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Sunday, November 28, 2004

Social Security Will Require Borrowing

The high stakes game of Social Security Reform has begun with the first blow to the bow of the President's legislative ship. Congress and analysts are saying it could cost billions or trillions of dollars in extra federal borrowing in the next 10-20 years to replace the revenue shortfall personal savings accounts would cause. Read below:
The New York Times: "Borrowing by the government could be necessary to establish the personal accounts [President Bush is proposing to reform Social Security] because of the way [it] pays for benefits. Under the current system, the payroll tax levied on workers goes to benefits for people who are already retired.

This is called a ponzi scheme--for those of you who don't know--and if you devised one you would go to jail. . . . But I digress . . .
Personal accounts would be paid for out of the same pool of money; they would allow workers to divert a portion of their payroll taxes into accounts invested in mutual funds or other investments.

The money going into the accounts would therefore no longer be available to pay benefits to current retirees. The shortfall would have to be made up somehow to preserve benefits for people who are already retired during the transition from one system to the other, and by nearly all estimates there is no way to make it up without relying at least in part on government borrowing."

In this article, we have been given in a nutshell the argument against the President's plan which will be made over the next few months as this proposal is put together and presented to Congress. And it is all we will be talking about in the blogsphere (other than the international terrorist threat) for 2005.

The fact is, whether the federal government borrows to pay for the shortfall or not, we have already mortgaged this system but have made no payments on it yet as we continue this ponzi scheme.

We didn't know it at the time, but from 1934 when Social Security was proposed until 1935 when it was signed into law (amendments added in 1939), FDR and Democrat Congressional leaders devised a marketing scheme similar to your typical furniture store ad today: ". . . No payments and no money down until the year 2004!" Well, the payments are due now.

But there is a bright side to this which I pray the blogsphere and conservative media will bring to the forefront (I'll bet Larry Kudlow is already thinking it--Greenspan is); when money flows into the markets and not into the government ponsi scheme, increased investment will provide an economic windfall strengthening the dollar and helping steer the Titanic of credit spending away from its inevitable disaster into a savings culture the likes of which we have not seen in at least a generation. I am no economist (though I hope to be one someday), but I think the case can be made that Bush's plan will have precisely this effect on our economy.

Even if it doesn't, I'll be glad to see bloggers hone up their economic skills this next year!
Articles of Interest
The illusion of 'wealth effects'
The History of Social Security
Social Security Propoganda so specious it's almost funny.