February 07, 2005,
How about those debates over Social Security? President Bush wants to privatize some of Social Security and the Democrats don’t want to change a thing. Harry Reid, the new minority leader in the Senate (how the memory of Tom Daschle fades so quickly!), says he has enough Democratic votes to stifle the president’s proposals even before they’ve been seen.
A couple of favorite Democratic themes that institutionalize the idea of Social Security have been the “lock box” and the evil of “raiding the Social Security trust fund.” Every time Republicans try to fix the system, Democrats parade out these notions to make sure the public is against any change. Even the AARP, the largest representative of retirees, has come out against any plan to privatize some of the Social Security system.
The truth is that there is no money in the Social Security trust fund. Most Democrats can’t handle this fact and instead fanaticize about a Social Security trust fund that supposedly represents a giant savings plan. The charade is exacerbated by the holding of only low-yield government bonds in the trust fund, as if these were equivalent to cash in a lock box that is available to pay beneficiaries when the “fund” is drawn down.
When the draw-down happens, the truth is that the federal government has to sell more bonds to finance the payoff of the bonds that are held in the trust fund. As the Wall Street Journal has pointed out: “Sorry to break it to these trusting souls, but there are no Social Security accounts. Today’s payroll taxes are spent by today’s politicians.” In other words, the Social Security system is a “payout” system you pay in and the politicians pay out.
Given this truth, how can we view Social Security solvency, the system’s ability to pay benefits in the future, and the viability of the privatization plan proposed by President Bush?
First of all, the truth is that the entire Social Security “system” is a general liability of the government since the government “borrows” from the trust fund. It’s just like when the government borrows from the public to finance the budget deficit. So let’s just call the Social Security system another federal government liability and lump it in with all the other liabilities the federal government finances.
As a general liability of the federal government, the system will always be solvent since the government writes checks to beneficiaries and nobody bounces U.S. government checks. Similarly, the system won’t go broke because the liabilities of the system are denominated in U.S. dollars and the federal government writes checks denominated in U.S. dollars. There is no limit on the federal government’s ability to write checks.
Another bugaboo in the Social Security debate is the shrinkage in the number of workers supporting retirees. According to David Wessel of the Wall Street Journal, “In 1960, there were five workers for every Social Security beneficiary. Today there are slightly more than three. In 30 years, there will be only two. That means fewer tax-paying workers to support more benefit-receiving retirees.” Obviously, the five workers in 1960 were paying a lot less into Social Security than the three are today.
And then there is productivity. Given the growth rates in productivity, one would think we could sustain sufficient economic output to pay for the additional beneficiaries. The key variable is the overall growth in the economy, not the ratio of workers to beneficiaries. President Bush’s policies to keep the economy growing at a healthy pace will do more for government solvency than will any adjustments in retirement age, payout manipulation, or increases in payroll taxes.
President Bush’s privatization plan offers a different benefit than provided by the current Social Security system. This benefit should change the name of the national retirement program to the Capitalist Security System. By allowing participants to actually save for their retirement, participants have a say in how that money is invested. Importantly, this money is to be used as each participant sees fit before and after death. Today, the Social Security system’s life-insurance benefit is miniscule. In some circumstances, all the worker payments that go into Social Security go the same way as personal tax payments into the big black government hole, never to be seen again. The president’s plan would give workers’ families a share in those lifetime savings.
Sometimes accepting the truth is difficult. This time it’s easy.
Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.