Social Security and the sports book

In 1933, Dr. Francis Townsend, a then 66 year old retired assistant city health director in Long Beach, California, introduced a national pension plan called 'the Townsend Plan.' The idea for his plan struck him as result of his witnessing elderly women scavenging for food in garbage cans.

Within a year Townsend had prepared a formal version of his national pension plan and began to actively promote the idea. Within 2 years Dr. Townsend had 5 million members in his Townsend Club, and shortly thereafter he presented President Franklin D. Roosevelt with a petition signed by over 20 million Americans. If we were to seek an example in our entire history of an idea whose time had come, Dr. Townsend's plan might be it.

The bulk of Dr. Townsend's plan was adopted and became know as the Social Security Act of 1935. The one element of the plan however that was not adopted is highly significant, though. Had it been adopted at the time, we wouldn't be in the fix we are today.

Dr. Townsend understood two things very clearly about a pension plan. One was the need for a steady method of funding it; and secondly, that inflation would have a hand in increasing its costs. His remedy was as follows:

'Have the national government create the revolving fund by levying a general sales tax; have the rate just high enough to produce the amount necessary to keep the  Old Age Revolving Pensions Fund adequate to pay the monthly pensions. Have the act so drawn that such sales tax can only be used for the Old Age Revolving Pension Fund.'

Townsend's rationale for the sales tax as the funding vehicle was simple. He argued that it was fair because no one was compelled to pay the tax (though 'we must buy or die'); and secondly that it was predicated on our ability to pay, since if we could afford to buy more then we could afford to pay more tax 'thus we will pay in accordance with our ability to spend.'

Congress did not live up to Dr. Townsend's vision in two respects. In the passage of the legislation created as a result of  Townsend's plan, Congress failed to adopt his funding mechanism. But  Congress also failed — miserably — in choosing the investment vehicle that the surplus funds would be placed in.

Instead of a market—driven return oriented investment strategy, Congress chose government debt obligations. This was sure to encourage overspending since we had our own ready market to sell our debt to: ourselves! Imagine the result if we had taken the surplus of the 1950's and invested say $3000 in a CD and rolled it over for 65 years for every baby boomer that was born.

So here we are today with a great plan that has served the country well, yet we know it is going to face some great stress in the next 40 years or so as we baby boomers age and finally pass on. Some have disputed the idea that Social Security is in trouble. If you are in that camp I invite you to do two simple things. Visit the Census Bureau and look at the number of people who are turning 65 over the next 20 years and also read the 2005 report of the Trustees of the Federal Old—Age and Survivors Insurance and Disability Insurance Trust Funds. They have been producing an annual report for the past 65 years and it is in a format easily understood by us average Joes. The essence of this year's conclusion is that something has to been done and the sooner we do it the less painful it will be.

The least painful way to protect this cornerstone of American life is to fix the two mistakes that congress made from the beginning. Add a source of funding that grows and invest the surplus in something that grows.

I am no Francis Townsend, but for what it's worth my solution to the funding would be the creation of a national sports book. Sport betting is a national pastime in the United States, and for the most part is dominated by the underground economy or  by offshore operations that contribute nothing to the country's tax revenues. 

Sports betting is a huge untapped source of revenue that could be easily exploited and regulated. The infrastructure for sports betting has been in place and functioning for a long time. This is not a moral issue of government encouraging gambling, since no matter what the government, religion or anyone else has to say about it, bettors won't change their practices one bit. It will not have any impact on state lottery income since lotteries have prospered while the bookies have as well.    In order to put the bookie out of business the spots book need only have lower vigorish  (commission on the value of the lost bet) than 10%.

Finally, we come to the issue of investment of the funds. The separate account is a valid concept. However, entrusting each individual retiree to accept the responsibility to properly allocate his or her funds to an acceptable level of risk with personal retirement funds of last resort is not a prudent course. The separate account concept could be applied by the trust funds themselves. The new revenues could be invested in financial markets other than government securities. The benefits would be greater long term rates of return, weaning the government off the trust funds and spreading American capital through out the world in efficient market oriented way.

In 1933, Dr. Francis Townsend, a then 66 year old retired assistant city health director in Long Beach, California, introduced a national pension plan called 'the Townsend Plan.' The idea for his plan struck him as result of his witnessing elderly women scavenging for food in garbage cans.

Within a year Townsend had prepared a formal version of his national pension plan and began to actively promote the idea. Within 2 years Dr. Townsend had 5 million members in his Townsend Club, and shortly thereafter he presented President Franklin D. Roosevelt with a petition signed by over 20 million Americans. If we were to seek an example in our entire history of an idea whose time had come, Dr. Townsend's plan might be it.

The bulk of Dr. Townsend's plan was adopted and became know as the Social Security Act of 1935. The one element of the plan however that was not adopted is highly significant, though. Had it been adopted at the time, we wouldn't be in the fix we are today.

Dr. Townsend understood two things very clearly about a pension plan. One was the need for a steady method of funding it; and secondly, that inflation would have a hand in increasing its costs. His remedy was as follows:

'Have the national government create the revolving fund by levying a general sales tax; have the rate just high enough to produce the amount necessary to keep the  Old Age Revolving Pensions Fund adequate to pay the monthly pensions. Have the act so drawn that such sales tax can only be used for the Old Age Revolving Pension Fund.'

Townsend's rationale for the sales tax as the funding vehicle was simple. He argued that it was fair because no one was compelled to pay the tax (though 'we must buy or die'); and secondly that it was predicated on our ability to pay, since if we could afford to buy more then we could afford to pay more tax 'thus we will pay in accordance with our ability to spend.'

Congress did not live up to Dr. Townsend's vision in two respects. In the passage of the legislation created as a result of  Townsend's plan, Congress failed to adopt his funding mechanism. But  Congress also failed — miserably — in choosing the investment vehicle that the surplus funds would be placed in.

Instead of a market—driven return oriented investment strategy, Congress chose government debt obligations. This was sure to encourage overspending since we had our own ready market to sell our debt to: ourselves! Imagine the result if we had taken the surplus of the 1950's and invested say $3000 in a CD and rolled it over for 65 years for every baby boomer that was born.

So here we are today with a great plan that has served the country well, yet we know it is going to face some great stress in the next 40 years or so as we baby boomers age and finally pass on. Some have disputed the idea that Social Security is in trouble. If you are in that camp I invite you to do two simple things. Visit the Census Bureau and look at the number of people who are turning 65 over the next 20 years and also read the 2005 report of the Trustees of the Federal Old—Age and Survivors Insurance and Disability Insurance Trust Funds. They have been producing an annual report for the past 65 years and it is in a format easily understood by us average Joes. The essence of this year's conclusion is that something has to been done and the sooner we do it the less painful it will be.

The least painful way to protect this cornerstone of American life is to fix the two mistakes that congress made from the beginning. Add a source of funding that grows and invest the surplus in something that grows.

I am no Francis Townsend, but for what it's worth my solution to the funding would be the creation of a national sports book. Sport betting is a national pastime in the United States, and for the most part is dominated by the underground economy or  by offshore operations that contribute nothing to the country's tax revenues. 

Sports betting is a huge untapped source of revenue that could be easily exploited and regulated. The infrastructure for sports betting has been in place and functioning for a long time. This is not a moral issue of government encouraging gambling, since no matter what the government, religion or anyone else has to say about it, bettors won't change their practices one bit. It will not have any impact on state lottery income since lotteries have prospered while the bookies have as well.    In order to put the bookie out of business the spots book need only have lower vigorish  (commission on the value of the lost bet) than 10%.

Finally, we come to the issue of investment of the funds. The separate account is a valid concept. However, entrusting each individual retiree to accept the responsibility to properly allocate his or her funds to an acceptable level of risk with personal retirement funds of last resort is not a prudent course. The separate account concept could be applied by the trust funds themselves. The new revenues could be invested in financial markets other than government securities. The benefits would be greater long term rates of return, weaning the government off the trust funds and spreading American capital through out the world in efficient market oriented way.