Better than Social Security, mate

Last week, my treatise on the cars General Motors should build included several cars GM does build, but in Australia, not here.

Rear-drive V-8 cars are not the only thing Australia does better than the U.S. Daniel J. Mitchell of the Cato Institute provides visual evidence of Australia’s answer to our Social Security:

Let’s start by looking at some numbers from Australia, where workers set aside 9 percent of their income in personal retirement accounts.

This system, which was made universal by the Labor Party beginning in the 1980s, has turned every Australian worker into a capitalist and generated private wealth of nearly 100 percent of GDP. Here’s a chart, based on data from the Australian Prudential Regulation Authority.

Now let’s look at one of the key numbers generated by America’s tax-and-transfer entitlement system. Here’s a chart showing the projected annual cash-flow deficits for the Social Security system, based on the just-released Trustees’ Report.

By the way, the chart shows inflation-adjusted 2012 dollars. The numbers would look far worse if I used the nominal numbers.

This problem has been getting worse, not better, the past few years for three reasons. When people don’t work, or when incomes drop, that reduces payroll tax revenues. Payroll tax rates have been cut as well, which further reduces revenues for Social Security given our unimpressive economic performance. Even before those two reasons, the deficit has been growing because the ratio of Social Security contributors (that is, the employed) to recipients is heading toward 2:1. No Ponzi scheme like Social Security can stay solvent very long when there are half as many recipients as contributors.

It never ceases to amaze me how few people realize what a ripoff Social Security is. As one of the comments on Mitchell’s post points out:

IF you want to calculate HOW BAD Social Security is it’s easy to do a little chart of your own. Assuming you only eary $40,000 annually for 45 years of your working life and you chip in 7.5% and your employer does the same you would and your employer would contribute $6,000 annually to your retirement. If you look at the Vanguard Fund or Fidelity Fund over the past 45 years even the most modest of their funds have earned at least 5% average return. This would pay double what you would get from Social Security and you could leave about $750K to your kids when you die.

How much Social Security do you get to leave for your kids? Zero. In fact, you have no guarantee of getting 1 cent of Social Security upon your retirement. The U.S. Supreme Court has ruled that no one has a right to Social Security. Whether you get anything at all depends on the whims of Washington, at least until they figure out that, you know, we’re broke.

Notice the two dips in the Australian chart, in the early 2000s and late 2000s. Everyone with money in an investment knows that the value of that investment can go up or down. But, as numerous investment professionals have pointed out since I’ve been bringing this up in the past nearly two decades, the drop in return is off a much larger base than otherwise would be the case.

The collective value of Aussie assets in their retirement system, even after their late 2000s drop, is now more than 90 percent of their gross domestic product. The same size system in this country would be nearly $14 trillion in size. I’m confident that private insurers als0 could come up with a better disability insurance system than Social Security has now.

Notice as well that the Australian Labor Party made this system mandatory. The Labor Party is the most left-wing of Australia’s mainstream political parties, supposedly more left-wing than our Democratic Party. And yet Labor drew the conclusion that Australians were better off in a private account-based system, whereas Democrats lack the courage to make that step.

In fact, it could be argued that with all working Americans having money in investments, that would create pressure to improve corporate governance, because, instead of only an individual company’s investors having an interest in how a company is managed, everyone would be interested in how all companies in which private retirement accounts are invested are run. That would also place pressure on politicians to effectively and appropriately regulate companies, in contrast to corporate regulation today.

We know that a retirement system that involves private accounts works better than Social Security. Ask federal employees. They don’t get Social Security; they have their own retirement system. For that matter, where are union pension funds invested? The stock market.


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