Social Security: Privatize or Bust!
by Andrew Bissell
New Year’s came and went over a month ago, but there’s new cause to uncork the champagne and celebrate. It turns out that Social Security, the federal retirement program we all thought we’d have to finance with crushingly high tax rates, is doing just peachy. (See www.thereisnocrisis.com for some truly pollyanna projections.) In fact, it has enough assets and expected future income to remain solvent until 2052, at which point, I suppose, we’ll all be old enough to just join AARP, collect benefits, and let our children figure out how to pay for the demographic nightmare we couldn’t be bothered to remedy.
Don’t become too enamored with that idea though, because these rosy estimates depend on a trust fund that is sheer fantasy. In a neat bit of accounting alchemy, the federal government counts Treasury bonds as assets on Social Security’s balance sheet, thereby magically transmuting a massive pile of liabilities into assets.
Since Social Security’s assets are a mirage, the date that really matters is not the year that it goes insolvent, but rather, the year that its tax collections drop below its payouts. That year, and every year thereafter, promised benefits can be provided only by raising taxes, borrowing money, or cutting spending elsewhere in the federal budget. This financial reckoning is slated to begin just 15 years from now, in 2020, according to intermediate projections. And it just gets worse as more Baby Boomers retire and the population continues to age.
To help address these mounting costs, President Bush has floated a proposal to allow workers to invest a portion of their payroll taxes in personalized, private accounts. While these accounts would not provide additional revenues to address Social Security’s mounting costs, their higher returns will help alleviate the pain of reduced benefits that today’s younger workers will undoubtedly face upon retirement—and perhaps, clear the way for means-testing and other needed reforms.
Of course, the words “private” and “market,” uttered in tandem, provoke acute skepticism and dread in Democrats and progressives, and they’re fighting Bush’s proposal tooth-and-nail.
First, to distract attention from the higher returns possible in private markets, they overstate the risks of private investing. They call the stock markets “a casino,” and investing, “gambling.” The truth is that the stock market is the exact opposite of a casino: play a consistent strategy for long enough (20 years or more), and you’ll make money every time. Show me a casino where I can do that, and I’ll show you my retirement plan.
When they aren’t busy making invidious comparisons between Las Vegas and Wall Street, privatization’s detractors try to drum up fear by raising the specter of high-profile corporate failures. “Just ask the Enron and WorldCom investors what they think of the stock market!” they cry. It’s a dishonest ploy that tries to pass off the market’s worst failures as the statistical norm. For every one Enron, there are a thousand solid, honest companies with growing stocks. In a properly diversified portfolio, stock implosions are a rare blip dwarfed by months and years of steady returns.
But amidst all this debate over market returns, portfolio diversification, and unfunded liabilities, there’s a much more important moral principle that goes unstated: No one has the right to make promises to seniors with your money.
Social Security’s defenders compare it to “insurance,” a promise to retirees that they can leave the workforce with the “dignity” of a minimum income, guaranteed by the federal government (that is, by the strong young backs still working every day to bring home a paycheck).
The comparison is tenuous, at best. Insurance is something purchased to protect oneself from unforeseen events like fire, flood, or premature death. But unlike these calamities, old age is a certainty, a simple fact of life for those who live long enough to enjoy it.
Everyone grows old or dies young. Either way, Social Security’s a raw deal. Live to eighty, and you could have made much better returns on your payroll taxes by prudently investing them in the private market. Die young, and you won’t collect a single thin dime of benefits from a program to which you contributed thousands of dollars. And since when did collecting government checks for the rest of one’s life become a form of exalted “dignity?”
Far from dignity, this is injustice, and I hope Social Security is abolished some day. But in the interim, I’ll take President Bush’s proposal, a bold move toward private accounts that could relieve the financial pressures on Social Security before they build to a full-scale crisis. I just hope his efforts aren’t stalled by a bunch of New Deal dinosaurs who would rather dig trenches around another welfare program than allow Americans to achieve true retirement independence.
This article was originally published in The Montana Kaimin on February 1, 2005.
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