I propose
the following:
That, in
place of CPP/Social Security, Socialized Medicine/Medicare, and Employment
Insurance, there be set up something I call an Individualized Forced Savings
Plan (IFSP). Employed or self-employed individuals will be required to put 10%
of their pre-tax income into their own IFSPs. Contributions will no longer be
mandatory once there is enough money/assets in the IFSP to enable an individual
to live modestly for about 10 years, let’s say the equivalent of $500,000 in
today’s money. There will be nothing ‘collective’ about these plans, each
individual will have their own plan and will manage it themselves. They may
change the asset composition of their IFSPs at any time, with the proviso that
no assets be used for personal consumption in any way, shape, or form (ie. no
buying a luxurious mansion that you plan to live in yourself as an
‘investment’. If you want to invest in real estate, it must be a
rental/income-generating property exclusively). The money in the IFSP can only
be disinvested and used for consumption for the following purposes: 1. If the
person becomes unemployed and needs to use the money to avoid poverty. 2. In
case of medical emergency or in order to pay for catastrophic medical insurance
insuring against such emergencies. 3. Genuinely career-focused educational
investments for the person or their children. 4. Once the person retires and
they are over the age of 65, they may use the money as they wish.
The primary purpose of the IFSP is to act as a
financial buffer, separating employed but unthrifty people from the minimal
welfare social safety net that I expressed support for elsewhere (http://thinkingabouthumansociety.blogspot.ca/2013/03/issue-analysis-welfare-social-safety-net.html). With the IFSP in place, if an
employed person loses their job, has a medical emergency, needs to invest in
training for themselves or for their children, or gets to be too old to work,
there will be a financial buffer, built up from contributions made during
employment, that has to be used up before the person is eligible for the
minimal social safety net. Not only will this reduce the welfare costs of the
government, but it will also provide a certain degree of stability to the
individual, as falling into the minimal social safety net would be quite disruptive to someone’s life. The minimal social safety net is
supposed to be the last resort for desperate people, thus to have a buffer of
forced savings between individuals and the net is a good thing to have.
Another
benefit of the IFSP is that, to the extent that people save in their IFSPs in
the form of investment capital (which they will tend to do as long as their
isn’t too much economic instability), there will be more capital available to
businesses in the economy. This will lead to a generally more productive structure
of production and to higher real wages for workers.
Why an
individualized plan and not a ‘collective’ one such as CPP/Social Security or Employment
Insurance? The problem with these ‘collective’ plans is that they are not
self-sustaining and they are too redistributive. These plans are typically not
on a fully funded basis, but on a so-called ‘pay-as-you-go’ basis, where
benefits come out of current contributions by other people to the plan, instead
of out of an individualized pool of solid investment assets. The result is an
unsustainable pyramid scheme which will become less and less financially viable
as time goes on, as is happening with CPP/Social Security. In addition, with
‘pay-as-you-go’ plans, not much actual investment is going on, as there is no
need to hold actual investment assets over long periods of time with this model as there is
with an individualized, fully funded plan. Rather than saving for the future
with investment assets, people are led by these plans to believe that they are
covered. The result is less investment in the economy, meaning less capital
available to businesses, meaning a less productive structure of production
overall and lower real wages.
These plans
are also too redistributive. Richer people pay far more than they receive from these plans, while poorer people receive far more than they pay. As with any
egalitarian policy, the results are a relative crippling of the incentives to
be productive and serve the consumers, and less saving and capital accumulation
than would otherwise occur.
Some
libertarians will object that the government should not be in the business of
telling people what they can and cannot do with their hard-earned income. I sympathize with
this point, but given that I have already expressed support for a minimal
social safety net, the IFSP needs to be in place as a buffer to avoid the abuse
of the social safety net by profligate people. Of course, one could just say
that this is a reason to scrap the minimal social safety net idea, but I think
that the minimal social safety net plus the IFSP are, as far as government
policies go, relatively benign, and could even lead to some good.
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