Analysis: These Doors and the World Beyond

When the Bush Administration began in earnest its campaign to convince the nation that the Social Security system needed to be overhauled, it set the stage for a contentious fight between those who want radical change in the structure of the old-age pension plan and those who want only marginal adjustments, the kind that have done before.

In the past few days, one aspect of the Republican plan has drawn particular criticism from moderates and liberals: the Bush Administration has made it clear that it plans to allow workers to use as much as four percent of their income that is subject to Social Security tax to invest in a limited selection of market securities, but it has indicated that the government will get the first inflation-adjusted three percent of any earnings those portfolios generate. Any excess will fund an annuity that will provide pensioners with extra money above the basic Social Security benefit, which the Bush Administration has broadly hinted will be cut substantially from its current levels.

That the government is taking the first inflation-adjusted three percent of any earnings a portfolio generates sounds to some like a raw deal called a "clawback":

The government is going to let me have some of my Social Security withholdings to invest in stocks and bonds, but if I actually earn money on the investments I choose, the government claws in the first part of that, and I don't get anything unless and until I've made more than what the government wants for its cut.

But that's not what's really happening. It's something worse; and it reveals things about sovereignty, power, and trust that common citizens probably should never have known because this knowledge will corrode the bond between the government and the governed.

Sovereignty
In the Social Security overhaul plan, the government is not "giving back" to wage-earners part of their Social Security withholdings. That money belongs to the government, and it is merely lending it to workers for them to use in a narrowly defined way.

When the government—when any government—assesses and withholds taxes on its citizens, it is exercising the sovereign power of first claim on their productive income and wealth. The assessment of taxes is the exercise of prior claim, and the particulars of that claim are codified in tax law. From time to time, the percentages may change, and sometimes tax cuts generate rebates to taxpayers, but that has nothing whatsoever to do with the absolute right of the state to take its cut first, which it will try to do by various means, including income and capital gains withholdings imposed and enforced by an enormous bureaucracy.

Power
Anyone who wants to test this principle may try at will to refuse the government's right of first cut. No court will entertain an alternative; and more importantly, no civilized country on Earth offers a different ordering of claims. Circumvention of the government's right comes at risk of discovery, garnishment of wages, asset seizure, fines, and imprisonment.

Your money, however you earn it, belongs to the government to the extent and amount that the law declares.

If that doesn't sit well with citizens, that's good. It shouldn't, certainly not in a society of free people. That's why it's not something that should be openly flaunted nor even discussed except in the rarified world of political philosophy and law classes.

Sometimes, politicians of a populist bent will toy at the edges of this matter by crowing about giving citizens back some of "their" tax money through tax cuts. Those politicians—provided they have the sense they were born with—know very well that tax money belongs to the government. Claiming to want to give back to people what "rightfully" belongs to them is entirely disingenuous.

If you don't believe that, watch what happens if you refuse to pay your taxes during the Administration of one of the rabidly low-taxes U.S. Presidents. You will be prosecuted just as quickly and just as viciously as you would have been had you tried the stunt under a high-taxes President. No politician will surrender the sovereign's prior claim to your money; and every politician will take what is needed to fund his or her priorities. That is the way of the world; and unless you want to live on some Libertarian dream world, survival-of-the-fittest island, you must find a way to reconcile yourself to this unyielding reality.

Trust
In exchange for the sovereign power of prior claim, the modern, democratically elected government must by its nature stand as the trustee in a binding relationship with the people it governs and from whom it takes what it needs. The Founding Fathers of the United States were quite explicit about the terms of this relationship: absent acceptable performance as trustee, the government may be altered through the electoral process, or it may be dissolved all together in favor of something else.

That puts the "binding relationship" into a bright and disturbing light: the government has the power of sovereignty, and the People have the power of destruction. It is clearly best if neither of those two absolute rights is discussed without extraordinary consideration before the engagement, even if the consideration is on an intellectual level.


But now, the Bush Administration wants to bring it all to the front of the agenda. The government will lend to workers an amount of money equivalent to a certain percentage of what it has taken from them in Social Security taxes. What was once the government's solemn duty as trustee of those funds now becomes the duty at will of the people who surrendered those funds in their role as responsible citizens.

Put in explicit terms, the government is retaining its sovereign power to confiscate productive worth, but abandoning its heretofore concomitant role to take care of that money so taxed away. And at the end of the day, the government will re-assert its sovereign power by taking the money and such earnings as that money has generated back to determine if there is any of it that should be provided to the pensioner as a reward.

In so doing, the government puts its people into the worst of all possible situations, being both trustee of government funds and beneficiary thereof. This is patently called "conflict of interest," and it is forbidden in civil contracts because of its potential for—indeed, its virtual guarantee of—ruin for the beneficiaries. In the current case, because a citizen under the Bush Administration plan must earn a portfolio return in excess of an inflation-adjusted three percent, the rational strategy is for that citizen in his or her investment role to take risk in portfolio construction.

And not just some risk.

If current models are any guide, the long-term return on a market portfolio—that is, on a portfolio roughly representing in a microcosm the entire economy—will be about five percent in the future. If the government is taking three percent up front, plus maybe an additional two percent to compensate for inflation, there's the five percent right there. And that doesn't include any transactions costs the investor would incur in forming and regularly re-balancing the portfolio. So the investor is put in a position of being forced to construct a portfolio of risk greater than the market portfolio to have the expectation of earning a return greater than the government's probable claim.

But it's even worse. Since the beginning of the Bush Administration's first term in January of 2001, major market indices, including the S&P 500 and the NASDAQ, have actually earned negative annualized rates of return. What happens if this trend continues for any length of time, either in the immediate future or down the road?

The likely scenario gets grim. As investors see negative returns settling in deeper and deeper into their retirement portfolios, they will have extraordinary incentive to go to riskier and riskier portfolios in an effort to recover as they approach retirement. It becomes nothing short of a "gambler's ruin" scenario, where the logical bet is all or nothing on the long shot.

In that case, both the government and the future retiree lose: the government doesn't recover the loan it made to the investor, and the investor becomes a retiree with a pension too small to survive.

And because the government had long ago abandoned its duty of trust to its citizens, it is left only with its rights of sovereignty and power.

And the People are left only with their right to destroy that government.






The Dark Wraith has spoken.