A GREAT DEBATE ON THE FUTURE OF THE AMERICAN SOCIAL SECURITY SYSTEM IS ABOUT TO BEGIN, AND THE SNAKE OIL IS BOTTLED AND READY TO FLOW.
The present system “is in profound crisis,” says the Cato Institute, a libertarian think tank in Washington. “Social Security is going bust both morally and financially,” billionaire former presidential candidate Steve Forbes wrote recently in the Wall Street Journal.
Neither statement is remotely true, but they’ve been repeated so often that they have led to a broad belief that the vast federal pension program is near collapse. In its place, Forbes, Cato and other reformers want to put a privatized system that would remake Social Security, not necessarily for the better.
One poll, which Cato loves to distribute, showed that more young Americans believe in flying saucers than think they’ll get any money from Social Security when they retire.
These young Americans can relax. Social Security is here to stay if it isn’t reformed out of existence.
Forbes, Cato and other reformers, lavishly bankrolled by Wall Street, want to end or modify the present system, in which the government takes deductions from the paychecks of workers and uses the money to pay the pensions of retirees.
Their idea is a fully or partially privatized system: Your contribution, instead of going to retirees, would go into your personal retirement account, to be invested in the stock market or other private markets. When you retire, you could cash in this account or turn it into an annuity.
Social Security has problems, and those problems need to be solved soon. But like most issues dealing with the elderly, it is seen as a “third rail of politics,” and there was tacit agreement to keep it out of last year’s political campaigns. Of all the presidential candidates, only Forbes mentioned it, and no one paid much attention.
But 1997 is the Year of Social Security, and a lot of work has been done already, most of it by privatizers like Cato (a humorless outfit whose Christmas card this year wished recipients “Peace and Free Enterprise”).
Sen. Bob Kerrey (D-Neb.) and retiring Sen. Alan Simpson (R-Wyo.) have sponsored a partial privatization bill. A commission of 13 experts is about to issue its much-delayed report; the experts split three ways, but all favor some investment in the stock market.
A few respected economists, like Henry Aaron of the Brookings Institution and Robert Eisner of Northwestern University, oppose privatization. But the Social Security debate, like the flat tax argument, has been dominated so far by the radical reformers.
Privatization has some surface appeal. Certainly, the stock market has been a much better investment over the years than the government bonds that are bought with surplus Social Security contributions. There is no reason for the government to do something that the private sector can do as well or better. And the “freedom” and “personal responsibility” of the private accounts has a pleasant ring to American ears.
But a rush to reform would be a mistake. There are plenty of reasons to look at the privatization idea with a very skeptical eye.
One reason is that much of the money behind the fervor comes from Wall Street brokerages and others who would benefit when all that pension money–about $150 billion a year–hits the stock market.
Cato itself is partially funded by brokers and other money managers, and the co-chairman of its privatization project is William Shipman, a principal at State Street Boston Corp., a big New York money management firm. Shipman and his boss, Marshall Carter, have written a book pushing privatization, and the firm is one of many that is planning seminars and other “educational” programs this year to promote the idea.
Another reason is that the pro-privatization forces have vastly oversold their case and overstated the problems facing Social Security. Their basic case is that the program “is going broke,” and that’s just not true.
Here’s the situation, and the problem:
Social Security currently runs a surplus of about $70 billion a year. This is invested in government bonds, which helps fund the federal deficit. This surplus will keep growing until about 2020, when it will peak at $1.3 trillion. Then, as the numerous Baby Boomers begin to retire, the system will go into deficit and the surplus fund will disappear by 2029.
When the privatizers say that Social Security is “going broke,” they mean the fund will be gone. There will still be enough money coming in from current contributions to pay 98 percent of all pensions, at least at the start.
But the deficit will be real and it will grow. Sooner or later, Social Security will be in real trouble if nothing is done.
But something will be done. Ever since Social Security began in 1935, we’ve tinkered with it–increasing a benefit here, raising a contribution there. Actuaries peering into the future have always spotted problems 30 or 40 years down the road, and Congress has always headed them off with a fiscal nip or tuck.
This problem is no different and no harder to solve. Raising the retirement age to 70 would help. So would taxing Social Security benefits.
Even better would be an end to the cap on contributions. At the moment, wage earners’ annual contributions apply to only their first $62,000 of income. This means that a worker making $60,000 pays 6.2 percent of her income, while her boss making $600,000 pays only six-tenths of 1 percent of his. It’s one of the most inequitable taxes around.
There’s an easier way. Brookings’ Aaron calculates that the shortfall could be solved for the next 75 years by increasing the contributions, currently 12.4 percent of incomes (split between employee and employer) by 2.2 percent. This could be done in stages–half a percent now, another half percent 10 years from now, and so on.
The longer this is delayed, the more painful the fix, so action in 1997 is a good idea. Apart from the patriots who oppose any tax increase no matter how necessary, few Americans are likely to see these half-percent nibbles as a threat to the republic.
Privatization, on the other hand, would raise more problems than solutions. While the stock market historically does better over the long run, a prolonged dip, as happened in the 1960s, could erode retirees’ nest eggs. If retirees are free to invest their accounts as they wish, what happens if they blow it? If the government invests the money for them, where should the money go? Into politically connected companies? Tobacco stocks? Foreign economies?
These details could be ironed out. More important is the erosion of the purpose of Social Security, which is a great national pension fund aimed at cushioning everyone, especially the poor, from the shocks of old age.
Its name is Social Security, not Social Maximum Return. Under the privatization plan, the wealthy–with their higher contributions and better access to financial advice–would profit more than the poor, who would be wiped out more easily.
The universality of Social Security–the feeling that all elderly are in the same boat–would be lost and, with it, the willingness of wealthier taxpayers to keep supporting it. If you doubt it, look what happened to welfare.
There’s some fine print in the reforms that the reformers don’t like to talk about. Privatization means ending the present pay-as-you-go system and setting up personal accounts. But the pensions for millions of Americans who have paid into Social Security for 20 or 30 years still would have to be funded.
Even privatizers admit this transition would mean a special “liberty tax” for decades to come of about 1.5 percent–or about three times what it would cost now to mend the present system and keep it whole.
Half the reformers–the Wall Street half–see privatization as a way to turn the nation’s pension system into a fast buck. The other half–the Beltway half–just hates government programs. Put together, they add up to a cure that’s worse than the disease.
