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February 6, 2005
Saving Social Security
As I wrote in my assessment of the State of the Union address, the Democrats have traded their donkey for an ostrich. They are bound and determined to ignore the realities of Social Security. And it's not just some of them, either. Every single Democrat Senator says that he or she is opposed to the president's plan. They demonstrated this by booing him when he said that the program was going to go bankrupt. Yet everyone also seems to acknowledge that the current state of affairs is not sustainable. What gives?
Most of us know the critical dates already, which the president outlined during his State of the Union address;
Thirteen years from now, in 2018, Social Security will be paying out more than it takes in. And every year afterward will bring a new shortfall, bigger than the year before. For example, in the year 2027, the government will somehow have to come up with an extra 200 billion dollars to keep the system afloat — and by 2033, the annual shortfall would be more than 300 billion dollars. By the year 2042, the entire system would be exhausted and bankrupt.
The cause is simple; Social Security is a pay-as-you-go system, and demographic trends have changed the calculus dramatically. In the 1930's there we 16 workers supporting every retiree, today there are 3.3, before the half-century point there will only be 2.
One of the best articles on the subject I've seen is "An Idea Whose Time has Come," by Ramesh Ponnuru, and is in the latest print National Review. If you have a digital subscription you can view it online.
Ponnuru looks at the problem and what the liberals are telling us;
The president says that “the crisis is now.” That comment has inspired a lot of fairly tedious semantic debate. Let’s just say that we have a serious problem. It is true that we do not have to fix it immediately. It is also true that every year we wait, the choices get worse. We can gradually cut benefits if we get started now. If we don’t, we will have to cut them (or raise taxes) very sharply. Andrew Biggs, now a commissioner at the Social Security Administration, has estimated that delaying reform for one more year will cost $600 billion — and that cost goes up every year. The Titanic didn’t have a crisis until it hit the iceberg, but it would have been better off gently steering a different course beforehand.
Liberals contend that the scenario I have painted above is alarmist. Social Security, they say, will not actually go bankrupt until 2042. The program can be saved with some minor adjustments. Just rolling back Bush’s tax cuts would raise the necessary funds. If the economy grows better than expected, the program might have enough revenues to pay for its promises.
None of this is true. The idea that the problem does not start until 2042 depends on sleight of hand. For several decades, the program, in anticipation of the retirement of the Baby Boomers, has collected more revenues than it pays out. The surplus has been banked in a Social Security trust fund. The liberal argument is that when payouts start to outstrip revenues, in 2018, the program can just draw on the trust fund — and it can keep drawing on it until 2042, when it is scheduled to run out.
Liberals — I mean you, Paul Krugman — have spent immense amounts of verbiage obscuring the fact that the trust fund is an accounting fiction. Its assets are IOUs from the rest of the federal government. When 2018 rolls around, the government will have to find the money to pay off those IOUs. It will have to raise revenues or cut spending or borrow elsewhere to do that.
Further, he points out, the "minor adjustments' aren't all that minor." Either taxes will have to be raised fairly significantly, or benefits cut by just as much. Even if the economy continues to grow at a high rate, something that is not at all assured, we will not bring in enough money to solve the problem. The reason is that a growing economy means increased wages, and since benefits are tied to wages, we're back where we started.
Wage and Price Indexing
How about moving from "wage indexing" to "price indexing"? Turns out that idea has some fairly significant pitfalls too.
Moving from “wage indexing” to “price indexing” isn’t a minor change. The middle-income worker of 2050 would be getting an annual benefit worth 37.5 percent less than he would have gotten under wage indexing. Price indexing would eliminate Social Security’s shortfall all by itself. Would it be a draconian cut in benefits? If wages grow over time, workers will be putting more tax money into Social Security: Shouldn’t they get bigger benefits as a result?
What that question ignores is that Social Security is not capable of converting our worker’s payments into those massively higher benefits. The only way he could get those benefits is if he agreed to pay more taxes over the course of his working life (and to work in the smaller economy caused by higher taxes on everyone). The system can’t pay for the larger benefits without tax increases. So nothing he could actually have, on terms he would want to have, would be taken away from him. If our worker wanted more money for retirement, he would almost certainly prefer to invest additional money himself rather than have the government raise his taxes.
On top of all this, Social Security is a rip-off. If presented with it as a choice, no one in their right mind would sign up. The reason is simple;
The program can afford to give a middle-income 25-year-old only 91 cents for every dollar he is going to put in over the course of his working life. Price indexing recognizes that reality, but does nothing to improve it.
Private Accounts
The answer is allowing people to put some of their money into private accounts. This is not at all speculative or risky, as liberals would have us believe. First, no one is proposing that the investment options be wide open. Second, there are many ways to enforce a diversity of investment. Third, and this is the most important, we are talking about long-term investment. If you take any twenty year period of the stock market, the market has always been higher at the end of those twenty years than it was at the beginning.
Yes there will be a difficult transition period. But ignoring the problem and pretending it can only be solved through "minor adjustments" will only push back the day or reconing, and when it does arrive make the choices far worse.
The Politics
Reforming Social Security is arguably the hardest domestic thing any president has done this century. Civil Rights was difficult enough, this will at least be it's match. Ponnuru points out that every single Democrat Senator is opposed to the president's proposals. And it's not just that they're opposed to the details; they don't want to even talk about it.
But if he succeeds
If he manages to get that policy enacted, it will not only be the signal domestic achievement of his presidency. It will be the biggest legislative victory in the modern history of conservatism.
This is worth fighting for. And fighting hard.
Posted by Tom at February 6, 2005 1:34 PM
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