Social Security Reform

Posted March 2, 2005


What Needs To Be Done BEFORE Reforming Social Security?



The Republicans and Democrats are both partially correct in their respective positions on the Social Security system. Both have important and valid arguments that are persuasive. The problem, though, which neither side is addressing, is the fact that major reforms OUTSIDE of the Social Security system have to be enacted BEFORE reforming it. Unless that is done, any reforms will cause more problems.

Bush wants to privatize part of the system and allow individuals to invest in Wall Street. In itself, this is a commendable idea. But it raises the question whether or not the tens of millions, who have already been active on Wall Street since Merrill, Lynch, more than 50 years ago, took Wall Street to Main Street, have actually benefited. Historical comparative statistics on family and household net worth cast some doubts on this. In spite of it, Bush's "ownership society" is a worthy goal if it increases family and individual net worth under private and not captive control, beyond political manipulation.

To achieve this, the following are necessary prerequisites and reforms prior to changing the system:

l. Fiscal and monetary policies must absolutely guarantee no long-term institutionalized inflation and must allow price flexibility so that prices and the consumer price index, generally, decline, commensurate with increases in productivity. This would dismantle the horrible and ravaging inflationary era of the last 60 years or so and restore normal price fluctuation necessary for effective economic processes that preserve purchasing power and encourage saving and investing.

2. Strict and rigorous enforcement of existing laws to eliminate corruption and mischief on Wall Street and to provide absolute transparency so that true and reliable information is readily accessible to investors. Asymmetric knowledge and insider trading in the markets allow exploitation and profiteering that deny maximum benefits to the masses. Bush has been noticeably quiet on this element as if the personal and institutionalized theft that characterized the markets during the so-called roaring nineties never existed. In short, ethics is necessary to restore trust and assure investors' confidence.

3. Maintain current contractual obligations to all who contributed to, relied on and trusted the Social Security system. One cannot change the rules of the game while the game is being played, and contracts, for reasons of ethics and efficiency, are sacred. This requires a transitional temporary use of general revenues to fulfill actuarial obligations and adjustments so that no one will be injured, left feeling cheated or neglected by the reforms.

4. Current rates of military spending, which Bush already wants to increase by 4.8 percent on top of the additional 80 billion added to the already 220 billion dollar war costs, will not allow transitional financing necessary for the reforms. For this reason, a rapid resolution of the Mideast conflicts is required. Considerable attention must be given to the history and causes of terrorism in order to effect a speedy resolution as well as to assure prevention.

5. Sizable reduction in residential real estate taxes is necessary. Home equity constitutes by far the largest part of household net worth, in particular for senior citizens relying on Social Security. In severe contrast to other economies, U.S. real estate carries the highest tax load of any advanced economy. In some cases, it is 10 to 25 times higher! This presents a horrible burden to Bush's vision of reforming the Social Security system and facilitating the "ownership society" of self-reliant individuals. It also accounts for a large part of the causes of what could be called "slumerica" that stretches from coast to coast. The state governments, in cooperation with the Federal government, must massively shift real estate taxes onto other elements such as consumption.

Unless these major reforms are addressed and solved prior to changing the Social Security system, a massive inflow of money into Wall Street may satisfy Bush and his supporters in the financial sector, but it will not provide economic security when the next generation retires. Inflation, loss of purchasing power, fraudulent accounting procedures, insider knowledge, and other forms of corruption will have taken their toll. Thereafter, the masses will turn again to politicians as they did in the 19th century and after 1929. Once more, they will demand change and rescue from economic entrapment, if not exploitation. In turn, this is likely to create another obliquely conceptualized national program like FICA, the Federal Insurance Contribution Act of 1935 which created the Social Security system.