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The
Very Big Insurance Company
Suppose
the Very Big Insurance Company sold millions of retirement policies to
the workers of America. For a modest monthly premium, Very Big promised
every policy holder a financially secure retirement. The Very Big
Insurance Company gave each worker an individual contract and an annual
statement of retirement benefits.
Unfortunately,
Very Big's executives underestimated the cost of these benefits, and
spent most of the money that had been entrusted to them. This went on
for many years. Eventually, however, an auditor figured out that
although Very Big had enough cash flow to cover current retirement
policy benefits, it did not have enough income to cover future
liabilities. The Very Big Insurance Company was headed for certain
bankruptcy.
But
Very Big's executives had a ready answer. "All we need to do is
increase the cost of worker premiums and reduce the benefits we promised
to pay to future retirees. That way, we can remain solvent". The
auditor, however, was still nervous. "What happened to all of the
money Very Big received for premiums?" Very Big's executives
dismissed the auditor's concern. "We spent it, and its gone."
Now
I have a few questions.
Were
the executives of The Very Big Insurance Company completely honest? Did
they defraud the workers of America? Did they misrepresent their
intentions? Did they squander the premiums? Did they breach their
contractual obligation? Did they violate their fiduciary responsibility
to the retirement policy holders?
And
more questions.
If
Very Big's Enron style of accounting were discovered by our politicians
in Washington, would there be a big stink? An investigation by multiple
Congressional Committees? Much pontificating by breast beating
politicians? Would the Justice Department take action? Would the press
have a field day with allegations, conjecture, and soap opera style
reporting?
This
is a very sad day for America. But the answer to all of these questions
is: YES.
How
can Very Big's executives get away with it?
Because
they are politicians. We have been conditioned to expect them to pull
stunts like this.
And
now Very Big's executives, - hands still firmly clenched on the goodies
in the tax cookie jar - tell us they are going to fix the Social
Security mess.
Why
should we believe them?
The
Congressional Credibility Problem
In
my previous article on Social Security "Will Social Security
Bankrupt America?", I pointed out that Social Security accounting
is done with smoke and mirrors, there is no such thing as a "Trust
Fund", and – for the reasons discussed in the article – the
Federal Government may not have the resources to finance future Social
Security benefits. Congressional comments, on the other hand, frequently
convey the belief that Social Security can be fixed with some minor
tweaking. Democrats like Kennedy and Boxer even claim there is no
"crisis".
That's
absurd. These people obviously slept through their accounting and
economics courses.
Congressional
members who sink into the sludge of extremist squabbling make themselves
part of the problem, rather than a contributor to the solution. We are
witness to a never-ending power struggle between the NeoCons and the
Liberals. Such theatrics make great press. But it is difficult to see
how Congress can assure the financial viability of Social Security if
legislative reasoning is based on political bias, rather than a
realistic assessment of future revenues, liabilities and cash flow.
And
oh yes, a spirit of teamwork. You know. Do
something for the American worker.
As
things stand, Congressional ideology reflects either a pervasive
ignorance or a deliberate disdain for any sense of fiduciary
responsibility. If Social Security
is merely a source of tax revenue, then Congress can ignore the
possibility that American workers
have a legitimate claim against the assets of the Federal Government.
Accounting can be deceptive. The terms "assets",
"liabilities", and "cash flow" need not appear in
the debate.
Thus
we see multiple members of Congress talking about the Social security
"surplus". What they don't realize, or perhaps chose to
ignore, is that the current surplus is merely an excess of collections
over distributions. In other words, Social Security is running a
positive cash flow. That's nice. Unfortunately, however, Congress has
every intention of spending that money to fund the federal Budget.
Congress also deliberately ignores, or perhaps doesn't understand, that
every dollar of this "surplus" should be – under lawful
accounting procedures – offset with a dollar of liabilities. In other
words, Congress is willing to recognize cash on hand, which is an asset,
but is unwilling to acknowledge that future benefits represent a balance
sheet liability.
And
these people are making fiscal policy??
The
Cooke Social Security Proposal
Since
rational thinking appears to have been overwhelmed by nasty political
power struggles in Washington, it is up to us poor economists to suggest
a solution for Social Security. I thus have a plan. It's a very simple
plan. Even Teddy Kennedy should be able to understand how it works.
Every
good plan starts out with a clear statement of purpose and a set of
specific objectives.
Purpose:
The fundamental purpose of Social Security is to provide American
workers with a dependable source of monthly income when they retire.
Objective
One: Social Security must be administered by a system of management that
has a defined fiduciary responsibility to present and future
beneficiaries.
Objective
Two: Social Security funds must not be co-mingled with Federal Tax
revenues.
Objective
Three: Congress must divorce itself from any involvement in the
management of the Social Security system.
Objective
Four: In order to insure its ability to meet current and future
beneficiary obligations,
Social
Security must have a viable financial structure.
Social
Security represents a contractual obligation between the Federal
Government and the workers of America. It is part of the Social Contract
that exists between any government and those who are governed. As such,
Congress has an obligation to put a plan in place that is trustworthy as
to purpose, and credible as to substance.
There
must be an explicit benefits plan. Each participant must have an
individual account that is tied to a record of earnings. Beneficiary
accounts must be guaranteed by a legitimate and unimpeachable
"Trust Fund".
The
entire Social Security program must be privatized and administered for
the benefit of its participants. The Social Security Administration
should be structured as a quasi-public institution with appropriate
rules for the recognition of income, expenses, assets, liabilities, and
cash flow. There must be an independent Board of Directors who are
charged with overseeing policy and operations.
There
must be a set of financially responsible investment criteria. In order
to secure the financial viability of the Trust Fund, Social Security's
administrators must be able to cash existing Federal Government IOUs on
a reasonable schedule of repayment.
Assuming
the Federal Government wants to continue its practice of borrowing money
from the fund, and to insure such borrowing is financially responsible,
a new investment vehicle will be created. Called Federal Revenue Bonds,
these instruments would be limited to the funding of capital formation
projects that – over the life of the bond – would be repaid, with an
appropriate rate of interest, by the revenues generated by the physical
asset thus created. The Social Security Administration would have the
right to accept, or reject, each proposed project. Examples of such
projects include bridges, toll roads, port facilities, airports, office
buildings, hospitals, schools, and rail yards.
In
addition, the Fund would be able to make short term loans using existing
available instruments such as bank, corporate, and treasury notes. The
fund would also be enabled to purchase credit worthy revenue bonds
issued by individual State governments.
Although
the interest payments and capital gains from these financing vehicles
would not be spectacular, they would be as secure as our economy and
they would provide a steady flow of income into the fund.
The
Result
As
an independent quasi-public entity, with an independent Board of
Directors, Social Security can become the retirement fund that we were
promised when Social security was established in 1935.
Is
this too much to ask?
©
2005 Ronald R. Cooke
The Cultural
Economist
Author, "Oil, Jihad &
Destiny" and "Detensive Nation"
Editorial Archive
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