Amateur Megalomania

The Social Security issue has always been a moral issue to me. The Fly Bottle has a link to a David Shapiro article on the morality of Social Security. It looks like I’ve been echoing Shapiro for some time without realizing it.

The thread of comments below by Chris G. has raised some deeper issues that I would enjoy talking about. If you haven’t already read the section, go here and get caught up.

What started as a policy discussion has lead to some questions of core philosophy that are worth taking the time to discuss. Specifically, it revolves around the role of government and the responsibility of the individual. It seems that Chris and I may have a reasonable disagreement between two reasonable people, which is just fine, and makes things interesting.

The issue of Social Security privatization has never been a question of social benefit or a matter of fiscal calculus to me. Not directly. While I firmly believe that a privatized system, even on a small scale, will indeed create more wealth for all Americans, the fundamental issue for me revolves around the question of freedom and responsibility. In short, the federal government has no Constitutional role in establishing a retirement program, and any such program is an infringement on the right of the individual. No where does the enumerated powers of the Federal Government include a retirement scheme, and despite the potential benefit of such a program, any exercise of this sort of power is a step down the path of unbridled Federalism. Unfortunately, that step was taken a long time ago, and we are well down that path.

Moving to a more practical argument, now that we have Social Security, the issue becomes a matter of choice and the exercise of some freedoms in how the money is invested and returned to the people. The current ‘pay as you go’ system has few advantages I can see. For one, while the benefit is ‘secure’ and known, it is far less than can be obtained in the private securities market. Choose any thirty year period and you will see a vast difference in the rate of return between Social Security and the market. The volatility of the market is something to be concerned about in the short term, and private holders of 401(k) accounts buffer this risk in later years by moving the investments to low yield, safe bonds, to preserve capital. A private system of investment would by necessity offer the same options. Another problem with the current system is the termination of benefits at death. Classes of people with a lower life expectancy are essentially cheated of the full ‘benefit’ of the program by having the misfortune of dying young. Blacks and Hispanics, powerful elements of the Democratic base, are especially prone to this problem. Finally, the demographic wave moving through the population will place a massive burden on younger workers, forcing two workers to support the benefits of one retiree. Such a system can’t be sustained.

There are other answers to these problems, such as reducing the benefit, increasing the payroll tax, or extending the retirement age. All of these, to me, seem to be poor solutions. Of them all, raising taxes would probably get the most support from people, since it would quickly assemble a numerical majority to seize money from a wealthy minority. I have serious moral issues with the ability to grab another man’s money, just because I have a friend with a like mind, outnumbering the rich guy. I might as well knock him over in a dark alley and take his wallet.

Why appropriate more money from the wealthy when private accounts offer so much?

Addressing some specific concerns raised by Chris –

Yes, 401(k) accounts exist and are currently available. But this is an additional cost on top of the 6.5% FICA taken from each check. Some people have a hard enough time socking away 5% in a 401, why can’t they have the option to cut into some of that 6.5% if they do so under specific controlled situations, waving away some of their future ‘benefit’ from Social Security (and an increasing number of young people are dangerous skeptical about the future of the program when they hit retirement age)? The foundation of a private plan would still involve government oversight, as distasteful as I find that on a level of principle. For example, my plan at work limits me to a certain mixture of mutual funds. The only pure stock I can buy is in Pfizer. A private plan would not offer a pure security. I’d even settle for limiting it to a mixture of bonds, since even those would provide a higher rate of return.

Private plans such as 401s are a great vehicle, yet we don’t have the ability to opt out of the current plan. It’s a bit ironic that Congress has given themselves the ability to opt out and invest in private programs, but we don’t have the same ability? As it stands now, we are forced to invest in a lousy program AND bear the added cost of taking care of ourselves responsibly through private investment.

The benefits of private investment also add liquidity to the market, which touches on an entire different topic of the catalytic affect of investment on wealth creation. But that’s for another long post.

Finally, Chris has the following concerns, with which I respectfully disagree –

But I have a real problem with this from a historical point of view. There is a very good reason why we have a high death tax in the US. The founding fathers realized that there needed to be a restriction on family money…this was because of their experience with European monarchy and and other blue-blood simply living off ancestors money and never themselves contributing in a positive way to the society. While over the centuries the US political spectrum has managed to counter some of these restrictions (to a bad end IMHO) and we are now seeing a huge disparage between the rich and the poor like never before – the estate tax is still a valid social concept – and one I support. I know that is not popular, but I don’t see why I should expect to directly benefit from my father’s (and mother’s) efforts beyound being raised in a manner that they can afford. I should be able to hold myself up on my own effort and merit.

While the Founders did have a healthy fear of aristocracy, they did nothing about the generational transfer of wealth. A search of the online Federalist Papers reveals nothing about the topic, and the estate tax was not even created until 1916, under the influence of an unhealthy fit of Populism. The Founders had a healthy respect for wealth creation, and indeed expected people to be able to pass on this wealth to their children. They addressed the concern of aristocracy through the system of representation.

Federalist #57 (The Alleged Tendency of the New Plan to Elevate the Few at the
Expense of the Many Considered in Connection with Representation) addresses the issue directly.

THE THIRD charge against the House of Representatives is, that it will be taken from that class of citizens which will have least sympathy with the mass of the people, and be most likely to aim at an ambitious sacrifice of the many to the aggrandizement of the few. Of all the objections which have been framed against the federal Constitution, this is perhaps the most extraordinary. Whilst the objection itself is levelled against a pretended oligarchy, the principle of it strikes at the very root of republican government. The aim of every political constitution is, or ought to be, first to obtain for rulers men who possess most wisdom to discern, and most virtue to pursue, the common good of the society; and in the next place, to take the most effectual precautions for keeping them virtuous whilst they continue to hold their public trust. The elective mode of obtaining rulers is the characteristic policy of republican government. The means relied on in this form of government for preventing their degeneracy are numerous and various. The most effectual one, is such a limitation of the term of appointments as will maintain a proper responsibility to the people.

Equal protection under the law is the most effective means to combat the influence of an oligarchy. One of the most crucial debates of the Founders was centered on the question of representation. The fear was that too dilute of representation would result in an unresponsive government, prone to undue influence by moneyed men. If representation is confined to a local level, meaning that a representative is responsible to a smaller constituency, then a corrupt officer would quickly be identified and turned out by a small electorate.

Who are to be the electors of the federal representatives? Not the rich, more than the poor; not the learned, more than the ignorant; not the haughty heirs of distinguished names, more than the humble sons of obscurity and unpropitious fortune. The electors are to be the great body of the people of the United States. They are to be the same who exercise the right in every State of electing the corresponding branch of the legislature of the State. Who are to be the objects of popular choice? Every citizen whose merit may recommend him to the esteem and confidence of his country. No qualification of wealth, of birth, of religious faith, or of civil profession is permitted to fetter the judgement or disappoint the inclination of the people. If we consider the situation of the men on whom the free suffrages of their fellow-citizens may confer the representative trust, we shall find it involving every security which can be devised or desired for their fidelity to their constituents.

A representative must be responsible to the whole of the people, and this is affected by devolving power to the local level. The essential problem in the current Federalist system is the removal of power to far away DC, and the current level of representation, making it easier for a corrupt politician to still retain office through districting and a general detachment of the electorate from the day to day actions of their representatives. This is one of the reasons the Founders so strongly opposed direct election of Senators. To win election in such a large region, and over such a large number of voters, a candidate would have to possess qualities of appeal that would remove them from the specific interests of local regions. An elected Senate would breed an aristocracy of name and image, which is exactly what we ended up with today!

A corrupt oligarchy is exactly what results as we leave the principles of the Founders behind. This is ultimately why I am so opposed to Democracy in general.

As for the potential problems of inheritance of private accounts, I don’t see the problem. An aristocracy of wealth is by definition exclusive. That exclusion doesn’t square in a universal system of privatization, when each and every citizen gains the ability to bequeath a benefit to their children. It is fundamentally equal.

It’s a deep issue, and I doubt this post will see the end of it. The nature of wealth creation, the non-zero-sum nature of the economy, and the moral issues of security haven’t even been addressed yet, but in the interest of brevity (of a sort), I’ll leave those for later.

Chris, thanks for the debate, and I hope you keep at it. THIS is why I like to blog.

Filed under: Social Security