###################################################################### SOCIAL SECURITY: WARNING! TIME IS RUNNING OUT ON THIS BANKRUPT SYSTEM by George L. O'Brien (Edited by Geoffrey Erikson & Tim Starr) ###################################################################### THE THIRD RAIL The issue of social security has long been considered the "third rail" of politics -- as on the electrified subway: "touch it and you die." There can be little questioning the popularity of the Social Security system. It is the only part of the welfare system which promises benefits to nearly every person in the country. It is also seen to relieve adult children of the responsibility of supporting their elderly parents, and it helps the elderly poor for whom there is a great deal of sympathy. There is only one problem: the system is a fraud. In theory, Social Security is a form of "insurance." In practice, it is a "ponzi scheme" which works very much like an illegal chain letter. The system is both actuarily unsound and bankrupt -- and soon the chain must break. The chances that today's younger people will receive any benefits from the Social Security system are remote at best. THE PRUSSIAN MODEL The origin of government Social Security was not American at all. It was created by the Prussian/German leader Otto von Bismarck in 1883. Bismarck was looking for a way to win the support of the working people, who were unhappy with the high taxes needed to support the large German military and the high prices created by the government-protected industrial cartels. He wanted to find a way to con people into believing that they were going to get something from the state, without its actually having to deliver. He asked an actuary how long most people could be expected to live. The answer was 65 years. Bismarck then set the age of eligibility for his social security system at 65, knowing full well that most of the people would have died before they received a dime from the system. In spite of this, the system was wildly popular. The Prussian concept of social security was an authoritarian one -- based on the false premise that people are incompetent to look after their own affairs and need a paternalistic socialist state to force them to provide for their own retirement During the 1930s in the United States, FDR was looking for a way to gain the support of the working people who were unhappy with the continuing Great Depression and the high taxes needed to support the New Deal. So the Social Security program was created in 1935 (just in time for the election the following year). In spite of the claims that Social Security was an old-age insurance program, it never actually worked that way. From the beginning, Social Security paid its benefits from current cash flow, rather than paying benefits out of interest accrued on a reserve fund as a private pension plan would do. As Social Security taxes were paid into the system, the funds were immediately doled out to beneficiaries. As more taxpayers retired, they would be paid from the money taken from younger taxpayers. However, there have been some major flaws with this system. First of all, people began to live longer. Whereas in 1883 most people died by the age of 65, by the late 20th century people were living an average of a decade longer. This meant a huge increase in potential beneficiaries. This was also paralleled by a decline in the birth rate which dropped the ratio of workers to retirees from 15:1 in the 1930s to only 3:1 in the 1980s. Bad as that is, it is only the tip of the iceberg. Once the "baby boom" generation (born 1946-1964) starts retiring, the ratio will be much worse. Estimates are that there will be only two workers for every retiree by the year 2025. Social Security taxes alone will have to exceed 22 percent of each worker’s income by that point. (This in addition to a compulsory matching amount paid by employers). CAN STATE SOCIAL SECURITY SYSTEMS SURVIVE INTO THE 21ST CENTURY? It is clear that the Social Security system of the early 21st century will not be able to pay its benefits out of cash flow. For the system to continue paying benefits even close to the current level (not to mention continuing Medicare, Survivor's Benefits, etc.), it will be necessary to greatly increase the Social Security "fund." The 1983 Social Security tax increase was supposed to create a reserve fund of $10 trillion by the year 2030. However, since the mid-80s Congress has been raiding over $150 billion each year from the Social Security Fund to hide part of their massive deficit spending. Thus the Social Security trust fund is filled with IOUs in the form of Treasury Bonds. The interest on these bonds must be paid for by you, the taxpayer. Thus, the U.S. Social Security system (and those of nearly every other Western country) are caught between rising debt and declining funding bases. The system is an increasing burden on individual workers, a drain on the economy, and cannot deliver its promised benefits for much longer. It's time for a change. But how? A BETTER WAY: THE CHILEAN MODEL Is there a workable alternative? The answer is "yes" -- and it comes from a very surprising place: Chile. Eleven years ago, Chile had an even worse problem than the U.S. Yet according to Rita Koslka in her article "A Better Way to Do It," published in the Oct. 28, 1991 Forbes Magazine: "Replacing the old system, then Minister of Labor Jose Pinera put in a plan that requires each of the country's 4.8 million workers to put 10 percent of his pre-tax income into a private pension fund of his own choosing; there are no employer contributions. There are 13 plans to choose from, and workers can switch their funds between plans to get the best returns at the lowest cost. "In Chile, at age 65 for a man (60 for a woman) the worker takes the accumulated savings and either buys an annuity or organizes an individual payout schedule. He can retire earlier if he has enough money in his pension fund. To protect worker’s savings, most funds are invested in securities automatically indexed for inflation. The benefits of this policy to the individual worker have far exceeded expectations. The original plans for the Chilean program anticipated a return of about 5.5 percent. A retiree with 40 years in the fund at that rate, would receive 70 percent of the average of the last five years of his or her salary. With a return of 6.5 percent the payout would be a 100 percent of that rate. It turns out that the average rate of return has actually been in the neighborhood of 13 percent, which has induced many workers to contribute far more than the required minimum amounts. This has not only made it possible for people to retire in comfort, but has provided funds for a major economic expansion. Because the money that goes into these private pension funds is invested in production, a great supply of investment capital was made available to businesses and entrepreneurs at relatively low interest rates. With capital available, production increased many-fold and a huge new labor market has been created. There has also been a major stock market boom (helped by new funds and new free-market policies). These private funds now constitute the equivalent of one third of Chile's gross national product. In 1992 alone, Chile's economy, measured by its Gross Domestic Product, grew by 9.7 percent per year. That is nearly 4 times the rate of growth in the U.S. for that same year. Inflation and unemployment in Chile have been declining steadily and rapidly over the last decade. In fact, so much investment capital is now available that Chilean investors have been able to invest abroad. This has led to an economic boom outside of Chile as well, particularly in Argentina. The program has been so successful that delegations from Argentina, Mexico, Venezuela. and Poland have visited Chile to study how this approach can be used in their countries. According to John Williamson of Boston College, "One of the big benefits of Chile's system is it keeps the money out of the hands of the government." THE COMMON SENSE SOLUTION According to Augusto Iglesias, chief economist for the Chilean pension fund, Habitat, the Chilean social security system "is based on very simple and reasonable principles: that people care about their money, and that putting it in private hands is more efficient than with the government." The Chilean program goes beyond replacing social security with a private system. It also eliminates the domination of retirement programs by corporate pension plans, since workers now control their own funds. Chilean Minister of Labor Jose Pinera summed it up by saying, "It is a common-sense system that is more easily understood by the average Chilean mother than by social security experts." At some point people must realize the futility of trying to save current bankrupt government Social Security systems. Perhaps then they will choose a new a system that actually works -- a system without the enormous taxes which threaten ultimately to destroy national economies -- a system that provides them with real security combined with vastly superior benefits -- a private system that will enable them to spend their retirement years in comfort and security instead of in poverty and want. RECOMMENDED READING Social Insecurity: The Crisis in America's Social Security System and -- How To Plan For Your Own Financial Survival (Dorcas R. Hardy & C. Colburn Hardy) ............................................... $15.95 For this and other books and tapes write, Freedom's Forum Books, 1800 Market Street, San Francisco, California 94102. Add $2.50 postage & handling for the 1st book and $1 for each additional item. Or you may order by phone with your VISA/MASTERCARD. Tel: (415) 864-0952 Fax (415) 864-7506. 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