Sunday, October 31, 2010

The Democratic Threat to Social Security

One can always tell that Election Day for federal offices is getting close in the United States the more one hears Democrats accusing Republicans of wanting to threaten Social Security with cuts in benefits or “privatization.” This scare tactic, targeted to frighten senior citizens away from voting for Republicans, even though none of their proposals would affect retirees or even those close to retirement, is the Democrats’ favorite trick in their playbook, one that has been disproved time and time again.

The most significant threat to Social Security is that, in the absence of reforms, it is going bankrupt. The bankruptcy of the retirement system created by the federal government is being hastened by overspending by the liberal Democratic Congressional and President Barak Obama, including the spending of the Social Security trust fund for other purposes. Unless Social Security is reformed for younger workers, the retirement age will have to be raised, benefits reduced or taxes increased. In fact, the last tax increase on Social Security was part of Democratic President Bill Clinton’s tax increase in 1993, of which no Republican member of Congress voted in favor.

The proposal to allow younger workers to choose to invest a small portion of their Social Security would be less risky for retirees than allowing Social Security to collapse. The current return on the investment of the Social Security trust fund money is low, but it has been low even under the most prosperous conditions. Workers should be allowed to invest some of their own retirement account funds in relatively safe instruments, such as government bonds. The risk in investing in stocks, which have always gained value over the long term, is minimized by the restriction on the amount of one’s Social Security account that could be exposed to risk (usually the proposal is only for a few percent); moreover, the risk would also be minimized by diversity (e.g. through a managed mutual fund, or a combination of equities, bonds and other instruments) instead of requiring the retiree to pick and choose individual stocks.

The argument about the current decline in the stock market is only relevant for those who sell during the downturn. Like homeowners whose home values have declined, those whose stock values have declined only realize those losses when they sell. Indeed, those who have not sold their stocks have benefited from a significant recovery in the value of stock, even though it is down from the highs it reached in 2007 before the recession.

The Democrats’ claims that Social Security is threatened by Republicans, even though they are false, underscore the fundamental problem with a government pension system: its vulnerability to politicians. However, the threat is not from any supposed mean-spirited politicians who would renege on the pledge of providing income for retirees who have contributed to the fund and relied upon it for their retirement plans. The threat is from those liberal Democratic politicians who would renege on the pledge of Social Security by spending away the money.

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