12.12.04

GET INVOLVED. Betsy at Betsy's Page reaches the young.
Both my husband and I have found that when we explain to our students in college and high school how the Social Security system actually works today and how it would work with private investment accounts, they are overwhelmingly in favor of allowing individuals the right to invest some of their Social Security in the markets. This is not only the right thing to do - it's a winner politically if it can be made clear to people so that they can evaluate the demagoguery that the AARP will throw at the idea.
A linked David Brooks column spells out the stakes.
This is not 1932 any more. This is not the age of big, static state institutions. This is actually about building a bridge to the 22nd century.
Two historians at Northwestern University have not yet grasped the message.
Social Security has served the nation well for 70 years and will continue to do so unless ideologues ruin it in the name of "fixing" it. Not only does Social Security not need the radical changes proposed by the Bush administration, those "reforms" will destroy the principles upon which this admirable system of social insurance was founded.
OK, tell us how you really feel.
Social Security was established in 1935 above all to prevent the elderly from falling into dire poverty. Private schemes for supporting the retired had failed badly--corporate pension plans went bankrupt, stock market portfolios melted away. Hence, the nation already has had experience with "privatized" retirement, an experience that ended disastrously with the onset of the Great Depression.
Talk about ideas preserved as if in amber. But look carefully at that final sentence. Its logic: There was a Great Depression. Private pension plans went bust. Therefore, private pension plans ought not replace Social Security. There's just one little problem with the argument. Social Security is not depression-proof either. It uses current payroll taxes to support current retirees. A depression is a situation in which people are not working, which a fortiori means smaller payrolls to tax. Keep that in mind as you read on.
The underlying principles of Social Security are a kind of social contract that is both intergenerational and intragenerational. That is, those who are working pay the benefits of those who have retired; and those who have never done paid work (widowed homemakers and dependent children, for instance) receive benefits from those who have worked or still do. Benefits vary according to salary-based contributions, but they are nevertheless progressive: Those who have earned the lowest wages enjoy a proportionally higher benefit. These noble principles assure that everyone who pays Social Security taxes helps care for everyone else, in return for the younger generations' help when we can no longer work.
I rather like Econo Pundit's characterization of this funding scheme:
Now imagine highway #2: a perpetually deteriorating tollway which must be feverishly maintained 24 hours a day, 7 days a week, crews constantly on the job. And here's the problem: the maintenance crews are financed by current tolls. If lots of cars are crowding to get onto the tollway maintenance crews are well-financed and the highway runs smoothly. Once all those cars crowd onto the highway and few new entrants provide new tolls, well, things kind of slow down.
Furthermore, those who have earned the lowest wages will collect a proportionately higher benefit for as long as they live. Longevity is a normal good. If I wanted to be cynical, I could suggest that Social Security's survival relies on the early deaths of some of its members. The historians' argument simply rephrases the old defense of an underperforming pension plan as an underperforming survivors and disability insurance plan bundled with it. And at least one Chicago area pensioner doesn't buy the intergenerational compact.
When I was working, I paid into the Social Security system every week. I had no choice; the money was deducted before I ever saw it. This was no problem for me, because I understood that my turn would eventually come to receive my Social Security after retirement.

I, and many others like myself, played by the rules.

Now that I am retired, I find that the payment that I receive is nowhere near enough to live on, let alone be socially secure. Fortunately I saved money in an individual retirement fund and a few investments.

Today senior citizens live much longer than the Social Security Administration planned on, so the system is going broke.
No doubt my Northwestern colleagues would reject this pensioner's counterexample.
Not only does the Social Security system operate efficiently and without corruption, it is essential to the standard of living of millions of elderly Americans. According to the Century Foundation, a leading research institute, it provides more than half of the income for more than 60 percent of families headed by someone 65 or older; and some 12 million households get 90 percent or more of their total incomes from Social Security.
On to the substance. Perhaps some of those pensioners would have a bigger pension had there been a real lockbox, otherwise known as their own account, to draw on. To suggest that, however, is only slightly less evil than wishing an atheist "Merry Christmas."
Those who wish to allow workers under 55 to set up private investment accounts with at least part of their Social Security taxes argue that the system is in crisis and must be reformed. They claim the coming retirement of the Baby Boomers will bankrupt the Social Security Trust Fund, which holds the premiums we pay each month. They assert that partial privatization is the way to save the Trust Fund because the benefits eventually paid to those with private investment accounts can and will be reduced. But these claims are false on two grounds.

First, the system is not in financial crisis. Economists and actuarial accountants have studied the problem every which way from Sunday, and the most reasonable estimates conclude that the Trust Fund, which has a huge surplus at present, will be able to pay benefits at the currently enacted rates (which increase with inflation of wages) through 2042. Minor adjustments to such factors as the age of retirement, the level of benefits, extending the payroll tax to those not now included or raising the ceiling on taxable income (or some combination) would secure the Trust Fund through 2075.

Second, it is obvious that allowing millions of workers to divert all or part of their Social Security taxes from the general Trust Fund into personal accounts would cause a massive deficit in the Trust Fund and actually generate the crisis that is falsely predicted. Even the White House and its conservative allies in Congress admit that partial privatization of Social Security would cause a huge "transitional" problem--the gap between Social Security intake and outflow until the reduced benefits under the new system would take effect. President Bush has not said how he would pay for that gap, but an increasing number of members of Congress say it would have to be paid for by massive government borrowing. Experts estimate that such borrowing would amount to about $2 trillion or more, on top of the total national debt of about $7.5 trillion. Given the current shakiness of the dollar, those "transitional" costs would be dangerous to the whole economy.
Let's take those points seriously. The first point says that today's entrants to the workforce face a depleted Trust Fund upon their retirement (2042-2004=x, where x is left to the reader as an exercise) which can be fixed by effectively cutting their pensions (means-testing, benefit cuts, delayed retirement, higher payroll tax rates, or raising the maximum salary subject to tax all do that) or by confiscating the vested pensions of workers currently exempt from Social Security tax, including Illinois state university employees. Oh, and if there is a serious recession or a depression, all those long term forecasts of current revenues are worth precious little. The second point complains that a contingent liability -- benefits to be paid out of future tax revenues -- converted to a known liability -- securitized pensions -- is dangerous. Did these guys work for Arthur Andersen? There is a more thorough and link-rich send-up of the phoney transition cost problem at Constrained Vision. Go there now or go there when you finish. I'm not done smacking these guys around.
Yes, Social Security will face a shortfall eventually. This is simply the nature of insurance schemes, which in turn make adjustments.

When hurricanes overtax homeowners' insurance, rates and deductibles go up and future payments go down. When private retirement pensions are inadequately funded, government agencies force companies to increase contributions. In other words, we adjust to changing resources and needs without destroying the underlying principles. We do this all the time in national life. We don't shut down the Defense Department or move its funding to private sources when expenditures soar and national deficits rise. When the highway trust fund falls short, Congress renews appropriations for it. We make reasonable adjustments to keep essential entities going. The entire federal government continues to operate despite enormous shortfalls and, in fact, Social Security already has made many adjustments to adapt to the nation's changing demographics and economy.

More important, allowing the establishment of personal accounts with Social Security premiums would violate the intergenerational and intragenerational social contract on which Social Security was founded. This social contract stands for mutual support, while personal accounts represent a completely different idea: self-interest. The main argument for personal accounts is that smart investors could earn more for themselves than the current Social Security plan would yield. Apart from the facts that investment in the stock market is always risky and that workers can set up private investment accounts with their own money now, the personal account proposal for diverting Social Security taxes would reduce benefit payments for the great majority. Is that what Americans really want to do? In an already atomized society, do we want to further sever our bonds with each other?
Sigh. Contracts, and mortgages, and investment clubs, all provide social bonds. In your Superintendent's view, those bonds, which act on gains from trade, are preferable to political bonds, which in the case of Social Security involve the theft by the current oldsters of the current youngsters' future. At least the professors didn't invoke Halliburton, which comes to mind when somebody raises the notion of privatizing the War Department. I would also guess that these people never met Lynne Kiesling, given their ignorance of privately financed highways.

RUNNING EXTRA: Katie at A Constrained Vision links to this post with some additional observations, including a Good Question.
We are far more certain about an impending Social Security crisis than we are about an impending global warming crisis, yet folks on the left tell us to worry more about the latter than the former. If they abandoned this illogical position, our children's futures would be much brighter.
Worry. Don at Left2Right frets about visible theft by current oldsters from future youngsters. The title of his post, "Don't Tax: Spend Anyway" introduces a complaint about rising discretionary spending by the national government coexisting with tax cuts. Money quote:
The real problem is that we are plundering future generations, who have no democratic voice at all.
Wrong. The real problem is that we are depriving future generations of economic growth that they could have, if we converted a contingent liability of unknown size (the unfunded obligations of Social Security) into a securitized liability that provided genuine savings for genuine investment. That would reduce the dependence on Japanese savers that Professor Herzog fears.

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