TCS Daily

Welfare-State Enthusiasts Desperately Fight Social Security Reform

By James K. Glassman - August 23, 2001 12:00 AM

President Bush is convinced that Social Security reform is an idea whose time has come. And he's right. Soon now, he will propose that Americans be allowed to take some of the money that now goes to payroll taxes and put it into personal investment accounts - a move that will both strengthen Social Security and provide people with financial assets they can own themselves, to use for retirement or pass on to their kids, their church or charity.

Without reform, Social Security is headed for disaster.

The only way to save the system as it now stands will be to cut benefits or raise taxes - drastically.

Not too many years ago, few elected officials had the courage to talk about reforming Social Security. It was the "third rail" of American politics. Touch and it, and you die. But President Clinton appeared ready to tackle the crisis as his final legacy. After the Lewinsky scandal, however, he got preoccupied. President Bush, whose style is highly strategic, began planning Social Security reform early in his presidential campaign. While some Republican politicians worry that even discussing reform could hurt them in the 2002 congressional elections, Bush wants to go ahead. He thinks it is the right thing to do - and that he can convince the public.

Certainly, the facts are on his side - but the opposition is intense. Advocates of welfare-state policies realize that Social Security reform is the first step in destroying the dynamic that preserves their power: the process of government sending checks to as many Americans as possible. Reform puts power back in the hands of families; once they have it, they won't let it go. They will want to make their own decisions about retirement, the way they make their own decisions on where to live (two-thirds of Americans own their own homes) and what to eat.

Social Security reform would create a nation of savers and owners - at a time when savings rates are extremely low and ownership of assets is concentrated among the wealthy. The median African-American household held only $3,060 in cash, certificates of deposit, stocks and bonds in 1998; the average Hispanic household, only $1,200. Social Security reform would change all that.

It would also add to the capital flowing into the businesses that propel the U.S. economy - from high technology to energy to consumer goods. The reason that TechCentralStation backs reform is that it would be a boon to technology.

Opponents have a difficult time defending the current system with facts, so they resort to smears and outright falsehoods. One of the worst offenders has been the New York Times. But, first, some background about reform.

Earlier this year, President Bush appointed a commission - eight Republicans and eight Democrats, headed by former Sen. Daniel Patrick Moynihan (D-NY), a liberal icon, and Richard Parsons, chief operating officer of AOL Time Warner -- to come up with a way to save a system that might have been helpful in the depths of the 1930s Depression but that faces a terrible crisis today.

The commission began with an interim report, issued in July, that clearly described the crisis. Social Security - unlike private pension plans - is unfunded. In other words, there is no pile of financial assets -- liquid stocks, bonds and cash - to provide the benefits of the tens of millions of retirees in the program. Instead, the taxes of working Americans go to pay the benefit checks for those retirees.

Unfortunately, the composition of the U.S. population has changed thanks to health improvements and the Baby Boom, and soon there will not be enough workers to support the retirees. Back when Social Security was started, there were 40 workers per retiree; today, there are 3; in another 30 years, there will be just 2.

As a result, in 2016, the revenue from the Social Security part of payroll taxes won't be able to pay for the benefits of that year's retirees. These cash shortfalls will then get bigger and bigger - up to $318 billion (in 2001 dollars) by 2035.

In other words, the Social Security system will become insolvent. Under the current set-up, there are only two solutions: cut benefits by $4,600 a year (again in 2001 dollars) by 2030 or raise taxes by about half by that date. Neither of those alternatives is very attractive - or politically possible. At any rate, President Bush has firmly rejected them. He has told his Commission to Strengthen Social Security that it can't recommend reducing benefits or hiking taxes. Period.

But what about the Social Security trust fund?
Don't make me laugh.

Each year since the 1980s, payroll tax revenues for Social Security have exceeded benefits paid out to retirees. The extra cash, by law, had to be given to the federal government to use to pay for federal programs like buying missiles or funding Head Start. In return, the government gave the trust fund IOUs, or special bonds (not to be confused with the kind of Treasuries, corporates or municipals that are traded among investors every day). These IOUs now total over $1 trillion, and the figure will keep rising until 2016.

But Social Security beneficiaries can't be paid with the IOUs out of the trust fund. They amount to vaporware, pieces of paper. The IOUs have to be converted to cash, and only the Treasury can do that. How? Either by increasing taxes, cutting federal spending or borrowing. Those are the only alternatives.

Lately, Democratic politicians have been saying that it is not until 2038 - the date when the "assets" of the trust fund will be used up - that the Social Security system becomes insolvent. That's nonsense. Beginning in 2016 - just 15 years from now - the inflow of taxes won't cover the outgo in benefits.

Here is the way that the Congressional Research Service describes the situation: "The Trust Funds themselves do not hold financial resources to pay benefits - rather, they provide authority for the Treasury Department to use whatever money it has on hand to pay them." And where will the Treasury find the $47 trillion (in 2001 dollars) to pay for the shortfall that develops between 2016 and 2075?

By getting Congress and the President to raise taxes and to issue more and more Treasury bonds - a frightening prospect.

By letting Americans invest 2 percentage points out of the 12 percent of their pay that now goes to Social Security, much of the pressure on the system can be relieved - while at the same time, retirement income can be maintained.

The answer, to put it simply, is saving. If Americans save more, then Social Security can be saved as well. There is no other answer.

Now let's get back to the New York Times.
On July 27, the Times blasted the commission's interim findings in an editorial headline, "A Biased Social Security Report." The Times said that the economic analysis in the report "exaggerates the problems facing Social Security in an effort to justify a quick move toward privatization." Exaggerates? How?

"The analysis maintains that the Social Security system will start to have 'cash shortfalls' in 2016." (Note the snide quotes around "cash shortfalls," as though this phrase were a fiction.) "The commission argues that the trust fund is worthless, since it is held in the form of Treasury bonds that the government would redeem against itself. But these bonds could be sold on the open market any time to finance benefit payments."

In the end, the Times urges President Bush's commission to be "open-minded" - an admonition the paper should follow itself.

A few days later, Robert Pozen, a Democrat who is vice chairman of Fidelity Investments and was formerly law professor at New York University and a partner of Mortimer Caplin, the IRS commissioner under President Kennedy, wrote a letter to the New York Times pointing out serious errors or omissions in the three main criticisms the editorial made:

1. That the Social Security commission exaggerated the financial problems of the system since the assets of the trust fund are real and can be sold on the open market. But they can't! Pozen quoted President Clinton's Fiscal 2000 Budget as saying that the trust fund balances "do not consist of real economic assets that can be drawn down in the future to fund benefits." The Times was caught in the act of exaggerating, or lying. The newspaper should immediately have acknowledged the mistake and apologized.

2. That the commission made an "outrageous misstatement" when it contended that current Social Security benefits end with the lives of beneficiaries. The Times notes that Social Security includes survivor benefits (that is, a small life insurance policy). But, as Pozen points out, the commission's charge was to concentrate only on the retirement portion of Social Security and to leave survivors' benefits intact - and, in fact, the report made that clear. There's no misstatement here, only willful disregard by the Times. The broader issue is that the retirement part of Social Security is an annuity - it pays only as long as the beneficiary is alive, and since minorities such as African Americans do not live as long as whites, they are gypped by the current system. Private accounts would constitute real assets that people would own and could be passed on at death.

3. That two Democrats on the commission, including Pozen, are biased because they work for "investment companies for which individual accounts would present a large windfall." Pozen notes that he will return to academia at the end of the year, that he has said in the past that "personal accounts are not a panacea for Social Security," and that a study by the Century Foundation has shown that "it is unclear whether this business [personal accounts as an alternative to Social Security] would be profitable" because of small account size and regulation. Indeed, mutual fund houses like Fidelity have not been aggressive backers of reform. By the way, the other Democratic member to whom the Times evidently refers is Fidel Vargas, a remarkable Hispanic man who got his B.A. and M.B.A. from Harvard, was elected mayor of Baldwin Park, Calif., and is vice president of Reliant Equity Investors, a private-equity firm that invests in minority enterprises and would never, under any conceivable scheme, benefit from personal accounts under Social Security reform.

So what did the Times do with Mr. Pozen's letter? Told him that it wouldn't run. Too long. So Pozen rewrote it - down to just 150 words. Again, rejected - this time because the Times disagreed with the criticisms. What about the horrendous mistake about selling the bonds to the public? Well, came the reply, Congress could change the law and allow such sales.

It could. Congress could also change the law and eliminate Social Security entirely - or declare every Wednesday a national holiday. But such changes are extremely unlikely, as the Times editorialists know very well.

Opponents of reform have now been backed into a corner. Many of them are saying that the crisis is not so severe. But it is, and the only feasible way out is to increase saving and investing. Those who are intellectually honest enough to concede that saving is the answer then take the position that government should do the investing - an idea rejected by everyone from Alan Greenspan to Al Gore for the obvious reason that it would make the federal government the owner of vast chunks of private U.S. companies, which it would inevitably try to influence, or run. The rest of the world - from France to Russia to China - is moving in the other direction, away from nationalized industries and toward private ownership. Should we move back in the direction of socialism?

The desperation of the New York Times and of many Democrats is evidence that this will be a tough fight. Make no mistake: changing the Social Security system, even a little, will not be easy. But never before has the case been clearer. That's why the foes are squealing.

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