24 February 2005

How about a new idea to offer financial security for each American when he or she reaches retirement age?

Here's a social security reform plan I could rally behind, and it's proposed by former Bush administration Treasury secretary Paul H. O'Neill.
If we decided as a society that we were going to put $2,000 a year into a savings account from the day each child was born until he or she reaches age 18 and if we assume a 6% annual interest rate each child would have $65,520 at age 18. (The worst return for a 25-year investor in the stock market from 1929 before the crash to 2004 was an average of 6% a year.) With no further contributions, again with a 6% interest rate, those savings would grow to $1,013,326 at age 65.

If we began to do this now, the first-year cost would be $8 billion; that is $2,000 times the roughly 4 million children born each year. The second year would cost $16 billion and so on until we were contributing $2,000 per year to a savings account for every child from birth until age 18. When fully implemented, the cost would be $144 billion per year. To put this $144 billion per year into context, this year's combined spending for Social Security and Medicare will exceed $750 billion.

What this plan would do is "pre-fund" for the needs of old age. It solves the long-term financing problem for both Social Security and Medicare, allowing for the gradual replacement of programs like Supplemental Security Income and Medicaid and food stamps and housing aid for those over age 65. To make this work, the savings account money would need to be invested my suggestion would be through so-called index funds. The administrative costs would be practically nothing because there's no need for a huge separate tax collection bureaucracy; the money would come from the general revenues of the U.S. government.

This proposal is far superior to the boondoggle scheme being flaunted by the Bush administration. It's simple, straightforward, less costly, and unencumbered by the additional bureaucratic entanglements that the Bush scheme is fraught with. Basically, Bush's privatization program adds layers of new bureaucracy and funnels money from working Americans into fat cat brokers and investment firms.

Comments

<li>The money goes 'round and 'round. The government will scoop out money according to some contentious tax scheme or another wherever it espies the glint of a coin changing hands. <li>The government will deduct the cost of its operations (including the costs of tax collecting and benefit dispensing), and then it will distribute the residue under some contentious welfare scheme or another.
<li>In the squabbling over the details of wealth redistribution the fact that the ruling class and its bureaucracy take more and more of the worker's wealth passes unnoticed. The economy will fade into the dull gray penury of communism.
<li>As long as it has is a large enough proletariat, the kleptocrats can live in as magnificent a state of luxury as any monarchial or capitalist utopia could promise.
<li>Wherever a government can succeed in violating the right of a man to the product of his own labor (Freedom from Redistribution) the rulers will always be rich, and the workers will always be poor.
<li>The above scheme suffers from this same fatal flaw. (And note that the government can readily recoup the loss of 6%, compounded, of the pension setaside by quietly increasing the inflation rate.