$4000 a Month From Social Security; M. Skousen

Economics on Trial $4,000 A Month From Social Security? by Mark Skousen "Social Security will remain nicely in balance for at least the next 20 years . . . If it ain't broke, don't tinker." -Prof. Robert Kuttner, Business Week, February 20, 1995 P rofessor Kuttner, the American Associ ation of Retired Persons (AARP), and other apologists for the current Social Se curity system don't get it. The real issue is not whether the national pension program is solvent or not. It is not a question of whether to reduce Social Security payouts, defer retirements, assess a means test or raise FICA taxes again. Congress has at tempted all of the above, and the system is still fundamentally unsound. The real problem is simple: Social Secu rity is a lousy retirement program and, as a result, imposes a huge drag on the U.S. economy and every other nation with a similar plan. FICA taxes cut deep into the pockets of every worker and every busi ness. Payroll taxes have increased 17 times, from 2 percent of wages, up to a maximum of $60, in 1937, to 12.4 percent, up to a maximum $6,438.00today. To cover future payouts beyond 2015, experts predict taxes willhave to rise to 17 percent ofgross income.

When is this craziness going to stop? Dr. Skousen is an economist at Rollins College, Winter Park, Florida 32789, and editor ofFore casts & Strategies, one of the largest investment newsletters in the country. For more information about his newsletter and books, contact Phillips Publishing Inc. at (800) 777-5005. The tragic irony of Social Security is that it is a forced savings plan that doesn't contribute one dime to real savings. That's because Social Security is a pay-as-you-go system. Contributions are immediately paid out in benefits. FICA taxes go either to (a) pay current Social Security retirees, who use the money to pay bills, or (b) the Social Security Trust Fund, which invests entirely in T-bills, in other words, government spending. In short, payroll taxes are con sumed, not saved. As Professor Joseph Stiglitz states, "the Social Security program is a tax program, not a savings account."

Social Security vs. Individual Retirement Accounts Imagine what would happen if Social Security taxes were invested in Individual Retirement Accounts, so that wage earners could invest in stocks and bonds. In other words, what would be the effect if Social Security funds were invested in free-enter prise capitalism, rather than government transfer programs? Such a study has just been completed by William G. Shipman, principal at State Street Global Advisors in Boston, Massa chusetts. He analyzed two workers, one earning half the national average wage (ap proximately $12,600in today's wages), and the other making the maximum covered earnings ($61,200 today). A low-income earner who retires this year willreceive $551 a month from Social Security. But if he had 395 396 THE FREEMAN • JUNE 1995 been allowed to invest his contributions in conservative U.S. stocks over his working years, he would be receiving an annuity of $1,300a month for the rest of his life, almost three times his Social Security income.

A high-income earner would do even better. If he retired today, he would receive $1,200a month from Social Security. Had he invested the money in stocks, he would be receiving an annuity of $4,000 a month. 1 Now that's what I call retiring with dignity. In sum, Social Security is a lousy retire ment plan and a tragic waste of resources. This year approximately $350 billion will be paid into Social Security. In addition, the Social Security Trust Fund, held for future payouts, is valued at $436 billion and rising. Imagine if all that money had been invested in the capital markets. Imagine if the Social Security Trust Fund could be managed by Peter Lynch, Warren Buffett, or another top money manager and invested in the financial markets. (However, I do not favor govern ment control of American companies. I'm simply demonstrating the profit potential when funds are invested rather than con sumed.) Chile Sets the Example Wishful thinking is reality in a small nation south of us-Chile. Its Social Secu rity system puts America to shame. In 1981, under the influence of free-market econo mists, Chile privatized its failing Social Security system and replaced it with private pension fund accounts for new workers.

Middle-aged workers were given the option of using the new privatized pensions or remaining in the state system, while the government plans for existing retirees and those within a few years of retirement re mained untouched. The results have been astounding. Today 93 percent of the labor force is enrolled in 20 separate private pension funds. Annual real returns on pension investments aver aged 13 percent from 1981 to 1993. Chile's private pension plan deepened the nation's capital market and stimulated economic growth. Its domestic savings rate has climbed to 26 percent of gross domestic product, and economic growth rate aver aged 5.4 percent annually from 1984to 1992. Retirees still on the state pension system are being paid from general revenues, boosted by tax revenues from privatizations of state companies and the expanding econ omy. In short, Chile provides a role model for a successful privatization of the U.S. Social Security system. Converting the pay-as you-go system into a genuine savings pro gram will dramatically increase capital for mation and economic growth in the U.S.

Reform is Coming UntH recently, discussion of privatizing Social Security or highlighting the Chile model has been muted. I recently reviewed the 1995 editions of the top ten textbooks in college economics. Only one mentioned the possibility of privatizing Social Security, and none mentioned Chile's alternative. Lately, however, resistance to reform has been crumbling. Time magazine ran a March 20th cover story, "The Case for Killing Social Security," and virtually endorsed the Chile model. Paul Craig Roberts wrote a favorable column about Chile and Social Security reform in the March 27, 1995,issue of Business Week. And now Senators Rob ert Kerrey and Alan Simpson are sponsor ing a bill to allow workers to pay 2 percent less in payroll taxes if they invest it in their own IRAs. It's a beginning. House Speaker Newt Gingrich pledged to keep Social Se curity off limits this year, but for how long?

As Lao-tzu says, "To resist change is like holding your breath-if you persist, you will die." D 1. William G. Shipman, "Retiring With Dignity: Social Security's Harmful Role, Capital Markets' Helpful Solution," Cato Institute Policy Analysis, forthcoming.

A REVIEWERREMEMBERED: John Chamberlain 1903-1995 John Chamberlain lived with the printed word most of his life. He was a reader from his earliest years and during his four years at Yale acquired a command of Western Civ ilization's literary treasures. John's fine lit erary sense developed early, along with a superb style. John's first book was a history of the Progressive Era in the United States roughly the four decades from 1880to 1920. In 1912 Teddy Roosevelt ran for President on the Progressive Party Ticket. John's book entitled Farewell to Reform (1932)was based on extensive research, a critical use of original sources, and mature literary skill. This book was republished in 1958 and stands today as one of the essential books for understanding those critical years. For several years during the 1930s John wrote the daily book review for The New York Times. There was rarely a time during this period, he has told us, when he did not have a book in his pocket. Even when he went to Yankee Stadium to watch a ball game he would read between innings! This would kill the ordinary man's love for books-or for baseball-but day after day John churned out his review and came to be regarded as one of America's most trusted book reviewers.

No one on the New York literary scene during the New Deal was unaffected by the left-wing slant of most intellectuals. If many of one's friends-intelligent, articulate, and well-meaning-inclined toward socialism and the Roosevelt regime, well perhaps there was something to it. So John was briefly involved, as he wrote later in his fine autobiography, A Life With the Printed Word (1982). Then in 1937, John came across a just published book, Our Enemy the State by Albert Jay Nock. That book, John wrote later, "hit me between the eyes." He had never really been convinced that government had a messianic role to play in society and he began then, as he wrote in his second book, American Stakes (1940), to move sharply in the direction of classical liberal Ism. John held positions on the editorial staff of Fortune (1936-1941) and Life (1941-1950), writing dozens of memorable articles. John's The Roots of Capitalism (1959) explained simply in his elegant prose how the capitalistic economic system functions and how economic freedom encourages en trepreneurs and increases the wellbeing of all.

In the early 1960s, John wrote a series of articles for Fortune about various industrial firms and business tycoons. Writing these articles involved extensive independent re search and in-depth interviews and led John to realize how much these able, far-seeing men had been maligned and falsely attacked by the ideologues of the left. These articles were published as John's story of American capitalism, The Enterprising Americans (1963, 1991). In 1950a small group of men-FEE Trust ees mostly-established The Freeman, re viving the name that had been used by a periodical edited by Nockfrom 1920to 1924. The editors were John Chamberlain, Suzanne La Follette, and Henry Hazlitt. John had a book review section in every issue and numerous articles, which were published in a 1991 book, The Turnabout Years: America's Cultural Life, 1900-1950. After the magazine was taken over by FEE in 1956, John continued his column, "A Reviewer's Notebook."

John Chamberlain was a very private person; modest and unassuming. He avoided the limelight, letting his printed words-multi millions of them-speak for themselves. And they continue to speak eloquently for this gentle man, genuine scholar, great stylist, and inspiring friend. Mter a brief illness John died on April 9, 1995. He is survived by his wife, Ernestine, six children, 19 grandchildren, and three great-grandchildren. 0 -Edmund A. Opitz 397 398 BOOKS All the Trouble in the World: The Lighter Side of Overpopulation, Famine, Ecological Disaster, Ethnic Hatred, Plague, and Poverty by P. J. O'Rourke Atlantic Monthly Press. 1994 • 362 pages. $22.00 (from Laissez Faire books, $17.95) Reviewed by William H. Peterson {\uiz time: name the libertarian wit who ~declaredjust before the unveiling of the Chnton universal health plan in 1993: "It hasn't even started yet, and already it's not working."