“Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits.” - Abraham Lincoln

Even though it is a “pay-as-you-go” system, Social Security is able to provide a solid return on investment. Wages typically increase over time, and this natural appreciation creates inflation-protected returns for contributions to the system. While we are powerless to control the fluctuations of the stock market, wages are actually quite stable, and our actions do influence our earnings.

Many politicians are presenting a worst-case scenario for Social Security and a best-case scenario for private stock accounts. Looking to the future, if the economy is prosperous enough to sustain the proposed system of private stock accounts, these accounts would be unnecessary. In other words, the level of economic growth needed to support private accounts would also serve to support the current Social Security system. However, if the economy does poorly, private stock accounts will actually make the Social Security problem worse.

For this reason, it would be unwise to implement a system of private stock accounts, and Honest Abe would probably agree. After all, labor is the superior of capital.

For more information, please read Social Security: A Cross-Generational Wage Swap.

A fixed percentage taken from the average wage of today is worth more than the same percentage taken from the average wage of 40 years ago. For example, workers who contributed to Social Security in 1964 earned an average of $97.41 per week, and these now retired workers receive benefits based on contributions made by workers earning an average of $528.56 per week. Hence the cross-generational wage swap.

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Due to favorable economic, demographic, and political factors, the Social Security system has attained a level of success that exceeds the merits of its original design.

While such success would be virtually impossible to duplicate, this measure will still be held against any significant reform. Therefore, even if private stock accounts were to succeed by sheer chance, the victory would be lost.

However, an unpopular reform like private stock accounts would be abandoned at the first sign of weakness. This means that the costs will be visible immediately, but the benefits may never be seen. Not to mention that a reform that compromises the basic integrity of the system could do lasting and irreversible damage to the program.

Even though economic projections show that the system faces future financing challenges, projections are simply projections. In the same way that the dark storm clouds of yesterday are soon forgotten in the bright sunlight of tomorrow, people will not remember the dire economic predictions of today.

It is simply too difficult to believe that the program faces an imminent crisis when it has not shown any signs of weakness. Millions of retired Americans continue to receive their Social Security checks each and every month, and benefits have not yet been cut.

If President Bush truly wishes to protect the long-term solvency of the system, his primary focus should be restoring the Social Security trust fund.

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In 1969, foreign governments held only $10.3 billion of our public debt, and this ownership represented a mere 3.7% of the bond market. However, over the past 25 years we have continued to buy more and more consumer goods from these foreign countries, and they have used these profits to buy more and more of our country. As of 2004, foreign governments now control a whopping 43.9% of our publicly traded bonds, and this percentage represents a figure of $1.886 trillion. Of these governments, Japan is by far our largest creditor, and we owe the Japanese government $683.3 billion as of July 2005. The United States should be extremely concerned about letting any one country have this much control over our financial affairs.

After all, the Japanese were responsible for the surprise attack on Pearl Harbor. Unfortunately, it was the Americans who later launched two nuclear attacks on Japanese soil, obliterating the towns of Hiroshima and Nagasaki. Whether or not our use of nuclear weapons was justified is beside the point. The Japanese have not forgotten these events, and neither should we.

It is highly unlikely that the Japanese government is secretly plotting our financial ruin. Since we are now trading partners, it is in the best interests of one to consider the best interests of the other, and this interdependence helps promote peace. In theory, foreign investment is actually beneficial to our economy, and that is why most economists do not view it as a problem. However, the Japanese government has some serious debt problems of its own, and Japan is hardly in a position to be lending other countries money.

It does not take a graduate degree in economics to realize that you should not borrow money from someone who is even more strapped for cash than you are. We cannot rely upon Japan to continually finance our national debt, because a day may come when the Japanese government will need this money back. In fact, the Japanese government continues to purchase our securities in an effort to stabilize its own debt, which means that these bonds should be viewed as a form of collateral rather than an actual investment. Unfortunately, if economic pressures ever forced Japan to sell a significant portion of its bonds on the open market, interest rates in this country would rise to dangerous levels and our economy could potentially stall.

Sources:

FY 2006 Budget of the United States Government (PDF - page 270)
U.S. Treasury - Major Foreign Holders of Treasury Securities (TXT)

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My grandmother took some amazing photographs on her recent vacation, and I have decided to post several of them on the website. I hope these majestic views will bring a refreshing change to my often complex musings on Social Security reform.

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Imagine that your friend comes to you for advice because he is on the verge of bankruptcy. You say, “No problem! I have just the solution for you. You need to start investing your money in the stock market.”

With a look of disappointment on his face, your friend replies, “That’s great, but if I had extra money lying around to invest in the stock market, I wouldn’t be going bankrupt, now would I?”

Think about it.

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