Federal Reserve Board Chairman Alan Greenspan wants to cut Social Security benefits for future retirees as a solution to the US’s $521 billion deficit.
Chairman Greenspan is wrong.
Consider this scenario:
You do business with a company that sells services, like plumbing or accounting.
The company does not have fixed prices, but has set its fees based on the customer’s ability to pay. People may not have liked this, but they agreed to this price structure because the company has a monopoly on certain services, like the deployment of military personnel and maintenance of roads.
This company also sells insurance policies: for a certain percentage of pay, you purchase insurance to provide retirement benefits, starting at age 65.
You’ve paid for this insurance for 35, 40 years, making sacrifices in other areas because you wanted to be responsible and independent, not a burden on your kids.
The company is required under state law to reserve, to set aside and invest funds to pay future benefits. However, through dishonest bookkeeping tricks, the benefits are actually self-funded: current benefits are paid for not from reserves but from current premiums.
By the way, EVERYONE who lives in your area is REQUIRED to buy this insurance EXCEPT the management and employees of the company. They have a special plan, with richer benefits, which is paid for from company profits.
Seemingly unrelated fact: the company’s management for years has accepted bribes from the wealthy. These bribes were used by the company’s management for personal expenses: parties, private jets, etc.
In exchange, management has provided these wealthy customers with special consideration: hidden breaks on fees, for example.
The wealthy customers are dissatisfied, though, and put pressure on the company to cut the prices even more for its services, but disproportionately in their favor.
Being obligated to this group, the company agrees.
One problem, though: the company, which operated at a profit only 3 years ago, no longer has enough money to cover its operating expenses, and starts to pile up debt.
What can the company do to solve this problem?
Easy! says the company’s management, between bites of canape: we’ll cut back on the insurance benefits promised to everyone who has a policy with our company, and we’ll use the funds that would have paid these benefits to cover operating expenses.
If this were a real company, these actions – failing to reserve for future obligations, using insurance premium payments for non-insurance purposes, then cutting back on contractually obligated benefits – would be illegal under the insurance laws of every state. It would subject the owners of the company to civil prosecution.
Yet, the Chairman of the Federal Reserve is unprincipled enough to recommend – twice in the same month – that our Federal government do exactly this.
If it weren’t so despicable, it would be laughable.