An Intelligent Scheme: Privatizing Social Security, Part 2

by | Sep 29, 2004

Current Senate hearings on “mandatory retirement” may have more than a little relevance to the huge question of how to “save” Social Security. Unfortunately, there is far too little attention being paid to the question of why Social Security requires saving in the first place. The key problem with Social Security is that it has […]

Current Senate hearings on “mandatory retirement” may have more than a little relevance to the huge question of how to “save” Social Security. Unfortunately, there is far too little attention being paid to the question of why Social Security requires saving in the first place.

The key problem with Social Security is that it has never taken in enough to cover all the pensions it promised to pay. Promises win votes but collecting enough money to pay for them does not.

Should we be surprised that politicians take the easy way out by promising a lot and leaving it to future politicians to figure out how to pay for what was promised — or how to disguise their welshing on those promises?

We hear a lot about how changing demographics have created a problem for Social Security, since people now live longer, changing the ratio of people paying into the system compared to people getting money out of the system.

But you don’t see insurance companies wringing their hands about how they can’t pay out the pensions they promised when they sold annuities.

That is because each generation’s premiums were invested to create additional future wealth to pay for that generation’s pensions, regardless of whether the next generation is large or small. The big difference between private annuities and Social Security is that private investment creates future wealth for the country as a whole and Social Security does not.

More total wealth through privatization offers some hope of solving the problem of inadequate wealth to pay the pensions that Social Security promised to the baby boomers. Otherwise, the government will have to welsh on its promises, because the amount of tax increase needed exceeds what is politically feasible.

That is where so-called “mandatory retirement” comes in. That concept is as fraudulent as calling Social Security “insurance” when it has in fact always been a pyramid scheme, where each generation depends on the next generation to pay its pensions.

There has never been any such thing as mandatory retirement. By contract or custom, employers have had a general practice of no longer employing people after they reached a certain age. But there has been no requirement that those people retire. Many — if not most — have in fact continued working elsewhere, often while drawing a pension.

By passing laws forbidding “mandatory retirement,” the government reduced the number of older people who would otherwise have retired and begun drawing Social Security pensions. This self-serving transfer of billions of dollars in financial liabilities from the government to private employers was thus presented as a virtuous rescue of older workers from unfair discrimination.

Never mind that the Constitution forbids the government from changing the terms of private contracts. Never mind that younger workers find their upward path blocked by older workers whom the employer cannot get rid of without legal hassles.

All of this is washed down with lofty rhetoric about how age need not mean a decline in efficiency, about how our senior citizens still have much to contribute, about how older Americans are “breaking the silver ceiling,” in the words of Senator John Breaux at recent Senate hearings.

In other words, the assumption is that individual employers looking directly at individual workers, whose work they are already familiar with, are not smart enough to make as good a judgment as distant politicians talking in generalities.

Even in the past, when a particular employer’s obligation to employ workers expired at a certain age, there was nothing to prevent a mutual agreement for particular workers to continue working when the employer saw that the particular worker’s productivity made this advisable and the worker wanted to continue on.

In short, neither Senate hearings nor “expert” witnesses were necessary. Much of this is a charade to allow the government to raise or eliminate remaining retirement ages, in order to escape from the impossible situation that politicians created when they designed Social Security as a pyramid scheme.

Related Articles:

An Intelligent Scheme: Privatizing Social Security by Thomas Sowell (September 28, 2004)
No matter what you were promised or at what age you were supposed to get it, the government can always pass a new law that changes all of that. But you still have to pay into the system. A private annuity plan run by an insurance company is legally required to pay you what was promised, when it was promised, and to maintain assets sufficient to redeem its promises.

Thomas Sowell has published a large volume of writing. His dozen books, as well as numerous articles and essays, cover a wide range of topics, from classic economic theory to judicial activism, from civil rights to choosing the right college. Please contact your local newspaper editor if you want to read the THOMAS SOWELL column in your hometown paper.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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