“The Greening of Social Security”

Perhaps the most frightening statement Obama has made yet came on Jan. 8th when he declared that “only government can provide the solution to the country’s economic ills.”[i] It affirms conservatives worse fear – Democratic control of Washington will lead to a systematic expansion of government’s size and scope. And, as this fiscal crisis worsens, the pressure will only amplify for congress and the president to “fix” the economy. As a myriad of options are mulled over, most of which involve massive spending of taxpayer dollars, one solution, which is not getting any attention, but may well provide conservatives an innovative stimulus solution are personal social security accounts. Certainly, this is not an earth shatteringly new idea; however, the proposal advanced in this article is significantly different than those that have been advocated by other conservatives.

Conveniently, for as bad as the Republicans have been on this subject, they have been infinitely more proactive than Democrats who have largely relied on outdated solutions, most of which depend on a decreasing number of workers supporting an increasing number of beneficiaries. The proposition put forward in this article, by contrast, will not only help revitalize the economy by putting private capital, not tax dollars, back into the markets, it will give conservatives one of their most sought after goals – privatized social security accounts. However, unlike the proposals put forth in President Bush’s 2001 commission report on social security reform[ii] or by other conservatives, the investments would be limited to “green” sector investments. Before wincing, hear out the proposal.

First, though, given today’s political environment there are some incontrovertible truths, which must first be recognized before proceeding to the proposed idea. These truths center on three key points: the state of the social security system, the economy and the Democrat agenda:

Political Truths

Social Security:

1. Fact #1, few experts dispute that without significant overhaul the social security system will become insolvent by the mid-part of this century – some estimates are even more dire predicting that, with the state of the economy as it is, this collapse might come quicker.

2. Given fact #1, Democrats and Republicans differ on how to solve this problem. While Republicans are relatively unified on the idea of personal ownership of private accounts, which would invest in capital markets, Democrats are less coherent in their approach. A recent proposal by Robert Pozen, a Democrat member of Bush’s 2001 commission, advances the notion of Progressive Indexing. This scheme, which has its liberal detractors[iii], is designed to index a low income recipient’s benefits to rises in wages while maximal earners would see their benefits tied to a pricing index. Those in between would see some combination of the two. The implication is that replacement rates — benefits as a percent of pre-retirement earnings — for low income earners would remain constant over time, while replacement rates for high income earners would decline sharply. Allegedly, this would allow the system to stay solvent without penalizing the poor. Despite its detractor’s, Ponzen’s solution is consistent with other progressive ideas which universally dismiss privatized accounts as a viable means of social security solvency, because, as they assert, would remove much needed funds from the program.

The Economy:

1. Fact #1, few economists don’t acknowledge the US and much of the world is in an economic free fall and without an infusion of capital and confidence in the markets this recession will be prolonged and deep.

2. Given fact #2, the Democrats will, if history is any indication, assuredly pass a stimulus package that will make Bush’s package look paltry by comparison. Obama has already indicated he wants to put together a package that will exceed $1 trillion.[iv]

3. Given fact #2, and as noted above, Obama’s has chillingly indicated that government is the “only” force that can fix this economic calamity. Rest assured, he means one thing and one thing only– a resurrection of an FDR era public works program focused on infrastructure and other public works programs.

4. Given fact #3, make no mistake, Democrats and, sadly, some weak-kneed Republicans will jump on board with Obama’s massive spending package. This will lead to the time honored hat-in-hand procession so that prospective suitors will not miss out on the gravy train for their respective congressional district or state. You can also reliably predict that every state, county, city, municipality, special district and special interest group or representative will want their cut of the pork as well.[v]

5. Given fact #4, is there any doubt that with the amount of money that will be doled out from this proposed stimulus package there will also be an equal level of corruption? In large part, that is why we’re in this mess to begin with – the “watch dogs” on Capitol Hill were cavorting with the enemy and were opposed to having their personal gravy trains derailed by goody- two shoe Republicans. Barney (Frank), Christopher (Dodd) and the “Keeper of Hope” himself, Obama, were all too happy to allow Freddie and Fannie execs to contribute to their coffers irrespective of the dealing going on in the cloak room. Why then would you have faith that as this money moves into the state party apparatus, on both sides of the isle, there will be any level of accountability?

The Democrat Agenda:

1. Fact #1, one of Obama’s core themes during his election was the ballyhoo over his “green” economy agenda, whereby the government will be spending billions on green technology, energy, infrastructure, etc. Liberal Democrats have long coveted this notion, which fits with their unflinching belief that global warming is an irrefutable fact and that man-made activity is the primary cause.

2. Given fact #1, if the economy turns upward, and even if it doesn’t, rest assured Democrat leaders will look for any opportunity to use your tax dollars to support these endeavors.[vi] Coloradans have already experienced this with Governor Ritter’s “new green economy” plan where Excel Energy, the state’s primary and largest energy provider, is in lock-step with the Governor and has been leading the way in the development of wind generators – of course, happily using taxpayer subsidies to support the program. You can anticipate this formula to be exported to other parts of the country, and for areas of the nation that lack the ability to consistently generate wind or solar power a massive electric grid system will be built to import/export power – all at taxpayer expense.

3. Given fact #2, this ambitious agenda will cost taxpayers billions in subsidies and increased energy bills.

The “Green” Social Security Solution

In 2001 one of President Bush’s early acts was the creation of the bi-lateral commission to examine options for “fixing” social security. The President’s Commission to Strengthen Social Security was co-chaired by Richard Parsons, a moderate Republican, and old congressional lion, Daniel Patrick Moynihan, former Democrat Speaker of the House. The Commission’s final report was a sobering assessment of the declining state of the social security system. Amongst the report’s findings was the acknowledgement that the system, would, by the mid part of the 21^st century, become insolvent. The commission presented three remedies for the faltering system. In each proposal, some level of privatization and personal ownership was recommended. The suggested contribution rates were modest ranging from 1- 4%.

The Democrats, true to form, blocked passage of any legislation, which would have allowed for private accounts.[vii] Unfortunate for free market conservatives, there is little indication congressional Democrats and most moderate Republicans will support for any form of privatized accounts particularly if the stock market continues to remain at its decade’s low levels. However, if the Democrats are nothing else, they are predictable. ,

For all their bloviating and demagogic rhetoric about Republican indifference for the “common” man and the party’s unwavering obedience to “evil” corporations, Democrats sing a different tune if their pet projects are financed by those same companies. Case and point, does anyone remember all the hand wringing by Democrats all throughout the 1980’s, 90’s and early 2000’s about special interest money corrupting the political system? Amazing how a couple of years changed all that. Now, the ivory halls of congress have been conspicuously quiet these last two election cycles as Democrats raked in millions in campaign donations – much of which came from, gasp, corporations. It is this reality that Republicans must come to grips with and tap into if they’re to be successful advancing their principles in a manner that will be embraced by liberals and, just as importantly recapture state and federal elected offices.

By The Numbers

Admittedly, there are too many variables to accurately assess the amount of money that might be infused into a green economy from social security receipts; however, if we use some basic assumptions it at least gives us a rudimentary idea how much money might be infused into back into the economy – albeit in “green” investments. Additionally, I recognize that other opportunity costs might be lost even within the scope of government control over those funds. With that said and as a fiscal conservative, I prefer that investors make those choices rather than ill-equipped bureaucrats. With that preface, let’s examine just how much might be injected into the green sector.

In 2007, the Social Security Trust Fund had $675.0 billion in receipts and had outlays of $495.7 billion. However, of the year-end surplus of $179.3 billion only $82.3 billion came from payroll taxes. The remaining $97.0 billion originated from paper transactions that yielded interest back into the trust fund.[viii] Therefore, using the $82 billion dollar figure, let us assume that of the estimated 312,901,000 citizens paying into social security, only 69% of those would be eligible to participate in the program (those 49 years and younger). Let us again assume that of those in the 69 percentile, only 50% would invest their 3% into the green sector.[ix] Thus, the total amount invested would be in 2008, would have been $1.7 billion. Now, let’s put this into perspective.

In 2008, of the $2.9 trillion federal budget, $24 billion was devoted to the Department of Energy. Within the DOE’s budget some of the notable earmarks were $3.4 billion for Energy Resources, $5.9 billion for Environmental Management and $3.6 billion for the Sciences.[x] Thus, the $1.7 that might have been diverted to the green sector it would have been roughly 7% of the DOE’s 2008 budget. This is not an insignificant investment relative to some of the DOE’s other program specific allocations.

Pros & Cons

While it remains to be seen whether we are still in an economic free fall, at the trough of a recession or climbing out of one, one thing seems certain, there are stalwart companies and industries that will, not only survive, but thrive as their competition withers away and new opportunities for growth materialize. Given this, you’d be hard pressed to convince me that, in this Bear market, there is a better time to buy than now. Democrats, predictably, have been loathed to allow you, the taxpayer, to invest your social security in these “risky” markets. Invariably, these arguments are met with the same tried and true retorts – the markets are too volatile to allow people to “risk” their retirement savings – never mind that any of the stimulus packages put forth will inevitably lead to inflation thus reducing the purchasing power of any retiree’s social security benefits. But, if there is one thing the Democrats are, they are predictable and like a jujitsu master, conservatives must use this to their advantage. To be sure, the proposal outlined in this article will be controversial and carry with it inherent shortcomings and benefits.

On the detrimental side, this program would earmark money for green only investments, which, from a purely economic point of view, would preclude those dollars from being invested to their highest and best use. Moreover, the investment in green technology, from a purely conservative standpoint, perverts the very principles of free market economies where investors, not the bureaucrats or politicians, choose what yields the best rate of return for the risk. Finally, there is no doubt that once government goes down this path there will be great temptation to funnel money to “pet” projects increasing the potential for corruption and influence peddling. However, given the realities of the Democrat controlled Congress and presidency, the inherent flaws in the program as outlined above will still exist, however the power, influence and inefficiencies will exclusively be the province of corrupt politicians serving their narrow interests.

The primary advantage for allowing direct social security contributions into the green sector would be the immediate infusion of capital into a comparatively tight monetary market. And, financiers acknowledge, there are tremendous opportunities right now in the equity markets in solvent and/or emergent companies. And, there may no more attractive emerging market than the green sector, which has the enthusiastic backing of this new administration and Congress.

Conclusion

With Democrats poised to spend up to a trillion dollars on a new stimulus package Republicans need more than simple opposition to this misguided and counterproductive action. GOP leaders must provide substantive alternatives that are rooted in free market and limited government principles. Moreover, given the inhospitable environment they find themselves in, much of it due to their own making, old ideas simply will not suffice. Innovative proposals, such as the one outlined in this article, are essential if the party is to regain traction with the American electorate. They must draw stark contrasts between liberal and conservative ideas, so the voters have a clear choice in future elections. Failure to do so will inevitably lead the US economy toward the European model of socialistic controls and away from individual choice and free market principles that have made this country the envy and driving force of the worlds’ economy.