Ponzi's revenge

National Review, Feb 24, 1997 by Ramesh Ponnuru

With Social Security in trouble, again, pols must decide whether to prop it up, again, or whether, finally, to scrap it.

"I PREDICT confidently that a Republican presidential candidate in the year 2000 will argue strongly for privatization of Social Security," said GOP pollster Bill McInturff at a forum sponsored by the National Academy of Social Insurance last month. Another panelist, Democratic pollster Celinda Lake, immediately muttered, "And I can't wait to run against him."

Social Security privatization is being discussed more seriously than anyone would have thought possible even three years ago, but it remains potentially hazardous for politicians. When Pete du Pont proposed privatization in his 1988 run for the Republican presidential nomination, rival Jack Kemp accused him of wild-eyed libertarianism. Steve Forbes got a more positive response when he raised the issue last year, against the advice of some advisors. While Forbes remains the most prominent Republican advocate of privatization, nowadays Kemp is on board.

Two fiscal realities, and the demographic trend underlying them, are the primary causes of this seismic shift. The demographic trend has been described as "the graying of America." When the Roosevelt Administration created Social Security, the life expectancy was lower than the retirement age it established. Now 31.2 million Americans, or 12.6 per cent of the population, are over 65. In 1945, 45 workers were paying into the system for every retiree drawing benefits. Now that ratio is about 3.3:1. By 2030 it is projected to be about 2:1. If current benefits and taxes are maintained, the program will go broke. The federal deficits so harshly condemned today will look awfully good in 2030, when it is expected that Social Security alone will contribute almost $200 billion to the deficit -- more than the entire deficit today.

Even while going broke, Social Security will be unable to give today's workers a decent return. That's a political problem for a welfare program disguised (by FDR) as an insurance plan. Workers officially pay 6.2 per cent of their wages as "contributions" to Social Security. (Actually they pay more: the matching "employer's contribution" comes directly from wage funds. Without these taxes, take-home pay would be about 13.2 per cent higher than it is.) They therefore feel entitled to benefits they have "paid for." In fact, benefits paid out are only loosely related to taxes paid in, which are mostly spent immediately. Retirees today are receiving much more than they ever put in; previous generations made out even better. Workers today, however, are projected to get subzero returns.

Less noted is the way the system penalizes elderly people who continue to work; their loss of benefits constitutes a very high implicit tax. This penalty was deliberately designed into the system, based on the Depression-era theory that older workers were holding jobs that could go to the unemployed young, but it's a crazy policy for a rapidly aging population.

These trends have led Rep. Nick Smith (R., Mich.) to introduce a bill to privatize the system over a hundred years. Mark Sanford (R., S.C.) is working on a quicker proposal. Forbes's new "message tank," Americans for Hope, Growth, and Opportunity, is launching a campaign to promote privatization and the flat tax. Rep. Jim Kolbe (R., Ariz.), co-chairman of the House Public Pension Reform Caucus, is holding hearings on it around the country. He says, "1999 is the year to pass something."

To say that the prospect of privatization alarms liberals would be an understatement. They are mounting a furious counter-offensive, so far mostly in print media. They see no "crisis" looming: the Social Security trust fund isn't projected to be depleted until 2029. They say minor fixes have worked before and would keep Social Security solvent indefinitely. The "crisis," they charge, is being manufactured by Wall Street to justify "the most unbelievable rip-off of the century" (James Ridgeway, the Village Voice), "an attempted bank heist" that would "rob the American people of a perfectly good social insurance program for ideology and profit" (Trudy Lieberman, The Nation).

The vaunted trust fund, alas, exists only on paper; or, as the privatizers like to say, there's no trust and no fund. The government uses the Social Security surplus (this year's payroll taxes minus this year's benefits) to finance the budget deficit and fills the fund with IOUs. This is less outrageous than it sounds: would it make sense for someone going deeply into debt to comfort himself by piling up savings in another account? In any case, the surplus won't go on forever: by 2012 at the latest, benefits will exceed payroll taxes and Social Security will start exacerbating the federal deficit rather than ameliorating it. Then the government will be faced with the same three choices -- raise tax revenues, cut benefits, or borrow more -- it would face if the trust fund did not exist. Which, again, it basically doesn't.