Why the Democrats won’t Privatize Social Security

Posted by PITHOCRATES - January 24th, 2013

Politics 101

FDR Transformed the Country because he had a Great Crisis to Exploit like the Great Depression

Once upon a time in a place that seems far, far away there was once a people that saved for retirement.  The savings rate was so high in this mystical land that businesses were able to borrow money at low interest rates to expand their business.  And there was great employment.  Then came an evil ogre who hated savings.  And responsible behavior.  He saw money saved as money leaked out of the economy.  Hurting economic activity.  His motto was spend don’t save.  And don’t worry about how you will take care of yourself in retirement.  So this evil ogre set out to destroy savings and responsible behavior.

That evil ogre’s name was John Maynard Keynes.  Who empowered governments with his inflationary monetary policies.  Allowing governments to spend a lot of money.  Giving them a lot of power.  By getting as many people dependent on the government as possible.  Keynes met with Franklin Delano Roosevelt during the Great Depression.  To offer him ideas of how to spend his way out of the Great Depression.  FDR didn’t think much of Keynesian economics.  For he did try to maintain the gold standard.  But he loved spending money.  And getting people dependent on the government.

FDR gave us Big Government.  He did the things Woodrow Wilson wanted to do.  But Wilson couldn’t because he didn’t have a crisis like the Great Depression to exploit.  FDR did.  And he was able to transform the country because of it.  People saved less.  And government spent more.  Which led to deficit spending, massive debt and inflation.  And perhaps the cruelest thing he did was impoverish the retiring class.  By taking their wealth through taxes and inflation.  And making them dependent on a meager Social Security benefit.

Social Security Contributions would create a Bigger Nest Egg if Invested in the Private Sector

After seeing so many poor, hungry, homeless, etc., during the Great Depression government did something.  They punished those who saved responsibly for their retirement.  By redistributing their wealth to those who didn’t.  It seemed fair and just and kind.  And there was an element of that in providing a social safety net for our most vulnerable people.  But that wasn’t the intent of Social Security.  FDR wanted to transform the country.  Which he did.  And today they forecast Social Security will go bankrupt in the coming years.  Requiring ever more wealth redistribution.  All while making Social Security recipients live a more impoverished retirement than they would have.  Had they saved for their own retirement.  A true transformation of the richest country in the world.

So let’s look at the numbers.  Your Social Security contributions are technically saved in a ‘retirement account’ that accrues interest.  Each payroll period both employer and employee contribute to this ‘retirement account’.  Via a tax rate on a person’s gross pay up to a maximum amount (see Historical Payroll Tax Rates).  So let’s see what this would have done in the private sector.  Year by year.  With the following assumptions.  The worker enters the workforce at 18 and works until retiring at age 65.  The worker earns the maximum amount for Social Security taxes.  So all of his or her earnings are subject to the Social Security tax.  With each successive year we add the current contribution to the running balance in his or her retirement account.  The annual balance earns interest at 6% (including anywhere from 2-4% real return on their retirement investment and the rest of that 6% accounts for inflation).  The following chart shows the beginning 5 years and the final 5 years.

Here we can see the power of compound interest.  As we earn interest on both our contributions and the previous interest we earned.  Note that the total contributions for 48 years of work total $282,608.38.  Which earned a total of $540,413.12 in interest.  Bringing the retirement nest egg up to $823,021.50.  Again, this is assuming that the Social Security contributions were actually private retirement savings.  That thing John Maynard Keynes hated.  So this is what a retiree would have to live on in retirement.  Had his or her money not gone to the government.

The Purpose of Social Security was to make People Dependent on Government and Redistribute Wealth

Now let’s look at what kind of retirement that nest egg will provide.  Starting with some more assumptions.  Let’s say the retiree lives 35 years in retirement.  Reaching a grand old age of 100.  Not your typical retirement.  But one this retirement nest egg can provide.  For someone with fairly modest means.  Each year the retiree lives on $53,553.  At the end of the year they earn interest on their remaining balance.  Which helps to stretch that $823,021.50 over those 35 years.  The following chart shows the beginning 5 years and the final 5 years of that retirement.

Note how that $282,608.38 in retirement contributions can provide $1,874,355 in retirement payments.  Again, that’s the miracle of compound interest.  So what kind of retirement would Social Security have provided?  Someone who retires after working till age 65 who was earning $110,100 near retirement will receive approximately $24,720 annually in retirement.  Over 35 years of retirement that comes to $865,200 in retirement benefits.  Which is $1,009,155 less than someone would get investing in a private sector retirement plan.  Or a reduction of 53.8%.  Which is what people lose when letting the government provide for their retirement.  So Social Security is a very poor retirement plan.  Besides going bankrupt.  Which is why the Republicans want to give younger workers the option to opt out of Social Security and provide for their own retirement.  Which makes sense.  And would probably increase their quality of life in retirement.  As shown above.  So why are the Democrats so opposed to privatization of Social Security?

Because the purpose of Social Security was not to provide a quality retirement.  It was to make people dependent on government.  To redistribute wealth.  Increasing the power of government.  And for those things Social Security is a resounding success.  But there is one other thing why Democrats oppose privatizing Social Security.  What would happen if the person that built up that $823,021.50 nest egg died 5 years into retirement?  Who would get the remaining $781,392.18?  The retiree’s family.  Whereas if a Social Security beneficiary dies 5 years into retirement the government keeps their money.  To spend as they please.

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