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A Great Essay On The “Ownership Society”

By Gary D. Halbert
February 8, 2005

A Great Essay On The “Ownership Society”


This week, I am reprinting an excellent, thought-provoking essay published last week by Karl Zinsmeister of The American Enterprise Online www.tae.comWith the current brou ha ha over reforming Social Security, this is an article that all Americans should read.

President Bush has revived the term “ownership society” which refers to a country where the citizens own most of the assets, versus a socialist state in which the government owns virtually everything.  This essay makes a compelling case for the former and illustrates why the trend toward an ownership society is already well underway in America, and why some groups want to stop it.

Due to space limitations, I omitted the first apprx. one-third of the essay, which is merely an historical reflection on how we got to where we are today in government entitlement programs.  A link to the entire essay is included at the end if you wish to read it all.

I hope you read the following, share it with others and think about it seriously.

[Editor’s Note: the bold emphasis that you see in the text below is mine, not the author’s.]

“Take Ownership

… Do you want to base your security in old age on a program engineered at the same time as the Model A and the vacuum-tube radio? Has work changed much since the era when slopping pigs for Auntie Em was a typical job? Does the boundary between state and individual look different now that the USSR has gone from progressive polestar to oppressive flop? Has American finance advanced from the decades when the only choices for ordinary savers were the passbook, the mason jar, or the mattress? Are the retirement goals of Americans still the same as in the days when the Bambino retired? Or is it time for Social Security to enjoy a major-league update?

The answer, I think, is obvious. Nothing but a government welfare program could ever last this long in unimproved form. Our transportation networks, our medical services, our economy are all light-years better than they were in 1935. So why are we still stuck with a gramophone/Hupmobile/fountain pen system of public pensions?

Two reasons: First, sentimental Democrats have flatly refused to let go of their FDR/New Deal glory days, and have repeatedly gone nuclear on anyone who suggested we could do better than blue paper cards, musty claims offices, $420 monthly checks, and payroll taxes headed over 20 percent. Reactionary, backward-looking politics has been reform blocker number one.

Reform blocker number two has been the ability of crafty administrators and legislators to prevent the public from understanding the demographic and economic contradictions that doom old-style Social Security in a modern era. Apologists have shamelessly employed dishonest terminology (from "Trust Fund" to "insurance" to "employer contribution" to "lockbox"). They have relied on repeated tax increases (from 2.0 percent of the worker's first $3,000 in the early years to 15.3 percent of the first $90,000 today--with all of that withheld from your paycheck before you even see it, so what's to miss?). They have used a succession of "blue ribbon commissions" to paper over problems rather than face them (I know--as a junior staffer I worked with the Greenspan Commission that cobbled together the 1982 Social Security patch).

But the days of being able to punt Social Security's glaring faults to the next political generation are nearly at an end. With the aging Baby Boomers due to start collecting checks in just three years, Social Security's finances will soon head south in a big way. And then, just a few years later, an even worse hemorrhaging commences in the other half of the Social Security Act: the Medicare program that pays the doctor and drug bills of America's oldsters.

All right, some of you are saying, don't give me scare tactics, give me specifics. How big a hole are we talking about? Is this a real problem, or just the latest alarm of the month? A mountain or a molehill?

Alas, this mess is a real mountain. The unfunded entitlements of the New Deal and Great Society are collapsing on themselves. For perspective, start with the fact that our officially acknowledged national debt, source of much caterwauling, currently totals $7.6 trillion. Unfortunately, the government's promises of future Social Security checks and Medicare reimbursements are not counted in our official debt. Those obligations pile up off the books, out of sight, and out of mind. But they are real obligations that will have to be paid. And when economists sit down and do the math on those commitments, the totals are staggering: The retirement checks promised to today's population add up to $10 trillion more than the payroll-tax revenues slated to flow in over the next generation.

That dwarfs our on-budget debt. Put together our official debt and our unfunded Social Security obligations and you have a sum larger than the entire value of all the companies listed on U.S. stock exchanges. Our Social Security deficits are real, scary, and unsustainable, no matter what Ted Kennedy and Harry Reid may say.

And our entitlement problem is actually worse than that--because the most out-of-control part of the Social Security program, mushrooming much more dangerously than even the retirement portion, is Medicare. Do you realize that taxpayers will pay $9,000 per senior citizen next year for Medicare, a figure rising every year at double-digit rates? As a result, Medicare's unfunded liabilities over the next lifetime come to a staggering $62 trillion. That's the equivalent of a hidden half-million-dollar mortgage piled on the back of every household in the U.S.

A few years ago, the levels of red ink in the Social Security program and the Medicare program were about the same. But adding the prescription drug benefit to Medicare increased its unfunded costs by approximately as much as the total Social Security shortfall. And medical costs continue to skyrocket. As a result, our Medicare hole is now several times deeper than our gaping Social Security hole.

The root of this is very simple--and it is an accident of history. During World War II, while strict wage controls forbade companies from paying higher salaries, firms short on labor grew desperate for ways to attract and keep badly needed workers. They discovered the government would let them pay the health costs of employees as a kind of backdoor substitute for increasing their wages. And health benefits, unlike wages, weren't taxed, a loophole that made them even more attractive to both workers and companies than cash wage increases. Employer-paid health benefits soon became universal and permanent.

The unforeseen side effect was that it became uneconomic for Americans to buy health care for themselves. Why pay your own doctor and insurance bills with after-tax income when your employer can do it with pre-tax dollars? Soon health care seemed like a "free" entitlement to average Americans. Given that something like 80 or 90 percent of our health care costs are now picked up by someone else, it's no wonder that medical expenditures in the U.S. have soared to 15 percent of our national income (roughly twice the level of countries like Japan, the U.K., and Italy).

What if those World War II employers had offered instead to pay the grocery bills of their workers? Imagine if today hardly anyone handed his own cash to checkout ladies, but instead a food co-op or insurance company selected by your boss covered the costs of whatever food you consumed. You can be sure that 1) You'd be spending a lot less carefully (and a lot more) on groceries today. 2) You'd have much less individual control over your diet. 3) The grocery and food-provision business would be far less efficient and varied and competitive and cost-controlled--almost certainly it would be one of the more troubled sectors of the U.S. economy.

The explosion of costs, and crimps on choice, within our health-care system can be repaired if we gradually free and reform the sector so that it operates more like the rest of our market economy. The authorization of individual Health Savings Accounts last year was a good start. In just the first few months, Americans opened a million such accounts, and many more consumers and companies will migrate in that direction in coming years.

Much more work remains, however. Ending the preferential tax treatment of employer-provided health care might be a nice item to add to President Bush's wish list for tax reform later this year. Until buying medical services becomes more like buying food or legal services or housing, it will be a problematic part of the U.S. economy.

One of the best ways we can prepare ourselves for the looming health-care crisis is by fixing the easier half of today's entitlement mess--Social Security. Let's put our pensions on solid footing so aging Americans at least don't have to worry about their living allowances when the nation starts miring down in the Medicare swamp.

Fixing retirement is a comparatively simple task. Straightforward measures can rein in today's uncontrolled spending spiral: The age of retirement (early retirement especially) should be raised, gradually, to reflect today's extended life spans. And the current rules that dictate annual benefit increases at rates considerably faster than inflation should be modified. ‘Nothing is more important than ending the automatic growth of these programs,’ argues economist Eugene Steuerle of the Urban Institute. ‘Every generation needs to have control of its own destiny. It's as if President Taft created a budget 100 years ago that determines what we spend today.’

The key to making these small trims attractive and fair to future retirees is to give them something in return. We must tap the power of long-term saving and compound interest to create individual accounts that will supplement Social Security's base payments. Even under cautious rules and conservative assumptions, average-income workers could build up as much as a million dollars over their working life in a personally owned, worker-controlled, inheritable investment account.

The public is not allergic to this. Gallup polls show that 82 percent of Americans under 30 (the group that will be most affected by Social Security reform) want personal accounts. Over the last two decades, Chileans, Argentineans, Mexicans, Poles, Russians, Swedes, Aussies, Germans, Brits, and others have all migrated to improved retirement systems that employ personal accounts. We too can use savings to build a better safety net. We can do it in a matter of months, if Congress shows some will.

‘Entitlement reform is the most important financial challenge facing the country.’So said 368 of the nation's leading economists, including six Nobel laureates, in an October 2004 open letter. Social Security modernization would eliminate trillions of dollars of looming, currently hidden public debt. It would reduce income inequality and give millions of modest-income families a chance to become stakeholders in capitalism. It would soften and enrich old age for legions of Americans. And the savings that would build up in individual accounts would be very good for our overall economy.

Yet many Democrats and plenty of Republicans resist. As journalist Michael Barone observed recently, ‘John Kerry, the darling of the self-regarding intelligentsia, called for the brain-dead policy of no change in a Social Security regime that any sensible person understands is in the long run unsustainable.’ Kerry and other political shirkers would stick with the increasingly threadbare retirement garments they've inherited, rather than exert themselves to make a new set. Given that the Baby Boom generation is about to commence an arduous climb into the mountain snows of retirement, this is a dangerous negligence.

Two more honest politicians, Democrat Bob Kerrey and Republican Warren Rudman, warned the nation a couple years ago where this would lead: ‘Suppose a member of Congress introduced legislation called the Social Security Do Nothing Act. Under this bill, promised retirement benefits would be 35 percent for today's newborns. Alternatively, payroll taxes would go up by roughly 40 percent.... These are the choices under the Do Nothing Plan.’

In their minds if not their hearts, most congressmen know this. Why, then, do they continue to dither? For those wedded to the political status quo, the answer is simple: The broad program of ownership now being promoted by President Bush is a potentially revolutionary platform. As it elevates individual opportunity and responsibility, it would speed a shrinkage of government's power and relevance. For Democrats in particular--whose use of the government to dole out goodies brought them 70 years of political power--this is profoundly threatening.

But all the trends are running toward individual sovereignty anyway. America was a majority homeowning country by 1950, and today fully seven out of ten families own the house they live in. More recently--about the year 2000--a majority of Americans became owners of stock (up from just one sixth in the early 1970s). If Congress establishes personal Social Security accounts, the fraction of Americans owning stock could quickly rise as high as 80 percent.

Other forms of ownership are also soaring. More than 10 million Americans are now self-employed. They own their personal livelihood. The number of small businesses in the country has tripled over the last three decades--to around 23 million.

The average family in the U.S. increased its net wealth by more than 50 percent between 1989 and 2001, according to the Federal Reserve. Even low-income Americans now own lots of value: Among the poorest fifth of our population, 41 percent own their own home, and 57 percent own at least one car. Those rates beat the average level of ownership in most European countries. The last quarter-century in the U.S. marked the biggest wealth boom in history. More wealth has been created on our shores since Ronald Reagan's inauguration than in all of previous American history.

So today's chatter about a new era of ownership is not just rhetoric. A genuinely new dynamic is dawning. Families and individuals are gaining much more economic authority than they ever enjoyed in the past.

The most important aspect of ownership is not that it makes you rich, but that it makes you free. Ownership gives you independence, choices, a measure of control over your own life. Possessing property can liberate you from capricious bosses and suffocating government alike. Opponents of the Ownership Society completely fail to understand that, as this little excerpt from a recent James Lileks column illustrates quite amusingly:

'I can remember as a little boy my widowed grandmother with eight children,' Senate Minority Leader Harry Reid recently told 'Meet the Press.' 'She lived alone, but she felt independent because she got every month her old-age pension check. That's what this is all about. The most successful social program in the history of the world is being hijacked by Wall Street.'
Ah yes. Old Granny again, re-animated to drag a nineteenth-century idea into the twenty-first. You could use the same granny to advocate for the return of the WPA, or the reinstatement of the sarsaparilla subsidy.
Reid channels the tropes of yore, when the simple yeoman of the fruited plain was whipsawed by the machinations of shadowy, oyster-eating financiers in New York banquet halls. 'They are trying to destroy Social Security,' Reid said, 'by giving this money to the fat cats on Wall Street, and I think it's wrong.'
It's the same old Chicken Little screed: The Republicans don't want to reform public education or Social Security or the high holy tax code, they want to destroy it for the nefarious enrichment of money men and Jesus freaks. Naturally you don't engage these maniacs on the issues. You simply oppose them out of hand.
But no one's proposing we go back in time, revoke Granny's benefits, and let Rockefeller spend her check on a pearl-handled cane so he can walk down Fifth Avenue and thrash beggars in style. The proposed changes in Social Security, after all, only affect the future. We're talking about letting younger workers have control over a small portion of their government-mandated contributions. 'Choice,' to use the hallowed word.

The drive to replace government entitlement with individual ownership is an attempt to give a new kind of autonomy and security to average citizens--to ‘little guys.’ The irony is that Franklin Roosevelt's ‘party of the people’ is kicking and screaming in opposition. As a practical reality, it is only Republicans and a few conservative Democrats who are sticking out their necks in an attempt to establish a new set of rules where regular Joes can build independent wealth.

This connects to a subject I wrote about back in our October/November 2004 issue--the fact that our two major parties have effectively flipped positions on the divide between elites and ordinary citizens. As whole blocs of ‘little guys’--ethnics, rural residents, evangelicals, cops, construction workers, homemakers, military veterans--have moved into the Republican column, Democrats have quietly become the white glove and top hat party.

Software millionaires, entertainers, academics, heiresses, journalists, Wall Street barons, trial lawyers--these and most of the rest of our controlling elites outside of business are now likelier to be Democrats than Republicans. And those individuals have already made it up the economic ladder. They've got theirs. They see salesmen and engineers moving into McMansions not as a blessing but as a blight. They're not keen on having the nouveau riche bid up the price of weekends at Nantucket and Palm Beach and Jackson Hole. It strikes them that their kids already have enough trouble getting into Brown and USC without having to battle the children of firemen and Indian-immigrant motel owners newly empowered with educational and personal retirement savings accounts.

Many liberal Democrats have lost their attachment to--and faith in--common people.We saw this in their dripping disdain for the majority of Americans ‘stupid’ enough to return George Bush to office (review pages 10-11 of our January/February 2005 issue). We see it in today's commonplace Democratic argument that if ordinary workers were given control of their own retirement accounts, they would screw them up. John Kerry, Ted Kennedy, and company much prefer that their gardeners and glass-polishers get their Social Security benefits ladled out by Washington functionaries.

Likewise, when it comes to health care, Democrats argue for more programs run by government experts. Helping households find their own answers via medical savings accounts, tax credits, and other decentralized initiatives is an abomination to most Democratic politicians. Even more hated by Democrats are school choice programs that would allow parents to find the best institutions for their own children. Schooling is too important to be sorted out by families, apparently--that's a job for Ph.D.s and education mandarins only.

Democratic devotion to top-down social engineering was clear in the last welfare reform. Democrats in Congress insisted that expecting welfare recipients to stay in school or work was unrealistic and cruel. But welfare recipients turned out to be much more competent and self-reliant than Democrats imagined--once pried from the grasp of state social workers, more than 7 million Americans worked their way off the dole in just a few years.

The Democrats' paternalism is summarized in their attitude toward taxation. Letting families keep more of their own money is no way to solve problems, Democrats insist. Whether the issue is day care or housing or college tuition, the automatic reflex of Democratic politicians is intervention by credentialed bureaucrats, using money pulled out of workers' pockets.

Democrats called it ‘Camelot’ when they first suggested, back in the 1960s, that our nation should be steered by Harvard technocrats. A generation later, many Americans think of this intrusive nannying from above as more like a ‘Nightmare on Elm Street’--and they are tired of being patronized. It's time to put more trust in everyday citizens.

The next moment a Democratic politician tells you that school choice, and individual Social Security accounts, and worker-owned medical savings plans are ‘dangerous,’ I suggest you answer with four simple words: Power to the People.”  END QUOTE 

Very best regards,

Gary D. Halbert



Karl Zinsmeister’s “Take Ownership” essay in its entirety.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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