GOP Lacks Vision For A Post-Welfare State America

Originally Posted At Forbes.com
By Lawrence A. Hunter, Ph.D.
Back On The Margin
September 20, 2011

Replacing FDR’s New Deal with the GOP’s Version of the Great Society
 
It’s not bad enough Wall Street gets bailed out by taxpayers; its mouthpiece at the Wall Street Journal also wants to stiff middle-class workers even more by reducing the pitiful rate of return they can expect from Social Security when they retire.  As the WSJ recently boiled down Social Security’s fiscal straits: “...the problem is that current seniors get more than they put in. . .”
 
How about applying that same standard to Wall Street?  How about we pass a law allowing the federal government to raid 15 percent of Wall Street’s investment capital over and above corporate taxes to help fund the government and then give that exact same, inflation-eroded amount back to it in 35 years without interest?  That’s what the WSJ is suggesting to “fix” Social Security.  Or better yet, how about the federal government pays the expropriated investment capital back to investment firms with a negative rate of interest—i.e., pays them back less than it raided—because that is exactly what Social Security already does in many cases and will do even more so in future, especially if the Journal gets its way.
 
As economics professor R. Wayne Counts concluded in a 2008 paper, the overall rate of return for Social Security contributions is a mere 1.8 percent, and for many workers in higher income levels, the return is actually negative.  In their landmark 1998 study on Social Security, Caldwell et. al. found:

    “Those born right after World War II will earn, on average, a 2.4 percent real rate of return. Those born in the early 1970's will average about a 1 percent real rate of return, and those born at the end of this decade will average essentially a zero rate of return.
    “Baby boomers will, under current law, lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. For today's children the figure is 7 cents. Measured as a proportion of their lifetime labor incomes, the middle class are the biggest losers, but measured in absolute dollars, the rich lose the most. Out of every dollar that postwar Americans contribute to the OASI system, 74 cents represent a pure tax.

Conservatives like to pretend that Social Security is an extravagant welfare program so even these pitiful rates of return are inexcusably high.  Despite the low, even negative rates of return workers realize from their payday contributions to the program, the conservative establishment in Washington considers Social Security benefits excessive as long as they comprise a real rate of return on investment in excess of zero, and even that rate of return is considered unwarranted for any retirees GOP politicians deem “too rich to deserve” them.  The position of the Republican establishment in Washington is not to convert Social Security from a financial house of cards into an actuarially sound retirement program that would improve everyone’s retirement income but instead to scrub its rolls and transform it into a real welfare program by means testing it, reducing benefits and making people work longer. 
 
The conservative establishment can call Social Security whatever it wants to now but for decades, don’t forget, they participated with every other politician in Washington telling workers they were investing in their own retirement every payday. It is, therefore, not surprising that American workers perceive Social Security as a public retirement plan they pay into each and every payday.  It is, in their eyes, forced saving in a government retirement plan, which precludes them from using their money to save and invest in a private retirement plan.  That’s not welfare, and to get there from here Republicans will have to pull the biggest bait-and-switch scam in political history.
 
It is bogus to hold Social Security to the standard of a welfare program, forcing people to work into their seventies and insisting that the money workers pay into it be redistributed by means testing benefits to yield most workers negative rates of return.  This is just another version of the insidious inflation tax pointed out by Dr. Richard Rahn where government taxes inflationary gains from interest earnings, dividends and capital gains; it is the same inflation tax government imposes when it conspires with the Federal Reserve to hold interest rates below market rates, thus debauching not only the currency but also people’s personal savings.
 
Here are the salient facts about Social Security in a nutshell:

1.  As poorly structured as Social Security is—it is indeed structured as a coercive Ponzi Scheme which makes no real investments but instead pays early comers out of forced contributions to the scheme made by later comers—actuarial projections demonstrate it will not go broke if economic growth remains at or near its long-run average of three percent and the government does not renege on its obligation to repay the money it pilfered from 25-year’s worth of surpluses and spent on other government programs.  All of the nightmare scenarios used to scare seniors about the program collapsing unless benefits are cut by almost a third are based on the assumption that real economic growth persists at only two-thirds of its historic average. 
 
2.  Memo to Republicans:  It’s the economy stupid.  Reduce other federal spending,  repeal ObamaCare before it metastasizes, cut tax rates, make the dollar as good as gold again and dismantle the oppressive regulatory state.  The economy will boom, and Social Security will take care of itself.  It will then be possible to improve workers’ rate of return on their retirement savings by allowing younger workers to opt out of the current program into a voluntary, asset-based retirement plan they own.  That way, it will not be necessary to force people to work longer, become welfare recipients or chisel current retirees’ benefits the way the White House and GOP leaders are conspiring to do with the chained CPI.
 
3.  According to research by Martin Feldstein and Elena Ranguelova, if workers were free to invest their retirement savings and earn a market-based 5.5 percent rate of return, “individuals could purchase the future benefits promised in the current Social Security law (the benchmark level of benefits) by saving 3.1 percent of earnings, just one-sixth of the payroll tax that Social Security actuaries project will be needed in the paygo system.”

Trying to make Social Security a better deal for government by making it a worse deal for workers as the Republican Establishment wants to do is the ultimate exploitation of the people by the government.  In their quest to transform Social Security into the world’s biggest welfare program, Republican politicians seek not just to dismantle the New Deal but also to replace it with the GOP’s own version of the Great Society.  Sadly, the establishments of both political parties lack any vision to guide us into the coming post-welfare-state era that economic reality is forcing upon America and the world.  And, without a vision, the people perish.

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