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How to Cure Poverty, Permanently

By: Frank Worley-Lopez - Oct 28, 2013, 4:17 pm

EspañolIn a world enamored with the idea of “social justice,”’ it’s a wonder why things haven’t really gotten better, except in those places where evil capitalism has been put to work. For all of the emotional rhetoric associated with the cause of the poor, the only system that appears to have ever actually brought people out of poverty has been the system that today in Latin America is so often reviled.

There is more to discuss on the topic of why so many people have fallen into the socialism trap, but we’ll discuss that in a future blog. For now, the topic at hand is how to cure poverty, one of the things socialism claims to do in a very roundabout way, but never does.

In the United States a long running “war on poverty” hasn’t much helped either. After spending a staggering US$22+ trillion “helping” the poor via cash, food, medical care, housing, social security, and a myriad of other programs (126 total in the federal government), the only thing the country has to show for their efforts is more poor and entire generations dependent on subsidies from government. That number is derived from the US$7.4 trillion paid in social security benefits since its inception, combined with US$15 trillion spent since 1964 on Johnson-era poverty programs.

It gets worse, however, since spending on Social Security, Medicare, Medicaid, and welfare account for a total of 55 percent of all current spending or about US$1.75 trillion dollars annually. All of this spending comes despite deficits of nearly a US$trillion per year.

Yet, as the Cato Institute policy report linked above indicates, the poverty rate in the United States is about 15 percent. So it appears by all measures that throwing money at government programs designed to help the poor does not actually rid us of the problem of poverty. So how do you get rid of poverty permanently?

Maybe the question we should ask first is, “what is poverty?”

Perhaps the easiest definition is: the lack of wealth or more specifically the lack of individual wealth. Until now, government’s solution has always been take some wealth from one person and give it to another after that money has traversed the great black hole known as government bureaucracy.

Since that isn’t working, as detailed above; how can you generate wealth for the poor in a consistent manner that is sustainable?

Riches arise on account of production, labor, creation, cooperation, and sales. Theoretically, capitalism alone isn’t a cure for poverty, but poverty is stubborn, and dependency is an infectious disease that threatens to destroy the proverbial goose that laid the golden egg via over-taxation and massive debt.

In my book, A Puerto Rican Manifesto, I outline a cure for poverty that leverages capitalism. In the plan, I recommend constituent service to help lower the cost of government, in exchange for payments from a national trust: not a popular solution, but a practical one. In order to succeed in any country long term, costs must be controlled and a mandatory service program is just one way to do that. It also pretty much shuts the door on public sector unions.

Let’s set that aside for a moment and focus on how to cure poverty in a country that is not as anti-union as I am. The system will take time and fiscal control, however, and that alone may be too large a task to ask of conventional government.

Here is how you do it.

Take 10 percent of all tax revenue and deposit it into a national trust or fund. You can put more if you can afford it, but I would actually expect most countries to start out with less because of political and fiscal reality.

The national trust fund then takes that money and invests it into a wide variety of interest, dividend, and growth earning stocks, bonds, funds. It also invests in commodities and precious metals, research and development, and even risky venture capital funds. When earnings accrue, take part of the money and pay it directly to individual savings accounts held by individuals. (More on that in a moment). But most of the earnings — at least half — should be reinvested.

In the meantime, replace all current employers assisted or paid benefits with a direct deposit program into individual accounts for every worker. In the United States, prior to Obamacare, it cost employers roughly US$0.35 per dollar of salary paid to employees to cover all programs mandated by law like social security, Medicare, unemployment, etc. So businesses could be required to pay in an amount equivalent of up to 35 percent of an employee’s salary — although I would argue that the amount could be lowered to 25 percent since the money would be going directly into the person’s account and not through government first.

This would lower employer costs and thus likely lead to lower prices, more employment, or a little of both.

Next, require all employees to deposit 10 percent of their own earnings into that account as well. I call these Social Services Savings Accounts or 3SAs. Based on the US Federal Government’s Thrift Savings Plan, these accounts are divided into two parts: retirement and insurance needs. Retirement includes disability, and insurance needs include unemployment insurance, along with health and life.

The money in that account earns interests and or dividends while it is on deposit.

As the national trust fund grows, the payments to individual accounts grow as well. Remember that the fund will grow from direct taxation (yes, wealth redistribution; even though I don’t like the concept you have to fund it somehow) and from interest and dividends earned.

Overtime, you will have created individual wealth for each person in a restricted account that can only be used for insurance or similar needs and long term retirement. Once a person dies, the money in the account is not taxed and is evenly distributed among all living heirs so that children and later grandchildren and great grandchildren start their lives with money in their own account.

The individual account holder determines which insurance products to buy, not the government. This keeps insurance rates low by keeping the market competitive.

This concept accepts that there are those people today who are not working or cannot work. However, it is not a short term Band-Aid fix. It is a long term plan designed to end poverty in three to five generations. Even someone who earns the minimum wage his entire life and is born under this system will likely retire very comfortably, and even with variations in the markets.

Notice I didn’t say regulate what people eat, drink, or smoke, or what job they could or couldn’t have. I did not mention regulations, rules, universal health coverage, or union labor. None of that is necessary for this system to work. Under your individual account you decide which health care insurance to buy, when to buy it, or not. You choose whether to buy unemployment insurance and, at a certain date, when to retire. Best of all, when there is money left over in the insurance account that is not assigned for unemployment situations, the individual can choose to save or spend the additional money. This would help improve the economy.

The 3SAs also allow for greater flexibility, since a working mom or dad or both can take off time to raise children, withdrawing a part of their own money to cover bills while they are out of work. A person who loses a job can choose to go right back to work somewhere else or draw money from his account. Obviously, the more you withdraw, the longer it takes to build up enough money to retire.

Since it is based on a set percentage of taxation and not a set formula for benefits, it will never run into a solvency problem like social security. The total benefits you receive depend on how long or hard you work or what you do to make yourself more valuable, whether you get promotions, etc. Over time, as the fund grows exponentially, the country involved can reduce or even eliminate the tax contribution to the fund altogether. If it grows large enough, the fund itself could also pay for all or part of government operations as well, thus limiting or eliminating the need for taxation all together.

Leveraging capitalism, to cure social ill and do the one thing that social justice cannot: create new individual wealth.

*Authors note: here is an additional reference on budgets from the White House historical tables.