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It's A Gray Area: Set yourself free from government interference

September 25, 2010|By James P. Gray

If you want to have a great and stimulating experience, read David R. Henderson's book "The Joy of Freedom: An Economist's Odyssey" (Financial Times Prentice Hall, 2002). In this wonderful, insightful and easy-to-read book, the author engages us in stories and events in showing us the enormous harm done by the government's interference in the marketplace. These have been my views as well, and I have often written about them in this column and elsewhere, but Henderson really drives these critical points home.

Specifically he discusses how private property rights and the marketplace contribute strongly to environmental protections, while government ownership and control does much less so, and how government intervention in health care and education are taking us in exactly the wrong directions. But the subject I most want to share with you today is Henderson's analysis of our so-called Social Security system.

He begins by introducing us to Charles Ponzi, who in 1920 widely advertised that he could double people's money within 90 days. Then he used later people's investments to pay "interest" to the people who had invested previously. In other words, this "chain-letter financing" was a fraud for which Ponzi's name has been synonymous ever since. But the only real difference between what Ponzi did and what the government has done with Social Security is that, by definition, the government's actions are perfectly legal.

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There is no such thing as a Social Security "lock box," and never has been. Just like with Ponzi, from the very beginning the Social Security program has used the contributions from present workers to pay the benefits of prior workers. Of course that was wonderful for the earlier people, because many of them only contributed for a few years, and then received benefits for the rest of their lives. But now there are too many claimants for not enough future workers' payments, and the system is going broke.

Social Security started out slowly in taking people's money. In 1939, the payroll tax rates were 2% on the first $3,000 of income, and these contributions were split evenly between employer and employee. But as of 2001, the tax rate had risen to 10.6% on income up to $80,400. That means that, where the maximum tax was $60 at the beginning of the program (which would be $735 when adjusted for inflation), it was $8,077 in 2001.

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