Monetise it!

I have been reading a great book lately. I will not divulge its title, because I want the reader to use their own intuition and reasoning rather than screen my remarks through a political lens, whatever the affiliation may be.

The topic is Social Security, clearly a very important subject no matter who you are. Whether you are saving for retirement, working, retired, about to be retired, an illegal immigrant, a naturalized citizen, or whomever, this is a topic that we must all have our minds firmly wrapped around so as to be able to speak intelligently on the subject and sift through the truths and the half-truths surrounding the program and its pillars.

Otto Von Bismark is recognized as the first modern world leader to have introduced the idea that a state would provide a pension for its older citizens when they reached a certain age. The thought process here, and why many people embrace this idea, is because there is a sense of security that comes with the fact that one will be cared for financially when one is no longer able to work.

The concept took shape in Great Britain shortly after it was enacted in Germany through the administration of some well-meaning conservatives. Surprised? The fact is, many of western social programs were brought to law through legislation introduced by none other than wealthy conservatives as opposed to Marxist sympathizers. The reason for this is simply because at some level, both Marxists and Aristocrats share the view that a body of wiser people, either chosen on their "merit" or by birth, should know what is better for the common man than the common man himself. In the case of Otto Von Bismark, it was also used more shrewdly to undermine the political platform of the rising social democrats in his day. Nevertheless, it is interesting to note, that most if not all social programs are derived from this mixture and culmination of both paternalistic, elitist, and power-seeking ideals. Ultimately, the notion that freedom is a burden for the common, less educated man and must be minimized so as not to injure himself is the driving thought. Although there are many every-day examples where the personal behaviors of those who espouse such ideals seek to maximize their own freedoms, these anecdotes are beyond the scope of this essay.

So the American version of social security was packaged with other social programs as part of what was called the New Deal during the administration of FDR. Our version of the program is that we are taxed, or in the language of the system, "contribute", funds that are held in separate accounts and that we may draw upon when we reach a certain age or through disability are unable to work. As part of the deal, employers are required to contribute a portion of the wages earned by their employees as well.

Let us now dissect this system so as to understand what it really provides, discourages, and penalizes.

First, what is provides. To illustrate what social security provides, allow me to relate a true story. An immigrant man from Italy in the early 1900s discovered that stamps could be bought in one country at one price and resold in another at a different price. He began raising large sums of money from investors and began paying interest to his clients. He became enormously prosperous at his discovered arbitrage trade and became one of the richest men in America. The problem however, was that he was actually not making money on his trades. He was simply paying off his old investors with the money from the new investors. If this sounds like a typical Ponzi scheme, the reason why is because the man who was committing this fraud was Charles Ponzi himself. So atrocious and far reaching was the scheme that we name this type of fraud after Ponzi himself.

So how does social security work? The first person to receive a social security check was Ida May Fuller. She paid in roughly $24 and received over her entire retirement some $24,000, an annualized return of 22% year to year. Today, we are hard pressed to find those types of returns by even the most skilled money managers. The reason why you won't earn a return even remotely close to Mrs. Fuller's, is because it is impossible unless it is funded by the rising generation of workers who in turn would be funded by the following generation of workers and so on. In other words, the social security system is first and foremost, a Ponzi scheme. Ponzi went to prison, FDR got a monument built to his name.

Second, what it discourages. One of the points of the social security system is that employers pay their fair share of the contributions for the retirement of America's workers. If you own a business and you employ workers to run the store, not only do you have to pay them a fair wage, but also a tax to employ them. Given the added cost, how many more workers are you likely to employ? The answer is very simple, fewer of course. Social security is nothing more than a creator of unemployment - a situation in and of itself social security aims to mitigate when a person is unemployed because of their age or physical condition. A complete paradox in intentions!

Third, what it penalizes. Typically, the poor or working class begin working at a younger age and usually work more years than a middle class or upper class citizen. This is an example of Director's Law, which states that social programs usually are paid for by the rich and the poor to benefit the middle class.

An additional and equally appalling circumstance is a widow who never worked a day in her life gets paid the same as a single mother who had to raise her children and earn the living over her lifetime to boot. Or what about a man, who through necessity or preference, decides to work beyond the age of 65? Not only does this man now have to forgo the benefit now given to his peers, but also has to pay the tax!

What legislative body would enact a law that requires the rising generation to pay for the support of the older generation? I can think of none. What legislative body would enact a law that would discourage employers from hiring workers? I can think of none. What legislative body would enact a law that penalizes the poor to help the middle class and unfairly treats its citizens? I can think of none.

Yet, when combined together, this is exactly what social security is, a system that provides no actuarial return to the contributors, creates an employment tax, and places an unequal burden of livelihood on the shoulders of those the system was primarily set up to protect. It should be abolished completely.

In the abolishment, we will also discover the true cost it has levied on our society. In other words, when the Ponzis of the world finally unwind their trades, it's never fun for the one holding the bag.

The author of the book lays out six steps to unwinding social security:
1) Eliminate the tax immediately
2) Continue to pay benefits to those receiving benefits until their deaths.
3) Give workers who have earned coverage the choice of taking an annuity or lump sum
of their benefits adjusted for the elimination of the taxes he no longer has to
pay.
4) Reimburse those workers who have not earned coverage the funds they and their
employers have made on their behalf.
5) Terminate the accumulation of new benefits.
6) And the most interesting, finance the payments of steps 2, 3, and 4 with the
issuance of government bonds.

In other words, monetize the system. Expose the economic loss the system has created. Place the freedom people should already have back into their hands to either provide for their retirement or not.

Have you thought about it? Rolled it around in your mind?

Then his name is Milton Friedman, the late Nobel Prize winner and former Professor of Economics at the University of Chicago and former Chairman of the Federal Reserve. His book is "Free to Choose". If anyone gets it, he does.