Social Security Pump and Dump

by DAVID PRICE

Thomas Paine, the great pamphleteering terrorist-provocateur of the Age of Reason, devoted his final pamphlet, Agrarian Justice (1795), to formulating a publicly financed economic security system. Agrarian Justice proposed that all citizens inheriting property would pay a 10% tax to finance a one-time payment of fifteen pounds sterling to all citizens upon their twenty-first birthday-a payment designed to finance their start in life (something I’ll anthropologically note that various cultures wisely accomplish with the institutions of dowry and bridewealth). By Paine’s calculations this 10% tax would also have financed payments of ten pounds sterling each year to all citizens over the age of fifty to guard against poverty in their old age.
Paine’s scheme was written in revolutionary times and never came to pass as neither France nor America were inclined to experiment with such a radical proposal. Another seventy years passed before America financed its first public pension system-though this and all subsequent American efforts lacked Paine’s proactive comprehensive design as these plans were always conceived as reactions to traumatic events like the Civil War and the Great Depression.

Today, President Bush’s clamor to raid the Social Security fund in the name of privatization is reminiscent of President Johnson and the Democratic Congress’ largely forgotten 1968 agreement to add the then secure Social Security Trust Fund to the General Fund in order to float cash for the Vietnam War and a bevy of domestic programs-a decision that helped secure our current trajectory towards Social Security’s insolvency. This 1968 bookkeeping trick helped hide the costs of the war and delayed the war’s economic impact by creating the illusion of budgetary viability as war spending grew to unacknowledged levels. Now that Americans find themselves with new expensive wars, unacknowledged deficit spending, a weakened economy, and plans to radically transform Social Security, they would do well to carefully consider some key elements of the history of the Social Security system before they allow the President to direct its plundering.

What is missing in the current public discussions advocating privatizing Social Security is a realization of what Social Security was and wasn’t designed to do, we are also lacking an analysis of the likely impacts of investing and then divesting these funds in the stock market. What Bush’s privatization apologists never acknowledge is that the Social Security Act did not haphazardly become disengaged from the American stock market system: This was a central design feature for very good reasons. As an investment, Social Security is indeed a low interest returning investment, but it was never designed to function any other way. It was designed to be a depression protection safety-net fund established outside of the whims of the stock market to protect Americans against the inevitability of another market collapse.

What is lost in the current giddiness over the prospect of stock market gambling with Social Security funds is an historical acknowledgment that market economies periodically become unstable and collapse. While most Americans know that Social Security was born of the Great Depression, there is little realization that FDR designed Social Security to address not just the problems of the 1930s, but also the recurrent flaws of an economic system that brought such other events as the Panic of 1873 and the recession of 1883-and the Social Security Fund was designed to protect Americans from the recurrence of these devastating features of capitalist markets. World War Two and the Cold War’s debt-laden spending frenzies allowed American politicians to delay finding solutions to these problems by subsidizing markets with military-industrial tax dollars, but the fundamental problems with markets remain. These problems in part derive from an inherent contradiction of capitalism: The fact that markets cannot expand infinitely-at some point what goes up, must come down.

While Social Security does little to protect against inflation (something it was not designed to do) it does protect against the potential ravages of economic collapses. To invest Social Security in the stock market would render this depression-safety-net worthless, and possibly could even hasten conditions of something hitherto unseen: a perfect storm in the market with the coming of an inevitable demographically driven market collapse.

Make no mistake, those who designed and fought for the Social Security system viewed it as a safe haven for funds outside of and protected from the stock market. Look no further than President Franklin Delano Roosevelt’s August 14, 1935 statement that his new Social Security Act,

"Represents a cornerstone in a structure which is being built but is by no means completed-a structure intended to lessen the force of possible future depressions, to act as a protection to future administrations of the Government against the necessity of going deeply into debt to funding relief to the needy ­a law to flatten out the peaks and valleys of deflation and of inflation-in other words, a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness."

Thus the Social Security Act of 1935 created a safe harbor trust fund-separate from the monies collected through taxes to fund the general federal budget-for low-yield funds to accumulate and weather-out the inevitable economic bad times. This "separate fund" was betrayed by LBJ when it was added to the general fund, and now President Bush wants to complete this betrayal by siphoning the fund to pump-up the stock market.

If you can overlook just how fiscally ill-advised this is, it is actually a very politically shrewd move. President Bush’s plan of privatizing Social Security would predictably bring remarkable short-term market gains. It is obvious that pumping such large funds into the stock market will cause the market to sore-this is the nature of the market: buying stocks in mass quantities makes markets climb. During his 2004 campaign Bush was intentionally silent on the specifics of his Social Security rehabilitations plan but past statements have both included and excluded Baby Boomers from his proposed privatization plan-though he has lately suggested that only "younger workers" could participate in privatization. To see how current and future demographic waves could endanger both Social Security and the stock market, let’s consider the market dynamics that the current wave of Baby Boomers would impact if America adopted a privatized Social Security plan today.

By the year 2040, America’s "dependency ratio" (the key demographic indicator used to measure non-wage earners, a ratio indexing people under the age of 15 and over 64 against the rest of the population) will almost double. Today the dependency ratio is about 21 (meaning that 21% of Americans are under the age of 15 and over 64) and barring a pandemic, meteor strikes or cryogenic revolution, this figure should remain stable for another five years. But as Baby Boomers age the Census Bureau’s figures show the dependency ratio sky-rocketing (due to aging Baby Boomers, and low Boomer fertility rates) to over 35 in the year 2030-and the dependency ratio will remain this high until the year 2050. In real numbers, this means that America will shift from a population of 35-million people over the age of 65 to a population of over 53-million in 2020 and 70-million in 2030-a process peaking with an aged population of almost 80-million in the year 2050.

But if Bush and his trailing band of Democratic and Republican members of Congress were allowed to privatize the Baby Boomer’s Social Security fund, what would happen when this great wave of Boomers cashes-out of the market in mass? Such a predictable demographic wave of institutionalized stock dumping would bring a market drop as the baby boomers retire in an ever-crescendoing bulge. But this crash is temporally remote enough that those politicians voting for privatization will long be out of office and safely away from the scene of the crime when the tumble would come to pass. Instead, they can grow strong in office as they bask in the glory of what may be a record market rally caused by the initial Social Security cash-infusion.
For those of us scheduled to arrive late to the Social Security trough, after the bulk of the Boomers have eaten their fill, we may well watch as our Social Security funds are used to push the DOW and NASDAQ to unimaginable heights, only to crash once the crest of this demographic wave withdraws funds from the market. There is some irony that the very fund designed to protect people from the peaks and valleys of capitalism’s markets is now being leveraged to fund what could be an epic market drop. But one of the paradoxes of cultural change is that cultures make short-term choices that have long-term consequences, and there are often few constraints in societies such as ours preventing the short term from winning over the long term (Don’t expect the AARP to confront this argument, unless Social Security privatization cuts them out of the hefty brokerage fees they are already earning.).

There are elements of Thomas Paine’s radical pension proposal that should be considered by American policy makers concerned with fixing Social Security, though our post-industrial world has problems unforeseen by Paine. His America did not have to pay high taxes to subsidize Halliburton, UNICAL, Raytheon, or Boeing’s shareholder profits in wars of empire-and under these conditions a mere 10% inheritance tax doesn’t go as far as it did in Paine’s day. But he was wise to search for funding in the inheritance of wealth. As Thomas Paine realized, the dead provide some solutions for the living. Today, more aggressive estate taxes on the rich could easily and relatively painlessly-after all the money is pried from the hands of the dead-be used to correct for the coming Social Security shortfalls.

There is a stark contrast between FDR’s emphasis on "caring for human needs" and Bush’s focus on caring for market needs. While we can expect President Bush’s commitment to protecting the inter-generational wealth of elites will steer him away from Social Security solutions that rely on capturing wealth from estate taxes, this is where the solution for the coming collapse of Social Security must be found if we are to meet the human needs of a coming wave of retirees and those who must live in the world they leave behind.

DAVID PRICE teaches anthropology at St. Martin’s College in Olympia, Washington. His latest book, Threatening Anthropology: McCarthyism and the FBI’s Surveillance of Activist Anthropologists has just been published by Duke University Press. His Atlas of World Cultures has just been republished by the Blackburn Press. He can be reached at: dprice@stmartin.edu

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