Planned Economies Do Not Work – Part 1

Submitted by:
Kenn Jacobine

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With good reason, the economy is the number one issue on voters’ minds this presidential election cycle. After all, currently, unemployment and prices are both rising and the things we own, like houses, are worth less with each passing day. Of course, the two major party nominees for president are offering their remedies for combating the most current economic difficulties afflicting our nation. Both John McCain and Barack Obama are offering essentially the same pabulum that is offered up every four years by Republicans and Democrats seeking the presidency. They would tinker with the tax code, adjust federal spending, fix social security, cure the health care crisis, lower oil prices, and ease the burden on homeowners. What’s amazing is that in all these years and with all the resources at their disposal, Republicans and Democrats have not learned that planned economies do not work.

Let’s take social security for instance. In the first place, I am still looking for a constitutional justification for the federal government to be in the business of retirement annuities. That aside, social security is nothing more than a Ponzi Scheme. In 1919, Charles Ponzi persuaded investors to send him money with the guarantee that he could double or even triple their investment by speculating in international postal reply coupons. However, his plan simply was to pay off previous investors with the money received from current investors. When he could no longer persuade new investors to send him money the well ran dry causing many to lose the money they sent him. Ponzi was caught, jailed for several years and eventually deported back to his native Italy for his fraud. Social Security is essentially the same scheme. It relies on an ample pool of current workers/contributors to pay off those that contributed previously during their working lives. In 1950 there were 16 workers for every retired person. Today there are 3.3 workers for every retired person. It is only a matter of time until the system meets the same fate as Ponzi’s and collapses.

Of course, neither McCain nor Obama are calling for an end to social security. They prefer to fix the system instead. To cover the expected long-term shortfall of the system (expected to be in the trillions of dollars), McCain wants to cut benefits rather than raise taxes. How can he do that? Isn’t there a contractual agreement between the social security trust fund and retirees about how much they get paid each month? The answer is no. Retirees are at the mercy of politicians for their monthly payments unlike private annuity programs and furthermore, there really is no such thing as a social security trust fund since those same politicians have been raiding it for years in an attempt to meet current expenses of the general federal budget.

On the other hand, Barack Obama, doesn’t favor increasing the retirement age or cutting benefits. Instead, he would increase the amount of payroll tax that very high-income workers pay by subjecting more of their income to the payroll tax. Therefore, his solution is to throw more money at the problem. Given the lousy economy he will inherit if elected president, this policy will only cause more economic hardship.

What we really need from McCain and Obama is a free market approach not an endorsement of continuing government planning in regards to retirement accounts. They should be proposing that Social Security be phased out as quickly as we can dismantle our worldwide military empire, sell most federal lands, and abolish all federal government departments that do not meet constitutional muster. With the money saved by these liquidations, current and some future recipients of social security can be paid off. With no social security tax to pay, younger folks would realize about a 6% income increase which they could save for retirement in a real investment with real returns. Businesses would realize the same 6% savings which can be passed along to stockholders many of which would be saving for their retirement.

By ending government central planning in retirement accounts, we would never again be subject to the same tired proposals every four years to perpetuate a system that if done by a private citizen would get them jail time. Economic central planning, whether it was/is the Soviet Union, Maoist China or Social Security, has proven unworkable. McCain and Obama should practice “straight talk” and give America “Change We Can Believe In” when it comes to Social Security. Whichever candidate is elected president should send Social Security to the same scrap heap containing the broken promises of the Soviet Union and Maoist China.

Part II will look at aid to homeowners.

Kenn Jacobine teaches History and English for the American International School of Lusaka, Zambia. Send him email at lovesliberty@gmail.com.