Posted on 04/07/2002 9:03:23 PM PDT by Copernicus
Two delicious excerpts from Reason Magazine about Social Security, the full article is at the URL link:
Roots of Dependence
The founding father of collectivized social insurance, German Chancellor Otto von Bismarck, was brutally candid about the political benefits of centralization.
As ambassador to Paris in 1861, he had seen how Napoleon III used state pensions to buy support for the regime.
"I have lived in France long enough to know that the faithfulness of most of the French to their government...is largely connected with the fact that most of the French receive a state pension," he recalled later.
For Bismarck, the appeal of social insurance was that it bred dependency on, and consequently allegiance to, the state.
Social insurance was thus born of contemptuous disregard for liberal principles: What mattered was not the well-being of the workers but the well-being of the state.
With that animating principle, social insurance necessarily assumed a collectivist character.
In particular, it would clearly not do simply to compel workers to provide for their own retirement; funded pensions that actually belonged to the workers would not inspire the proper feelings of dependency and subservience.
Far better was the "pay as you go" system in which the government would transfer funds directly from current taxpayers to current retirees.
When such ventures are attempted in the private sector, they go by the name of pyramid or Ponzi schemes and constitute criminal fraud. The essence of a pyramid scheme is that investors’ money is never put to productive use; it is simply diverted to pay off earlier investors. As long as new victims can be found, everything seems to work fine. Eventually, though, the promoters of the scheme run out of new investors, and the whole house of cards collapses.
Pay-as-you-go public pension systems operate in precisely the same way. As long as the contributions of active workers are sufficient to cover payments to current retirees, the system is fiscally healthy.
Indeed, in the early decades of such programs, it appeared that the market had been outfoxed. Consider Nobel Prize-winning economist Paul Samuelson’s smug optimism back in 1967: "The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in....How is this possible? It stems from the fact that the national product is growing at compound interest....Always there are more youths than old folks in a growing population....A growing nation is the greatest Ponzi game ever contrived."
Sooner or later, though, such hubris must receive its grim comeuppance. Shifting demographics impose the ultimate constraint. As populations age, the number of retirees begins to grow faster than the number of new workers, until at last the burden is unsustainable.
Meanwhile, the perverse incentive structure of collectivized social insurance works to accelerate the system’s ultimate breakdown. In particular, workers have strong incentives to minimize or evade their contributions to the system, while retirees have an obvious stake in campaigning for higher benefits. Such dynamics steadily worsen the relationship between revenues and obligations and thereby hasten the eventual day of reckoning.
Today, with a global pension crisis that affects rich, developing, and postcommunist nations alike, the reckoning is at hand. Around the world, the ratio of active workers to retirees is shrinking. Promised benefits have spiraled out of control, while demographic changes and widespread evasion reduce the relative size of the contribution base. Consequently, the hopes for retirement security of hundreds of millions of workers are now in serious jeopardy.
The inevitable Ponzi endgame is now obvious in the rich countries of the world.
The Crushing Burden of "Security"
Already today, public pension spending in the rich member countries of the OECD averages 24 percent of the total government budget, or 8 percent of GDP. To fund these enormous outlays, the tax burden imposed on current employees has reached punishing levels: In Italy, Germany, and Sweden, for example, the combination of employer and employee contributions and personal income taxes now averages around 50 percent of gross labor costs. And while workers put more and more into the system, they can expect to receive less and less. In Sweden, the average rate of return for the generation retiring 25 years after the establishment of the public pension system approached 10 percent per year; for the generation retiring 20 years later, the rate of return had dropped to 3 percent. In the United States, real rates of return for two-earner couples now range from -0.45 percent to 2.13 percent, depending on income.
Even with rising tax rates and declining returns, pay-as-you-go systems throughout the advanced nations are heading toward financial collapse. In the United States, Social Security revenues currently exceed expenses, but the system is expected to begin running deficits in 2016. The annual shortfall is projected to be $1.3 trillion by 2030, a figure that represents more than two-thirds of the entire federal budget for 2001. Over the next 75 years, Social Security’s total unfunded liabilities have an estimated present value of $9 trillion -- as compared to the current national debt of $5.7 trillion. In Germany and Japan, the current unfunded liabilities of the public pension system are well over 100 percent of GDP; in France and Italy, they exceed 200 percent.
Since developing countries still have relatively young populations, one might expect that the problems with their pension systems remain in the distant future. One would be wrong. First of all, developing countries are making the transition from high birth and death rates to low fertility and mortality much faster than did the advanced nations. It took France 140 years to double the share of the population over 60 years of age (from 9 to 18 percent), while Belgium needed nearly 120 years; China, on the other hand, will repeat the feat in 34 years, and Venezuela will do it in 22. Between 1990 and 2030, the percentage of the world’s population over 60 years of age is expected to increase from 9 percent to 16 percent, and most of that growth will occur in poorer countries.
In addition, administering public pension systems in poor countries is severely complicated by the large informal sectors endemic to those societies. A vicious circle is often triggered. Because many people work in the informal sector, payroll taxes (collected only in the formal sector) have to be higher than would otherwise be necessary. High payroll taxes, though, create incentives for even more people to retreat into the informal sector, thus necessitating even higher rates, which push more people into tax evasion, and so forth. Rising payroll tax rates in Uruguay, for example, caused the proportion of workers contributing to the system to fall from 81 percent in 1975 to 67 percent in 1989. In Brazil, evasion cut contribution revenues by more than a third during the 1980s.
The transitional economies of the former Soviet empire have inherited no end of problems from the Communist era, including tottering public pension systems. During Soviet rule, dependence on state pensions was nearly total, since occupational pensions and private saving were virtually nonexistent. With communism’s collapse, the folly of that dependence has become abundantly clear. To begin with, the countries in question have populations that are nearly as old as those in the advanced nations: As of 1990, over 15 percent of people in former Communist bloc countries were over 60, as compared to 18 percent in the OECD. Like developing nations, though, they also have large informal sectors that erode the contribution base.
By the mid-1990s the pension systems of the transitional economies were saddled with cripplingly high dependency ratios. In Poland, pensioners totaled 61 percent of active workers by 1996; in Ukraine, the figure was 68 percent; in Bulgaria, 79 percent. To cope with this crushing burden, contribution rates were forced to remain at the punitive levels that had been set during Communist rule: 26 percent in the Czech Republic, 30.5 percent in Hungary, and 42 percent in ...........
Best regards,
Best regards,
The economics of this problem remind me of health care funding model - on a nation scale push comes to shove.
Oceanic demand and limited sources of supply.
Bump
Interesting article but is the author suggesting all plans be done away with where he states "The Crushing Burden of "Security"?
Ponzi schemes by any other name are still criminal activities.
The full article at the URL is worth the read.
Best regards,
SOCIAL SECURITY: (This is worth the read. It's short and to the point.)
Perhaps we are asking the wrong questions during election years. Our Senators and Congressmen do not pay into Social Security and, of course, they do not collect from it. Social Security benefits were not suitable for persons of their rare elevation in society.
They felt they should have a special plan for themselves. Many years ago they voted in their own benefit plan. In more recent years, no congressperson has felt the need to change it. After all, it is a great plan.
For all practical purposes their plan works like this: When they retire,they continue to draw the same pay until they die, except it may increase from time to time for cost of living adjustments.
For example, former Senator Byrd and Congressman White and their wives may expect to draw $7,800,000.00 (that's Seven Million, Eight-Hundred Thousand), with their wives drawing $275,000.00 during the last years of their lives. This is calculated on an average life span for each.
Their cost for this excellent plan is $00.00. Nada. Zilch. This little perk they voted for themselves is free to them. You and I pick up the tab for this plan.
The funds for this fine retirement plan come directly from the General Funds--our tax dollars at work!
From our own Social Security Plan, which you and I pay (or have paid)into--every payday until we retire (which amount is matched by our employer)--we can expect to get an average $1,000 per month after retirement. Or, in other words, we would have to collect our average of $1,000 monthly benefits for 68 years and one (l) month to equal Bradley's benefits!
Social Security could be very good if only one small change were made. And that change would be to jerk the Golden Fleece Retirement Plan from under the Senators and Congressmen. Put them into the Social Security plan with the rest of us and then watch how fast they would fix it.
If enough people receive this, maybe a seed of awareness will be planted and maybe good changes will evolve.
How many people can YOU send this to?
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