by Archie M. Richards, Jr., CFP^®
May 14, 2001

And you thought the polls were telling the truth when they referred to Social Security as insurance.

With insurance, you pay the money in, and the beneficiaries get it back later with interest. With Social Security, workers pay money in - boy, do they ever! - but the money goes to retirees immediately. More money is currently coming in than is being paid out. The excess is invested in government bonds, with the cash becoming part of general federal expenditures.

Insurance, my foot. Social Security is partly a transfer of funds from young to old and partly a source of money for legislators to spend as they please. It fulfills the foremost rule of government: Get the money, get as much as you can, and get it now.

Social Security was first put in place in Germany by Chancellor Bismarck in the 1890s. It was designed to provide income to those over age 65. Hardly anyone in Germany in 1890 lived to age 65. Cagey fellow, that Bismarck.

In 1945, there were 41.9 workers for each beneficiary. Social Security taxes were tiny. But two little surprises happened on the way to golden retirements. After the baby boomers popped out of the maternity wards, the birth rate slowed way down, and life expectancy increased tremendously. Fewer workers now fork over to many more beneficiaries.

Crunch time approaches. Only 3.4 aggrieved workers now stand behind each beneficiary. For many, Social Security is the largest tax. The return for beneficiaries is far lower in relation to the taxes paid than would have been earned by U.S. Savings Bonds.

The Social Security trustees say that, by 2030, only two workers will support each beneficiary. But by that time, I expect most people to live something like ninety years, about ten years longer than the trustees project, making the ratio lower than 2-to-1. (By the end of the century, I expect death to be an option, not a certainty.)

But even assuming a ratio of 2-to-1, you don't suppose those two beleaguered workers would allow themselves to be taxed heavily enough to support a retiree they don't even know, do you? You don't think the workers would reelect legislators who impose such a huge tax? The next time a member of Congress uses the word "guarantee" in connection with Social Security, look to see how long his Pinocchio nose has grown.

Social Security is the grandest Ponzi scheme in world history. If a private company sold such a policy and called it "insurance," its executives would be tossed into the jail cell next to Timothy McVeigh. The government, of course, exempts itself from the glut of laws and rulings that regulate the behavior of mere people like us.

For District of Columbia blacks, whose longevity is relatively short, the likely return on Social Security taxes paid is minus-4 percent, with no property rights. Nice going, polls; way to look after the disadvantaged in your own back yard.

Peter J. Ferrara, Associate Scholar of the marvelous Cato Institute (www.cato.org), proposes the following remedies:

• To current retirees, promised benefits would be paid in full, with no reductions.

• Current workers would have the option to stay with Social Security.

• But alternatively, the money could be paid to a private investment account, like a 401(k) plan.

• The worker would select the investments and choose among government-approved investment advisors or mutual funds. The investments could include stocks, although these certainly wouldn't be required.

• No withdrawals would be permitted prior to retirement.

• Upon premature death, the money would be paid to beneficiaries.

• Those who opt out of the Social Security system would receive federal bonds that would cover part of the benefits, according to the taxes they'd already paid.

• The government would guarantee minimum benefits to everyone.

Some twenty countries of the world have privatized their retirement systems. Chili did it nineteen years ago. Its average real rate of return has exceeded 11 percent. The invested funds have been an engine for employment and economic growth. The plan has worked superbly.

Nineteen years seems long enough for a test, doesn't it?