This was previously posted on www.anton-wahlman.com on or before 2007-09-17:
Fundamental problem: The 74 year-old social security system is a ponzi, or pyramid, scheme with no individual private sector investment value. It has created a multi-trillion dollar liability for the US government.
Political problem: Within the confines of the government's income statement, a solution can only come from lowering benefits or raising taxes -- neither of which is politically possible.
Fundamental and political solution: Massivie privatization in the form of selling US government property, particularly some part 92% of the US land mass owned by the US government as well as the 99% of the spectrum in the air currently unutilized, underutilized or mis-allocated to useless tasks. The proceeds from this asset sale would go into IRA or 401(k) style accounts compensating for an abolition of the entire social security system. I calculate that some $30 trillion, or $100,000 for each US citizen, could be raised from this asset sale. These proceeds would go into IRA accounts for each person.
The 1933 establishment of the social security system created a gigantic long-term economic and political dilemma for the US taxpayer. When introduced, it effectively constituted a welfare hand-out because recipients in the first few decades received benefits far in excess of what they had paid into the system. In fact, the earliest recipients had not paid in anything to the system.
When a scheme of this nature is attempted by a private citizen, we call it ponzi, or pyramid, scheme. Someone gets a lot of money in the early phases, while the later entrants are left holding the bag. The later entrants have paid in a lot more money into the system than is available for distribution.
Within the confines of the social security system itself, there are only two ways to continue this system. First, you can cut benefits. This can be done in two ways. You can simply reduce the payouts per year, or you can raise the retirement age -- or both. There are good reasons to do both. By reducing benefits, we recognize the social security system for what it is and always was -- a ponzi scheme. People simply have to acknowledge that they should have never relied on it in the first place, realize that the taxes paid in previous decades was a form of welfare, flush away the spilled milk, and move on.
Increasing the retirement age is a very logical thing to do, for the obvious reason that people are now capable of working longer and they live longer.
The problem with both of these approaches is that they have effectively proven politically impossible. As with anyone who has come to expect that a government subsidy will continue, recipients of social security will fight tooth and nail to kick the can of taxpayer burden down the road onto the next generation.
The other side of the equation is the tax used to fund the payments. As the number of retirees grows, the benefits grow, and people live longer, these taxes would have to grow until they eventually reach 100% of all production and income in the country. As Ludwig von Mises wrote in 1920, "The Santa Claus Principle will eventually liquidate itself." This approach puts the US on a fast track to becoming a 100% socialist state where the income tax returns would be very simplified:
1. How much money did you make last year?
2. How much is left of it?
3. Send it in.
That is, unless it was just taxed at source to the tune of 100% at which point every person in America would rely for every bread crumb, every unit of housing, every piece of clothing on government handouts either in the form of a check or in-kind. Basically, it would look like a classical socialist/communist country, most of whom have faded away (North Korea and Cuba being the two remaining stragglers).
In other words, within the confines of the levers available to the social security system itself, there is essentially no solution likely to happen, except those who create political chaos or a gradual leap into total socialism. And that's the future for which we are now on auto-pilot, barring a radical change of direction.
Therefore, the only solution must come from outside the social security system itself. This solution is no different that any other person who is spending too much money, making too little money, but doesn't want to change those parameters. To prevent this person from bankruptcy, there must be an asset sale in order to fund the gap between too high expenses and too little income.
Fortunately, the US government has just the kind of assets that could and should be sold in order to yield a politically realistic solution to the social security ponzi scheme.
Let's begin by looking at an aerial map of the 50 United States. Guess what? 92% of it is owned by the Federal Government. As the crudest measure of the degree to which a country is a socialist country, this high percentage ought to be outright alarming. Social security ponzi scheme or not, the government shouldn't own 92% of the land. Fortunately, this at leaves us a fantastic source from which to fund an end to the social security system. What is this 92% of our country worth? There is no easy answer to this, to say the least, but the GDP of this country is around $15 trillion per year, and the underlying asset base is many times that number. Assuming that the asset yield is 10% per year, our national assets are worth $150 trillion. At a 5% yield, the assets are worth $300 trillion. Of that underlying asset base, a significant portion is the land value itself. One can therefore assume that the government's holdings are worth at least several tens of trillions of dollars. How much of the 92% would or should be sold, and what would the sale actually fetch? There is no way of telling for sure, of course, but there should be no reason not to start with at least putting a price tag on a few trillion dollars' worth of millions and millions of acers, from sea to shining sea.
The other major US government asset is lurking in the air all around us. Currently less than 1% of all sub-75 gigahertz frequencies have been sold ("licensed") to private industry for its most fruitful use - interactive IP Internet, which is where almost 100% of Silicon Valley's innovation resides. Most frequencies are either unused, withheld by The Pentagon, underutilized by churches and schools, or gravely mis-allocated to outdated technologies such as terrestrial broadcast television. 91% of US households have either cable TV or satellite service, rendering terrestrial broadcast television a complete waste occupying the finest beachfront property from a spectrum perspective. In 1994, the US government sold relatively unattractive spectrum at 1.9 gigahertz to entities which later became T-Mobile and Sprint PCS for tens of billions of dollars, contributing to the decline in the government budget deficit in the following years. In 2006, there were more sales of equally inferior 1.7 and 2.1 gigahertz spectrum, raising many more billions of dollars. In 2008, we expect the sale of the 700 megahertz spectrum to raise perhaps much more than $10 billion dollars. And yet these sales are tiny, constituting small slices of less than 1% of the total spectrum that could be sold. The overall value of all spectrum is hard to estimate, of course, but if less than 1% of the spectrum has yielded well over $100 billion in previous sales, much of it before the advent of the Internet, the other 99% of the spectrum may just be worth at least $10 trillion.
So there you have it: Selling government land and spectrum each have the capacity to yield at least $10 trillion. Let's say $15 trillion each, or $30 trillion in total. Given a US population of 300 million, that's $100,000 per every man, woman and child - $400,000 for a family of four.
How would we funnel this $100,000 per person to each individual? Fortunately, we already have very good systems available for this, in the form of IRA accounts and 401(k) accounts. They are largely similar in all relevant aspects. The government would simply open up an IRA account for anyone not already in possession of one, deposit the proceeds from the actions of the sale of government land and spectrum, until each account eventually looks like some $100,000 in addition to what it was before.
Once these accounts have been funded, the government could simply abolish the social security system. No slow phase-out, just abolish it. We would have undergone a transition to a fully private system in a very short period of time. Social security would never again become an economic or political problem. The social security "tax" would go to zero immediately, yielding the largest tax cut in US history. Talk about a boon to the economy!
There would be other benefits with this system as well. First, by transfering ownership of land from the government to the private sector, it is evident that it would be put to better use. Second, the privatization of the spectrum would be a boon of olympian proportions to our technology and communications industries. Internet speeds now achieved by fiber-optic cables (gigabits) would be achievable wirelessly in the air. Just imagine what this would do to individual and corporate efficiency, as well as for homeland security.
Privatization was key to the success for Margaret Thatcher and Boris Yeltsin alike. It transformed stagnant economies into booming ones. It created vibrant stock markets and gigantic leaps forward in terms of wealth, where there was economic paralysis before. Privatization ought to be the answer to the social security crisis that's creeping upon us right now here in the US, too. It cannot be done from within inside the social security system itself, but rather it has to be funded from auctioning off the largest swaths of government property, to the tune of some $30 trillion. Fortunately, the assets are there to do it. The only remaining question is who the President will be who decides to save America by applying capitalism to our biggest national balance sheet problem.