Conservatives and Republicans are ecstatic about the bond buy-back and debt pay-down policy now in effect. This is misplaced joy and a political miscalculation. Every dollar that we use to pay down the debt has an opportunity cost. Each dollar could be used in a different way. Liberals are quick to advocate spending it on education, housing subsidies or some new program. But conservatives and Republicans have alternative uses of the dollars, as well.
Instead of paying off the debt, the dollars could be used to reform the tax system and eliminate the tax bias against capital. The return on our money from fundamental tax reform would be greater than from paying down debt.
Another alternative use of debt reduction dollars is to privatize Social Security. Polls show that a vast majority of younger earners would opt out of Social Security, if given the chance, in favor of a private pension system. The problem is with those already retired and those approaching retirement.
Social Security is an intergenerational transfer payment funded by an employment tax. If younger persons were allowed out, there would be no wage and salary base to support the older people whose payroll taxes supported a previous generation of retirees.
The budget surpluses provide the money to fund the transition from Social Security to a private pension system. The surpluses make it possible for younger earners to build personal wealth in private pensions without jeopardizing the benefits promised to older workers, who haven’t enough years left to build up a nest egg.
Social Security is a bad deal for everyone, and it is an especially bad deal for higher earners and those who die young. For those who have an average retirement life span, Social Security produces a lower return than a safe investment like government bonds.
Prudent people who save for their own retirement get very little from Social Security, as an independent retirement income can result in 85 percent of Social Security pension being subjected to income tax.
Numerous studies have shown repeatedly that if the wages withheld for Social Security were invested instead in stocks and bonds, the retiree would not only build wealth for his family but also enjoy a higher retirement income.
Social Security was a response to the Great Depression, which was caused by the newly created Federal Reserve System making a fantastic mistake and withdrawing one dollar in three from circulation. The shrinkage in the money supply collapsed prices, employment and output.
It also made people fearful to be independent and left them with the mistaken belief that only a government check is secure. What Social Security has done is to make people feel secure while keeping them relatively poor.
The politicians love the system that keeps vast numbers of retirees dependent on a government check. As long as there were budget deficits, the politicians could say that there was no way to fund the transition to a private pension system. Now that there are surpluses, they say we need to pay off the national debt.
Unless Social Security is privatized, paying off the national debt will be a short-lived pleasure. As the population ages, the revenues from the payroll tax will fall below the promised benefits. By the time the debt is paid and bond traders have moved into other lines of work, it will be necessary to again issue debt in order to pay Social Security benefits.
The bond market would have to be revived, and the national debt would build.
The benefit from paying off the national debt would accrue mainly to bond holders, who will experience higher prices from the buy-back program.
In contrast, the benefit from privatizing Social Security pensions would be permanent and enormous. Even relatively low paid people could accumulate assets over their working life that could be passed on to heirs.
But the last thing politicians want is independent people who don’t need cradle-to-the-grave welfare. A worker with $100,000 or $250,000 or $500,000 in his pension fund is a totally different worker from the one who votes for politicians promising handouts.
The problem with Social Security is that it serves the politicians’ interests, not ours, and they are going to keep it that way.
