Saturday, March 01, 2008

Socialism Can’t Work

Over the Senior Spaghetti Dinner at the Druids Hall, my Liberal friends were decrying the world’s rapidly increasing population. Apocalyptic predictions were prophesized, eerily reminiscent of Paul R. Erlich’s book that bombed, “The Population Bomb.”

From the conversation at our table, possibly inspired by the Green atmosphere, Ehrlich was being recycled. According to my friends, only doom and gloom is in store for an Earth whose human population will grow from six billion to nine billion by the end of the century.

I entered the conversation by noting that wherever prosperity increases, the rate of population growth rapidly decreases. The cure to the menace troubling my Liberal friends already exists, and is being practiced. Therefore, we don’t need a great idea, or a great leader, to save us.

We’re already saving ourselves.

Of course, along our way to salvation we’ll have to discard many of our current solutions that don’t work, chief among which is socialism. Socialism sounded great when there was a large population of relatively young workers paying a large but not crushing percentage of their earnings into the pot that provided benefits of education and medical care, etc., to all. However, the percentage of the population that was older and in worsening health steadily increased over the years, creating a need for additional funds at the same time the tax-paying segment was shrinking in proportion to the whole.

The European dependency ratio – the ratio of workers to people over 65 years old – is now four to one, and by 2050 will fall to two to one. The European fertility rate is 1.52 births per female, well below the “replacement rate” of 2.1, which is considered the level needed for a stable population. However, not one European Union country has a birth rate as high as the replacement rate.

With current trends, the United States with a population of 160 million less than the European Union will equal the EU by 2050 if current trends of shrinking EU and growing United States populations hold. The negative population growth rate of the EU has already caused projected EU economic growth to be reduced about one percent per year. Anyone familiar with the effects of compound interest knows that a one percent reduction would cut growth a third by 2050.

I don't see how the effects of a shrinking and aging European Union population, which will be accompanied by ever increasing tax rates, can result in anything but a negative growth rate for GDP. Simply, there will be fewer people to make goods and buy products, they'll have less to spend because of increased taxes, and older people buy less of almost all things except medical care. And in the European Union, governments pay most of the medical care costs after they tax the money from their shrinking work force.

So what is the answer? I never thought you would ask.

Privatization of social security and medical care, of course.

The same laws of compounding interest that dramatically affect GDP when the difference is only one percent, have the same effects on funds invested for retirement or medical needs.

Medical insurance that pays for catastrophic injuries or illness, but has the policy holder pay routine medical costs - just as your car or home insurance doesn't pay for oil changes or plumbing repairs - would greatly reduce medical insurance costs.

Contributions to a private savings account for social security add up quickly. For example, 12.4% of an annual income of $50,000, if invested at 5 percent, would result in an estate of over $1,000,000 at retirement age. Invested in an annuity at three percent, the payout per year for 20 years would be $65,000, or about triple Social Security. If you didn't want to take chances, in case you lived to 105, your annual payout would be about $42,000, roughly double Social Security.

If you didn't make it to 105, the balance would go to your estate.

Under Social Security, if you're single and don't make it to 65, nobody gets anything. With a privatized account, if you died at 65 the $1,000,000 would go to your heirs.

The nicest benefit about privatized accounts, from the viewpoint of our nation, not the individual, is that you fund your own medical and retirement needs. Under our present system, and in the European Union, the ever shrinking current worker group is funding the medical and retirement needs for an ever growing retired group.

Those numbers just don't add up.

And will only get worse.


Anonymous said...

Is this still believed today (November, 2015) ?
I think it wasnt realistic anymore just one year later.

Major Combs said...

These are facts, not beliefs. Just get the facts and run the numbers. Socialism is a Ponzi scheme that has its failure built in because its shrinking base cannot support its growing top.