Thursday, February 10, 2005


Many pundits have noted that the number of persons paying social security has and is declining relative to the number of persons drawing. John Mauldin at "Thoughts from the Frontline" has written about the problem in terms of "old age".

The Social Security actuary tables are built based on an average life expectancy of 77 years. We all know that life expectancy is increasing. It is becoming routine for the surviving spouse to live to 95 or more and to draw Social Security for 25 years or more. Will this be extended to 35 years? When I was 12 to 15 years old, several of my Dad's fellow engineers had heart attacks and died before they reached retirement. Life expectancies have increased 10 or 12 years in the past 30 years.

The Social Security plan was not a bad plan based on what we knew 60 years ago. In today's world it is a flawed plan. The youth of today have little chance to get back the payments they are making to their grandparent's generation. There is a reasonable chance that the youth of today will spend more years in retirement than years working. O.K. maybe the youth of today will not average 105 years of age but each additional year will be a burden to be paid by the next generation. Once benefits are promised, it is unreasonable to take them away.

The new senior citizen drug benefit shows the folly of government paid programs. Two years ago, we were told the plan would cost $400 Billion over 10 years. Now, looking at the first full year of benefits as the starting point, we learn the plan will cost $790 Billion over 10 years. Just what is the slope of the demand curve for "free" drugs? Can we depend on doctors to curtail demand in the face of an effective drug sales force? The doctors do not pay for the drugs and they often get paid an office visit to dispense a prescription.

What we have learned is that many citizens of the US will not voluntarily save for retirement or set aside adequate funds for medical care. The idea of requiring citizens to fund their own retirement is distasteful but necessary. The idea is the same as requiring the driver of a car to have liability insurance. The modification needed to Social Security and to Medicare is the personal savings account. Citizens need a safety net, but they also need to know that the funds for their health care or retirement do not grow on money trees. There needs to be an incentive not to spend every nickel one can.

The cost of medical care has zoomed for many years because consumers have not been financially responsible. It is common sense that consumers will ask for and expect extra tests and extra treatments if they do not have to pay. Why not "be on the safe side" and do the extra test?

Heath savings plans are a common sense solution. Americans all over the country are gradually adopting these plans. They work. Participants typically get a debit card and can use it to buy everything from aspirin to dental xrays. Their money is invested until they use it. If they do not spend the money, it remains in their personal account. The money, the interest and the capital gains are all theirs to keep. If they have money left at the end of their life, they can bequeath it to their aires. The plans require catastrophic health insurance coverage. Those who have serious health problems will always have coverage. The law says that one must purchase catastrophic insurance before one can open the tax advantaged accounts.

At 54 years of age, it is too late for me. I have paid my share into Social Security. My Grandparents withdrew much more from Social Security than they paid. My parents paid 40 years or more and my Mom has withdrawn for 17 years. Mom and Dad did not get a "good return on their investment". Year after year, their five children paid in far more than they withdrew. Now is the time to face the music. There is barely enough money in the fund to pay my generation--certainly not the next. I do not begrudge my grandparent's generation for the "extra" benefits they received. I do not expect the Social Security accounts to get this money back.

Yes taxes could be raised to cover the short fall. This is the easy "solution" that does not solve the problem. It would solve the next financial crunch but it would not realign costs and benefits, it does not encourge those who want to work more to work and earn more it does not help the nation build capital. Raising taxes would raise hidden costs to all Americans. It is ironic that the French this week will vote to change their employment laws. Years ago the French decided to make it illegal to work more than 35 hours per week. The French were very happy with this plan for a long time. They became a people of leisure. However, the long-term consequences have come home to roost. The French economy has been stagnant for years. The nation has declined to a third rate country while "communist" countries like China and "free" countries like the US have boomed.

The French use millions of foreign nationals to do their work and have had to change numerous laws to accommodate the largely Muslim work force. The new law will allow work of up to 48 hours per week. The change will reduce the countries dependence on migrant workers, it will allow those who want to work to do so and it will increase the revenues of the country without over-burdening the tax payers.

I am all for legal migration. The US needs young folks to migrate here. I and millions of others my age and younger need immigrants to pay Social Security for the next 40 years. Given a choice, I would have much preferred to have invested for my own retirement rather than to depend on my children, grandchildren and immigrants.

The answers are clear. A free economy allocates resources far more efficiently than restricted economies. Freedom is not pure or perfect but it beats the alternatives. The Russian, Chinese, French, British and our own government have demonstrated time and again that government programs become boondoggles. Government programs need to be adjusted frequently (had Social Security been adjusted frequently it would not be in an 11 Trillion Dollar hole). The market will adjust an infinite number of times while a government program may go years without adjustment. Free market programs provide more benefits, lower costs or both.

Years ago, I told my children that they should plan to live to be 120 years old. I told them that I do not predict that they will live that long; simply that they should be prepared to live that long. One should not store up ones treasures on earth. However, while you are here, you have the responsibility of trying to provide for your self and your household.