; that is, not at all. Reagan’s welfare queen was a single anecdote that was probably the only of her kind in the United States. By giving a little bit of non-need-based benefits, the benefits can become monotonous, meaning that the more savings one has, the more one has when savings are added to any benefits one might receive. The only country I know of that has a problem of welfare queens is Sweden, whose social expenditure is outrageous. Retirement benefits will work and produce the same results as other safety nets.
Government in the United States is already too small. This objection is totally irrelevant, as the cut in needed services will be a fraction of the cut in government, and will shrink as time goes by. Further, the cut in social security need not be spent on tax cuts, which is the only case in which this objection even applies. Less money on benefits to people who do not need them need not mean less taxation on the rich; it can also mean more money on education, universal health care, welfare one can live on, and so on. Besides, this objection does not apply to countries whose government is relatively large, such as Germany, Sweden, France, and Britain.
If social security is part of the general budget, then the government can modify it at will. So? The security that making a program separate from the general budget gives is illusory, or there would be no talks of privatizing it. Besides, this way the government will also be able to increase payments, or spend more money on it as the population ages; the latter cannot be done as long as there are two separate accounts.
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