One of the biggest
problems with Social Security — with any of the social welfare programs in
place in most countries in the world today — is the fact that they are being
used to do something that they were never intended or designed to do: be the
primary or even sole source of income for people no longer working or unable to
work. Social Security was intended as an
economic safety net, a sort of systemic poorhouse to ensure that no one fell
through the cracks.
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| A tontine advertisement. |
Thinking of it
that way, we realize what went wrong with the idea and its implementation. Originally, Social Security was set up on the
premise that a whole lot of people would pay in, but only a few would receive
benefits. Most people would never get
anything, as it was expected that most of them would die before reaching the
age of 65. A small amount paid in by a
large number of people meant that those who survived long enough to qualify for
benefits would receive far, far more than they paid in — sort of like a tontine
. . . which, by the way, are illegal now almost everywhere that we know of.
What’s a
tontine? A sort of lottery, usually put
together for some charitable purpose.
It works (or used
to work) this way. People buy tickets,
and the money collected is invested. As
the earnings come in from the investments, admin costs are paid, and the
remainder is paid out to subscribers: those who bought tickets. As subscribers die off, the amount
received by the survivors increases, with the last survivor getting all the
income. When the last survivor dies, the
principal is given to the charity.
One of the
reasons tontines are now illegal most places is that there was an incentive to
kill off your fellow subscribers to increase your income. Social Security isn’t quite that bad, but the
“tontine problem” still exists: it only works if many pay in, and few receive
benefits.
In an effort to
reduce the number receiving benefits without reducing either benefits or the
number paying in, most proposed solutions focus on delaying benefits in the
hope that more people have the decency to die before they start receiving
benefits. There is also the idea that
increasing the amount and type of income taxed will increase pay-ins, thereby
maintaining the expected level of pay-outs.
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| Reagan at the Presidential Task Force for Economic Justice |
Feldstein’s
solution that we looked at yesterday is this sort of thing, i.e., increase the amount fewer people
pay in, and hope there are even fewer people to receive it. Ironically, Feldstein was an adviser to
President Reagan, who supported a much better solution: a Capital Homestead
Act.
The idea behind a
Capital Homestead Act is not to get a lot of people paying in for the benefit
of a few receiving payouts, but to have everybody purchasing capital assets on
credit, paying for the assets with the earnings of the capital itself. You increase your income not by eliminating
your economic rivals, but by working with them to become more productive.
In a tontine — or
Social Security — the problem is how to increase the number of people who get
little or nothing, so that there are fewer people to divvy up the income
generated out of past savings. The more
losers there are, the better off the few winners will be . . . until someone
kills them. Lose-lose.
In Capital
Homesteading, the problem is where to get the money so that people can borrow
enough to purchase capital to generate enough income without taking anything
from anyone else. The more losers there
are, the worse off everybody becomes. If
everybody has capital, however, everybody is better off, because when other
people have money, they can buy what you produce with your capital, giving you the money to buy what they produce. Win-win.
So, where is the
money to come from so everybody can own capital? We’ll take a look at that tomorrow.
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