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'Riding' Social Security off a cliff

| Friday, Dec. 7, 2012, 8:56 p.m.

Suppose Jones proposes to ensure that each and every retired American enjoys at least a minimum annual income. Jones' plan is to ask every working American to voluntarily contribute money each year to a fund that he will set up and administer. After a few years, when the fund has accumulated enough dollars, Jones will start to distribute a portion of the money every year to each retired American.

Each worker will be told that, by contributing today, he or she will enrich a fund that in the future will pay to him or her in retirement a minimum annual income. Thus, this collective fund will be maintained — and will grow as the number of retired Americans grows — by Americans continuing to make voluntary contributions to it.

What would be the reaction to Jones' proposal?

“Crazy!” is one word that likely would be frequently heard. Such a negative reaction is understandable and appropriate. If Jones' fund will pay an income to every retired American — even to those who did not contribute to the fund — too many Americans will fail to contribute to the fund. Even if everyone agrees that a fund to guarantee minimum incomes to retirees is a fine idea, everyone also recognizes that what economists call “the free-rider problem” will result in the fund being incessantly underfunded.

This reality is the rationale behind the requirement that all workers “contribute” to the Social Security fund — a requirement enforced ultimately at gunpoint. Everyone must pay; there's nothing voluntary about it.

Trouble is, requiring every worker to “contribute” doesn't solve the free-rider problem. It simply shifts that problem to another arena.

As currently arranged, Social Security allows today's retirees to free-ride on other people's money. By voting for candidates who promise to maintain (or even better, to increase) Social Security's stream of payments to each retiree, retirees free-ride on the earnings of current workers.

Or if Uncle Sam borrows the money to pay today's retirees, these retirees free-ride on the earnings of future workers, who will be taxed so that Uncle Sam can repay his creditors.

If it's crazy to believe that individuals will selflessly contribute adequate amounts of money to a voluntary fund — that is, selflessly avoid the opportunity to free-ride on others — it's just as crazy to believe that people will selflessly refuse to vote themselves benefits to be paid for by faceless others.

Don't believe me? Look at the fiscal crises now engulfing Europe — a society a bit further along than America in turning government into an agency through which each individual tries to live off of the fruits of other individuals' efforts.

Or look at the current “negotiations” in Washington on avoiding the “fiscal cliff.” No serious proposals to dramatically rein in the explosive indebtedness of Social Security and Medicare are in play. And even the few modest proposals to kinda, sorta start to deal with the problem of underfunded entitlements are, at this writing, being dismissed with ridicule by President Obama and many members of Congress.

The same realism that reveals to every sane person above the age of 12 that Jones' voluntary plan for a collective retirement fund is doomed to failure should also reveal that Uncle Sam's existing plan for financing collective retirement and health-care funds is just as certainly doomed to failure.

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.

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