I'm from the government, and I'm here to help

By DAVID MOON, Moon Capital Mangement
March 6, 2005

One of the definitions of insanity is 'doing the same thing repeatedly, hoping to get a different result.' By that definition, any effort to change our current Social Security system is rational. Not everyone agrees, but the current system, left unchanged, is the largest threat to our country's long-term continued prosperity. Some people refuse to believe something until they see it. If they use smoke detectors to warn of a yet unseen fire danger, they ought to be willing to accept the warning of a yet-to-be-seen Social Security danger.

While it is lunacy to travel down our current path, pretending there is no coming problem, and while I laud anyone who is sincerely and honestly working to forestall the crisis, using additional payroll taxes to fund voluntary private retirement accounts is the wrong solution, as long as those accounts are subject to any government restrictions.

The proposed 'private accounts' we hear about these days aren't nearly as 'private' as is your IRA. In the most often discussed form, the investments within these accounts would be limited to a few government-approved choices. I don't know about you, but I can't wait to have Ted Kennedy and Trent Lott picking my mutual funds. Do you think there might be any political favoritism or influence involved in the selection of these investment choices?

The current plan wouldn't even allow you to take distributions from your 'private account.' You would be required to use your money to purchase an annuity. I wonder if the annuity industry favors this idea?

An even more dangerous risk is that the federal government could change the rules on these accounts. They might tax them if the balances exceed a certain amount. Or they may decide to take all of your remaining balance if you die with any money left. I haven't heard or read of either of these proposals, but don't assume the federal government only does what is logical and fair. And don't assume elected officials will limit their actions to what they say they will do.

For example, you're still paying for the Spanish-American War.

The U.S. government accrued a significant debt to expel Spain from Cuba in 1898. To pay the accumulated war debt, Congress enacted a luxury tax on a relatively new gadget owned and used by few people in that post-Reconstruction society: the telephone. After the war debt was retired, the telephone excise tax was to go quietly into the night ' which, three years later, it did. But when the United States entered the first World War in 1917, Congress remembered what a nice little funding mechanism it had had in the Spanish-American War telephone excise tax, so it reinstated the 'temporary' tariff to pay for another war. After WWI, however, the telephone tax would be extended every few years until it was made permanent in 1990.

Look at your telephone bill and find the line 'Federal Excise Tax.' The amount won't be much, about three percent of the cost of your basic services. But it should be a constant reminder of the risk of allowing the government to have control of any more of your retirement payroll taxes, whether the account is called 'private' or not.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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