Introduction

Social Security is the grand program created for us by our benevolent and merciful government to save the poor, the vulnerable, the destitute, the sick, the weak, and the elderly. Social Security exists to protect against the "hazards and vicissitudes of life," to keep us from starving on the streets, living in destitution, or growing old in poverty.

What kind of monster would be against this? What sort of people would ever want to deny such basic needs to the most needy? No society with the ability to help would allow good hard working people who truly need assistance to starve or parish. Nor did it before the government intervened. Especially in the American society, being one of the most charitable nations in the world, we have always taken care of our poor and needy. When the Social Security program was implemented there were already many charity groups serving the poor such as the Freemasons, the Odd Fellows, Benevolent and Protective Order of the Elks, Loyal Order of the Moose, Fraternal Order of Eagles, and churches. Furthermore, there were also steps a responsible citizen could take to prepare for the unknown, such as social insurance and prudent saving and investment. The idea that we need a great government program to provide for us is offensive to our American ideal of rugged individualism and an outright taking of our freedom to spend our money as we choose. Social Security is simply a way to increase our taxes and expand government bureaucracy in the guise of social mercy.

The message of President to congress on June 8, 1934, states,

"Security was attained in the earlier days though the interdependence of members of families upon each other and the families within a small community upon each other. The complexities of great communities and of organized industry made less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole though government in order to encourage a greater security for each individual who composes itThis seeking for a greater measure of welfare and happiness does not indicate a change in values. it is rather a return to the values lost in the course of our economic development and expansion" Franklin D. Roosevelt: Message of the President to congress, June 8, 1934

With these words Franklin D. Roosevelt began the construction of the greatest pyramid scheme known to mankind, Social Security. Each worker contributes money through payroll deductions into the "trust fund" and that money is then immediately paid out to the current beneficiaries. This means that there is no trust fund and that in order for benefits to be paid you have to have an ever expanding pool of depositors.

Charles Ponzi is infamous for this very same concept. He devised an investment fund that pays large dividends yet requires no initial investment by the first beneficiaries. The first investors are paid by the new investors, and the new investors are paid by the even newer investors. This system is a great investment plan as long as an ever enlarging pool of fools can be found. This scheme is now illegal due to the fact that it cheats the last investors out of their investment and profit. The government overlooks the ethical concerns of such an investment scheme and implements it as a mandatory retirement program. Unfortunately for the social security system, this pool will cease enlarging. Now following the model of the original Ponzi-scheme, the last pool of investors will be cheated out of their return on their investment by 2012 when the baby boomers begin to retire. Even more discouraging is that the entire system will be bankrupt by 2029 if we maintain our current course.

What do we do? Now that the government has lulled us into a sense of security by promising us the world? They have depleted our ability to save by withholding a huge percentage of our wages. They have told us that Social Security will provide for our comfortable retirement. Now we find out that the nay-sayers were right, the government can not be trusted with our retirement. The system is going bankrupt, so how will we retire now?

There are only two answers to this question: We can increase payroll deductions to pay the ever increasing pool of beneficiaries, destroying the economy and putting an unfair burden on the younger generation; or we can privatize the system and allow people to make their own investments, infusing the economy with new investment capitol and providing our retiring population with a much higher standard of living.

The answer is clearly privatization.

Social Security is Unconstitutional

"The road to hell is paved with good intentions."

Assumptions:
1. The Social Security System was founded in paternalism and political rent seeking, quite contrary to the rugged individualism of our framers.
2. The Social Security System violates the framer's view of freedom and property.
3. The Social Security System violates individual rights as provided by the framers.
4. The Social Security System violates the provision of the constitution that says that the states are to retain power in times of peace and the federal government in times of war.

The entire Social Security movement was founded in uncertainty and fear. It was a program with good intentions in mind and political motivations in heart. In the year 1935, America was in the worst economic depression in the history of our country. Americans were concerned and demanded answers to their problems. Our president at the time, Franklin D. Roosevelt, was a proponent of big government. He believed that all social ills could be solved by careful government planning, even such ills that were already being taken care of by the private sector. Congruent with such beliefs, he appointed the Committee on Economic Security to study the problem of economic insecurity and make recommendations that would serve as the basis for future legislation. The CES studied the issue of economic security by focusing on European social programs and American input though a forum on Social Security. Given the turmoil in the American economy and the socialist nature of Europe the committee's recommendations had a liberal slant. The committee developed a report to congress and drafted a detailed legislative proposal.

President Franklin Roosevelt justified this expansion of the federal government with these words:

"Long before the economic bring of the depression descended on the Nation, millions of our people were living in wastelands of want and fear. Men and women too old and infirm to work either depended on those who had but little to share, or spent their remaining years within the walls of a poorhouseThe social Security Act offers to all citizens a workable and working method of meeting urgent present needs and of forestalling further needWe have come a long way. But we still have a long way to go. There is still today a frontier that remains un-conquered-an America unclaimed. This is the great, the nationwide frontier of insecurity, of human want and fear. This is the frontier-the America-we have set ourselves to reclaim." President Franklin Roosevelt.

Examine the above language. Does this sound more like a plan for reelection or a plan for Social Security? Blatant rent seeking of President Franklin Roosevelt taints his statements; his glutinous paternal language makes a mockery of the American people.

This proposal, which was passed in August of 1935, created a social insurance program designed to pay retired workers age 65 and older an income post retirement. The program was very popular at that time and still is today. However popular support is not enough for a public program to be considered valid. There are constitutional issues that were never resolved. The framers of our constitution would never have consented to such a program where the government became so huge and bureaucratic. They knew that a big government would take away the rights of the American people. David Kelley, author of A Life of One's Own, explains "Just as the idea of a constitutional right to welfare is at odds with the Founders' legal conception of the function of government so the idea of a basic human right to welfare is at odds with the Founders' philosophical conception of the rights of the individual."

The rights of the individual were most strongly stressed by our Founders. The powers of the state were never to infringe on these rights. In order to completely understand the founder's intentions you first have to become familiar with the concepts of negative and positive freedom. In laymen's terms a negative freedom is freedom from something and a positive freedom is freedom to something. Free speech is a negative freedom. It is being free from governmental controls on your right to express yourself -- whereas an example of positive freedom would be social security, a right to a retirement pension. On paper the two concepts seem to coexist. In reality quite the opposite is true. Positive freedoms actually usurp other people's negative freedoms. They do this by taking away your right to choose, your right to decide where and what to spend your money. This is how the Social Security program is a violation of your individual rights. Neither the criminal nor the government has the right to take your wealth for the sole purpose of redistributing it to others. This is only a restriction on our freedoms. Perhaps if Social Security existed in it's purported form, as a trust fund, it would be valid, stretching it's constitutional validity, but far better than the Ponzi scheme that exists now. For the young generation Social Security is nothing but a very costly social welfare program. For the elderly it is simply a very bad investment program.

Secondly, the Social Security program steps on the toes of the constitutional mandate of a small federal government. If a program such as Social Security was willed by the people it was never to be provided by the federal government. The creators of our constitution did not want the federal government to become so huge. As The Federalist Papers read: "The operations of the federal government will be most extensive and important in times of war and danger; those of the State government in times of peace and security...the State government will here enjoy another advantage over the federal government. "

As wonderful and romantic as it would be to see all of our elderly taken care of by a wonderful government program designed to paternally provide for it's population, it is simply not constitutional. The federal government is specifically denied these powers, yet it still exercises them. Therefore, privatization is the only constitutional option. Furthermore, it is the only moral option. For how can we be free if we cannot even be free to decide where to spend our money?

The American citizen that prefers the government to provide for their needs rather than provide for themselves is simply not an American. It is against every fiber of an American's moral being. Our founders came here and fought for our freedom to free us from such paternalism. We are Americans, we are proud, we are accountable, we are capable, and we are free. Social Security takes this freedom away and insults the filament of rugged individualism in each and every one of us. We were not founded in collectivism, we were founded in individualism. The right of the individual is most sacred, the rights of the group irrelevant.

Privatization: Our Only Option

Assumptions:
1. Social Security Privatization gives control of their financial future back to the American people.
2. Social Security Privatization produces higher returns and greater benefits to the American people.
3. Social Security Privatization gives Americans back his or her private property rights.
4. Social Security Privatization creates wealth and instills a sense of pride in the American economy.
5. Social Security Privatization empowers the individual to control his or her retirement investment and rewards their hard work via a growing account balance.
6. Social Security Privatization will improve the overall economy of the United States by providing an increase in savings and investment.

Social Security Privatization is allowing the American people the right to choose where to invest and save their retirement dollars. It allows Americans to invest in any option that they choose, from 401k plans, to stock index funds, to a simple savings account, the investment option being whatever you want it to be. The government currently subtracts 12.4 percent of our pay checks every month. This is a sizable portion of our withholdings. Instead of this 12.4 percent being funneled through a federal bureaucracy, it would instead be invested in ways you choose so that your dollars can be used to promote your cause or invested in the most efficient manor.

Privatizing has many benefits to every investor. The returns are much greater than Social Security. For current workers the return on their investment is approximately 2 percent, which is very bad. What is worse though is that for younger workers the return to dollar invested ratio is actually negative, meaning you are not even getting what you put into the system. Under privatization we can take full advantage of our very efficient economy, investing in a diverse pool of investments which would allow us to gain maximum returns with minimal risk. Investors could also choose the aggressiveness of their investments. The could purchase government bonds for ultimate security which would return between four and five percent. Alternatively, they could choose a stock fund which as of late has been returning an average of fifteen percent. Ultimately the choice is yours.

Under Social Security we have no ownership of our retirement fund. It belongs to the government in the commons - the commons being a very dangerous place. Our politicians, rather than using the money for our retirement, would rather spend it for their re-election. Besides there is no fund in existence, there is simply just a promise to pay. Which coming from our current government, the promise is a hallow one. As best summed up by P.J. O'Rourke, a Cato Institute Mencken research fellow.

"Debts owed to the government by the government are absurd in the first place. Furthermore, these IOUs have the same force of laws as, oh, the statutes against perjury and obstruction of justice in a case against the president of the United States involving sex."

Under privatization you would own your own account. As novel as it sounds, it works. Rather than having some politician siphoning money off of your retirement to provide us with a bloated federal government, you will have your own account which you can watch grow and pass on to your children.

As if the benefits above were not enough, the list goes on. Privatizing social security makes the American people, rich an poor alike, stockholders in our economy. This has multiple functions in our economy. First of all, it allows workers to feel a sense of ownership in their company, giving them an incentive to work hard, further fueling the economy. Secondly, this very investment provides the capital for further economic growth to be discussed in later paragraphs.

Social Security Privatization makes the worker a residual claimant in the economy. Through their prudent investing, workers gain the positive benefit of seeing their accounts grow and bloom. Every promotion they get at work makes their account grow faster, providing workers with more incentive to work hard. Whereas in the current system you are penalized for growth with higher taxes and no higher returns, in this system if you make more money, you get a better retirement. This also provides a seed to plant for the younger generation, as they get to keep what is not used in their parent's retirement. In contrast now if your parents die at age fifty-five they don't receive a penny of their life long investment, and neither do you!

Finally and most significantly, the privatization of the Social Security system has been called by experts the $10 trillion opportunity. First, let's look at the numbers. According to Martin Feldstein, a professor of economics at Harvard University and President of the National Bureau of Economics research:

"The average growth of real wages singe 1960-2.6 percent-can serve as a reasonable estimate of what an unfunded Social Security program can yield over the long-term future. In contrast, the real pretax return on non-financial corporate capital (i.e., profits before all taxes plus the net interest paid) averaged 9.3 percent over the same period."

What this means is, in simple terms, that $1000 of Social Security dollars would yield $1900 of retirement income (after 25 years). Under privatization it would only take $206 to yield $1900 dollars of retirement income given the 9.3 percent historic investment return rate. As is apparent, Privatization would allow much more attractive retirement options, allowing the golden years to be truly golden. Moreover, just the very act of privatization according to Feldstein would "raise the well-being of future generations by an amount equal to 5 percent of gross domestic product each year as long as the system lasts." This means we are 5 percent better off every year than the year before more than if we had current the current Social Security system (in dollars this is 10-20 trillion) . This is like having your raise at the end of the year doubled (average yearly raise is 5%) every year simply because you are eliminating waste and misinvestment.

We simply can not afford to not privatize. It is any wonder, and a true testament to the American economy, that we have progressed this far with such horrible financial policies. Ludwig Von Mises stressed this point best in his words: "The policy of the United States is worse than bad-it is insane." If we wish to remain competitive with the rest of the world we have to put our best foot forward, allowing investment capitol to flow where it is most needed and where it is most efficiently utilized. The current system, if left unchecked, will bankrupt the American people and place use behind the rest of the world. No more will the United States be the market dominator. Emerging markets with better financial polices will knock us off of our pedestal, forever ending the days of American glory.

Popular Concerns of Privatization

Questions
1. What about the workers that have paid into the system and are loosing benefits?
2. What about the huge transition costs associated with privatization.
3. What about the plight of low income workers, won't privatization hurt them?
4. What happens to the disability and survivors benefits provided by the current Social Security Program? 5. Why not have the government invest my money under the current system?
6. Why start from scratch? Why not just save the current system?
7. Isn't the stock market too risky for retirement income?
8. What happens if I lead a very unfortunate life and my account is not adequate for my retirement?

There are many fears about the Privatization of the Social Security system and not without reason. This is a huge undertaking, with many variables, but privatization is the only option. The benefits are tangible and the negatives negligible.

The most common concern of privatization is of the middle-aged baby boomers. What will become of them and the huge 20 year investment they have already made into the social security system? According to the Cato Institute:

"Social Security is now such a bad deal for younger workers that up until about age 40 or 45 they will probably still be better off in the private sector even without the refund of any past taxes, as long as they no longer have to pay into Social Security in the further and can use all of those fund for their private investment accounts instead."

The returns on Social Security presently are so dismal that as long as you could stop paying into the system you could at least retire as well if not better without Social Security, relying solely on your personal investments from 40-45 on. The current retirees and those who would not be able to recoup their losses from privatization would be allowed to stay in the current system, being paid benefits out of the general revenue.

According to Michael Tanner and Peter Ferrara, much of this additional expense would actually be funded by the higher economic growth provided by the additional investment capitol in the economy, thwarting the transitional gains trap . Furthermore, we are going to have to pay the money one way or another. According to Milton Freedman, a Nobel Prize winning Economist:

"To see the phoniness of "transition costs" (the supposed net cost of privatizing the current Social Security system), consider the following thought experiment: As of January 1, 2000, the current Social Security system is repealed. To meet current commitments, every participant in the system will receive a governmental obligation equal to his or her actuarial share of unfunded liabilityThere are no 'costs of transition.' The unfunded liability would simply have to become funded"

Whether we privatize or not we will still owe the same amount to each participant. By privatizing now though we will reduce that liability from growing in the future.

Low income workers actually have as much to gain from privatization as anyone else, if not more. Social Security costs too much and returns so little it is not a good deal for anyone. How could it get worse? One in ten seniors live in poverty now. This figure will only improve in privatization. A member of the Senate put it best: "There is no more Democratic idea than building a generation of wealthy Americans who participate in our economy rather than feeling isolated from it." -Senator Bob Kerrey (Democrat Nebraska.)

What about the survivors benefits and Disability provided by the current Social Security program? Of the 12.5 percent withholding every month, simply divert 2 percent of that to a private disability and life insurance program. This would provide better benefits and much less cost than the current system.

Some suggest that rather than scrapping our current system, we should improve it by having the government invest the money in the Social Security System. Alan Greenspan sums it up best with his wise words "Has very far reaching potential dangers for a free American economy and free American society." This would bring government intervention to a new high, creating political investment strategies, social investing, etc. Government would be the largest single investor in the Economy, resembling Communism and providing it with undue influence.

Why not just save the current system? It would be much less effort than starting from scratch. That answer is simple - the current system is simply too inefficient and too expensive. We would have to raise Social Security taxes to 18 percent and cut benefits by 25-33 percent to keep the system solvent. This would raise the number of elderly living below the poverty line to a devastating high.

The stock market is too risky for investment of retirement income. The stock market actually in the long term has been growing at an average rate of 7.56 percent, including the Great Depression. Today average returns are between 12-15 percent. Furthermore, a diverse portfolio would not rely on stocks alone, but a combination of stocks, bonds, and treasury bills.

What happens if your retirement pension is not adequate for survival? Then you must rely on the charity of others. America is one of the most charitable nations on the planet and with the extra income they will receive upon retirement, willing people could and will donate to private charities to provide for the unfortunate. Never in American history have the elderly been forced to starve on the streets pre or post Social Security.

Conclusion

The case is so clear, the benefits so tangible, it is any wonder why Social Security is not already privatized. P.J. O'Rourke summarizes it best with these words:

"We're all getting what we want from Social Security without understanding it. This is what economists call 'rational ignorance.' Old folks get something to carp about - the $770 average monthly payment. Young folks get to tell old folks to shove off: That $770 will be a fortune in Sun City; we need the spare bedroom for a home gym. A huge number of government bureaucrats get a huge government bureaucracy to run. And politicians get an issue that everybody's for and nobody's against. Plus, every couple of election cycles there's a 'crisis' with this issue - a crisis that politicians don't have to understand, either, but that allows them to make thoughtful, caring and statesmanlike noises."

The above quote is very pessimistic indeed, but there seems to be no better reason, than P.J. O'Rourke's words on Social Security, why such a insane system would still be in existence, or ever come into existence. We can only hope that the eyes of the American people will open and the damage corrected before it is too late and the American economy is in ruin.