THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Thursday, March 5, 2009

Saving Social Security

As everyone knows (or should know, given that the book Capital Homesteading for Every Citizen is available as a free download on the CESJ web site), the Social Security and Medicare systems are headed over an extremely high cliff of bankruptcy in the not-too-distant future, and CESJ developed Capital Homesteading as a way to address this problem. Thus, the subtitle to Capital Homesteading is "A Just Free Market Solution for Saving Social Security," even though the proposals in the book apply to the economy as a whole, not just Social Security and Medicare.

Early this morning we received an e-mail from a student who had read my article on the "Helium" web site on the subject, "Should Social Security Be Reformed to Include Personal Retirement Accounts?" The student's concern was an upcoming presentation on personal retirement accounts and social security for an economics class, and was having trouble with my presentation and the topic in general.

The student asked if I could send my basic talking points on the issue, and why I feel that way. Although the problem with Social Security has not been in the forefront of the news (for some strange reason we're more concerned with the immediate economic disaster than the one projected a few years from now), it is still a critical issue, and must be dealt with. For that reason, we decided to post a slightly revised version of our response to the student.

The best place to go to get the full picture on the proposed reforms of the Social Security system is the web site of the Center for Economic and Social Justice,, where a free download of the book, Capital Homesteading for Every Citizen, is available, as well as a link to a dedicated web site. The chief talking points are:
• All current promises must be kept. Anyone who paid into the current system is legally entitled to receive the promised benefits.

• All new capital formation (i.e., all new investment in productive assets of all kinds) should be financed not by cutting consumption or out of existing accumulations of savings, but by using the commercial banking system and the central bank (the Federal Reserve System) as designed and intended. That is, per "Say's Law of Markets" and the "Real Bills doctrine," money can be created by the banking system without inflation IF the money created through the extension of bank credit for loans discounted at the central bank is made ONLY to finance capital formation.

• To ensure as far as possible that all new capital formation proves feasible, and that Say's Law and the Real Bills doctrine function properly, the new capital must be broadly — and directly — owned by as many people as possible, so that they will use the income after debt service for consumption, not reinvestment.

• Each citizen will receive — as a right of citizenship — the right to borrow the per capita amount of new capital to be formed during a period. It's important to note that this does not involve printing money and then investing it, but the right to participate in the creation of money via the extension of loans by commercial banks for qualified capital projects. The money is not (and cannot) be created until and unless a financially feasible project is presented to a commercial bank, which then turns around and discounts the loan at the Federal Reserve, which then creates the money. If no feasible investment is found, no money is created.

• Each citizen will be permitted to accumulate up to (we estimate) $1 million of capital assets (i.e., income generating, not speculative) "tax free" by allowing a lifetime total tax deferral of up to $1 million for dividend/investment income used to make payments of principal and interest for assets deposited into a tax sheltered "Capital Homestead Account." Any dividends used for consumption purposes would be taxed as regular income to the recipient, but tax deductible at the corporate level. Any assets removed from the Capital Homestead Account would be taxed as regular income to the account holder, or his or her heirs if distributed due to death of the account holder. (An heir could defer taxes on any such inheritance — or any inheritance, for that matter — by depositing the assets in his or her Capital Homestead Account.) Note that this is a deferral, not an exemption; eventually the accumulations will be taxed. These accumulations will supplement and, eventually, replace Social Security and other entitlements, except in cases where investments fail or there has not been enough accumulated. In that case, the Social Security system can then function as originally intended: as a "safety net" for those who do not have sufficient savings (investments) to generate enough income on which to live in a manner befitting the demands of human dignity. Portfolio insurance would also reduce reliance on Social Security.

• To accelerate these accumulations as fast as possible and pay down the growing deficit, the tax system will be reformed to merge all Social Security and Medicare taxes into the general tax rate. Most deductions would be eliminated, but the personal exemption would be increased to (we estimate) $30,000 for a non-dependent, and $20,000 for a dependent, giving a "typical" family of four a tax-exempt income of $100,000. The tax rate above the increased exemption would be a single rate determined by the size of the budget and whatever was needed to repay a reasonable portion of the deficit. All income would be taxed at this single rate, not excepting inflation-indexed capital gains and dividends. The tax deductibility of dividends at the corporate level added to the ability to finance new capital formation by bank credit collateralized with capital credit insurance would remove the current incentive to retain earnings and withhold dividends from investors.
We believe that these measures (and others) would not only address the coming crisis in Social Security and Medicare, but the current economic meltdown that seems to have baffled politicians and economists from all across the spectrum.