End the ‘Governmental Ponzi Scheme’: Harvey Pitt, Former SEC Commissioner

Pitt, chief executive officer of consulting firm Kalorama Partners, served as chairman of the Securities and Exchange Commission under President George W. Bush from 2001 to 2003.

People defer planning for retirement security. If you ask them, “Are you immortal?” intellectually, they would say “Of course not.” But by not planning for their retirement, emotionally they’re saying, “Maybe I am immortal.” The first step is to educate people about why it’s crucial to take steps to protect themselves. It’s a problem that kids in elementary school and middle school are not constantly being educated about the need to self-fund their own retirement.

Many people rely on a governmental promise -- we call it Social Security. The truth is that Social Security is insufficient, and there are significant questions about whether everyone will be able to receive Social Security.

One thing the government can do is try to winnow out as many people from the current system as it conceivably can. Give people an option to be bought out from their Social Security entitlements at an earlier time on a tax-free basis; that would give them the right to reinvest the proceeds and self-direct what happens with their retirement funds. There are people opposed to that because they take a more paternalistic view. But that’s why the first aspect of my solution is: There has to be education. People have to understand what the risks are.

Although they could be bought out, people near the end of their gainful employment should be able to receive the full benefits they’ve been promised. For people who do not really have much of an investment in the Social Security system, the need is to shut it down. Replace it with a viable alternative that doesn’t strain the government’s ability and resources. Money of new or relatively recent participants could be funneled into private-sector accounts.

Part of the difficulty is, because you need the funds of younger people to finance the obligations to the older ones, you’ve effectively created a governmental Ponzi scheme. People who work their entire lives can’t suddenly be told: “We’re sorry, we can’t live up to our promise.” But we don’t have to perpetuate the difficulties. We can substitute Social Security with something that gives people a retirement benefit but takes the burden and pressure off the government.

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