Daily Archives: January 26, 2008

Retirees Are Not Part of a Stimulus Package

Social Security pensioners want to be included as part of the fiscal stimulus package meant to boost the American economy out of its slumping state. This would have two major negative effects – namely, it would:

A) Further bloat the federal budget deficit and shift even more of the onus of responsibility for debt service onto future generations (mortgage our posterity)

B) Skirt the issue of sustainability of the Social Security fund itself

There is no doubt that these suggestions of including pensioners into the proposed Congressional Fiscal Stimulus package are meant purely for political expediency. George Walker Bush (43rd President) earned plenty of enmity for, among other things, his mission to reform Social Security. By the same token, Fmr. Sen. Fred Thompson (R-TN) lost an election bid to the White House due to his [implacable] stance on Social Security reform. Needless to say, elected officials aren’t willing to risk their jobs proposing confrontational agendas with little broad-based political support.

That is why it is up to the people to demand change, to demand sustainability. Social Security pensioners need long-term solutions, namely, benefits that correct for inflation and measures which keep the government’s budget in the black.

For all intents and purposes, Social Security is bankrupt. It is not currently nor was it ever a trust fund. People cite the percentage of income tax that funds their Social Security pension, but that money could go anywhere. The fact that it is denoted “Social Security withholding” means nothing. That could say, “PETA” withholding, which might be unconstitutional, nevertheless, that money funds whatever the government and its agencies want to spend it on.

Briefly, Social Security is invested as a mutual fund and, being as top heavy* as it is, it earns miniscule returns. In fact, in 2005 (one of the most productive market years in recent history), the Social Security account earned a negative one percent return. Not only does [the fund] receive less income than it needs to survive, but the investment is tantamount to a boat with a leak, taking on water in the middle of the sea. When bureaucrats envisaged Social Security, it had more than 40 payers per retiree; now that ratio is less than ten.

From the government’s perspective, then, the present value of Social Security’s future income stream is increasingly negative. This ‘compact between generations’, therefore, is no longer actuarially sound. If private bankers were in charge of reforming Social Security, however, they would establish individual trust accounts, or government-matched 401(k)s, as it were.

In conclusion, the aforementioned hypothetical would be the best solution to our long-term problem, but this push to include pensioners in the proposed Fiscal Stimulus package is a short-term band-aid, which would be nothing more than a feint to distract attention away from the necessary debate over the future of the Social Security regime itself. As such, this policy (of including pensioners) should not be considered in the final drafting of Congress’ bill.

*top heavy. Based on the principle that a large fund requires large gains to achieve a small percentage increase in earnings, whereas small funds require less to achieve more and are therefore more productive, ergo growth oriented. e.g., small caps v. large caps or blue chips. Note: Hedge funds and many other mutual funds remain closed to outside investors to guard against the effects of inefficiency caused by too much money chasing too few opportunities. Big government funding is unproductive for many reasons; this is a prime example.