TCS Daily

Technology, Growth, Not Surplus, Provide Only Answer For Social Security

By Duane D. Freese - September 10, 2001 12:00 AM

Here's a question that journalists, and even some economists, ought to dust off regarding the Bush administration possibly dipping into the so-called Social Security surplus for $9 billion this year: So what?

What difference does it make? Really? The Congressional Budget Office forecast of a $9 billion deficit versus the administration's prediction of a $1 billion surplus amounts to a bare difference of 1/200th difference -- 0.5%. In a $1.9 trillion budget, that is trivial. In a $9 trillion economy, it is nothing.

Yet, economist and columnist Paul Krugman, who as an economic modeler ought to know better, used his New York Times column last week to say the administration is "lying" and "cooking the books." And Democrats and political pundits are expressing worry about the disappearing budget "surplus."

Throughout the Clinton administration the CBO's numbers proved to be too pessimistic, with the agency constantly revising the deficit down and then the surplus up due to faster economic growth and rising revenues from capital gains.

The point, of course, isn't that CBO and OMB disagree. The point is that Bush administration critics are looking for something to beat the Bush tax cut with and the CBO report was handy. Those who favor redistributionist tax policies, as Krugman and many Democrats do, believe government ought to do the spending, not individuals, at least not with their own money.

They cloak this animosity to the private sector behind the virtue of protecting the "surplus" for Social Security, as if the trust funds for them actually exist. But as the nonpartisan Congressional Research Service has noted, they don't, really. "The trust funds do not reflect an independent store of money for the program or the government." They are a government bookkeeping entry "creating a form of IOU from one of its accounts to another."

Oddly, if the trust funds were real, the government's borrowing from them would increase their assets, not deplete them, as critics charge. They aren't, though. So, borrowing from them just doesn't matter as far as their solvency or insolvency is concerned.

Nor does it matter in the big scheme of things if the surpluses don't pay down all of the $3 trillion federal debt. That is small potatoes, too when the government faces a $47 trillion liability, in today's dollars, for Social Security. Reducing that by $3 trillion will save future taxpayers barely a nickel on the dollar.

Thus, the problem the country faces isn't, as Krugman argues, "the tax cut, stupid." It's how do you deal with the other 95 cents of that liability. In short, it's the blind stupidity of those who think you can deal with the massive unfunded liability of the current Social Security system by piling up phony government surpluses in its unreal trust funds. All that will do is either: A. swamp future workers with massive tax increases, or B. reduce benefits to future retirees to leave them in penury, or C. both.

The demographic and economic realities aren't that hard to understand.

In 1970, there were five workers for every retiree. Today, there are three. By 2030, there'll be 2. Now, from 1970 to today, we've dealt with the shortfall by raising taxes, from 8.4% on wages up to $7,800 in 1970 to 12.4% on wages up to $80,600 this year. Benefits also have been cut by the backdoor methods of raising retirement ages for future retirees and by taxing larger shares of social security benefits for retirees with incomes above $30,000. As a matter of fairness, equity and economics, we've done both probably, too much.

The tax and benefit cuts have created the current Social Security surplus, which is forecast to total $3.5 trillion by 2011. But they've come at a high cost. Personal savings have plummeted in tandem with Social Security tax hikes. Thus, while the government is running surpluses, families are not - a pretty bad trade for both individual well-being and liberty. At the same time it has made it tougher for families to save for their own retirement, the government has given them an increasingly worse deal.

Back in 1940, a 65-year-old man could expect to live another 12.7 years, but would get back what he put into Social Security in less than 3. Today, a man can expect to live about 16 years on reaching 65, or to the age of 81. But he won't get back what he put into Social Security - and this doesn't include the interest it might have earned if it had been put in a private bank account instead - until he's 82. And as for the future, by 2030, the 65 year old can expect to live 18 years, until he's 83, but he won't get out what he put into Social Security unless he lives until he's almost 92.

In short, the Social Security system's method for meeting its obligations is to not give all the money back that people put in. The system benefits if people die young.

And what do the proposals of those who want to keep the system as it is do? More of the same. They'd keep the system solvent by borrowing massively, taxing heavily and paying retirees lightly.

The bipartisan commission that President Bush has appointed to see if a partial privatization of the nation's main retirement system - as a host of other countries from Britain to Chile to Japan are successfully doing now - could avert such a result.

But the key to making any plan work is to get private, not phony government accounts, saving, investing and growing again. As Carolyn Weaver, a pension specialist who worked on President Clinton's Social Security commission, noted, the need today is to create meaningful savings.

Government can help that process most through smart deregulation. As Federal Reserve Board Vice Chairman Roger Ferguson Jr. told an audience at the U.S. Embassy in The Hague, the Netherlands, in June: "Deregulation has altered the business landscape by allowing - indeed forcing - businesses to focus more clearly on a more competitive marketplace, with fewer constraints and increased flexibility." Midnight regulations by the Clinton administration before leaving office haven't helped. Government must ensure its rules produce more benefits than they cost. Otherwise the loss of economic activity they cause will further deprive the country of meaningful savings for boomer retirements.

Government also must invest wisely. How will it maintain national defenses in the face of the demographic reality of private demand for workers? . Democrats can attack Bush as much as they want for his high-tech approach to defense, but future armed forces will need to be more tech heavy to compensate for manpower losses.

Money spent on education, another Bush priority, could have big returns, too. To become more productive to handle a rising number of retirees, the economy will require ever more people proficient in technical professions. The speed of technological change, meanwhile, will demand they constantly upgrade their skills. Lifelong learning, online and at home, not in schools, is the only means to do that. Current tax, student aid and other rules that discourage such distance learning need immediate reform.

Economic growth demands open markets. Free trade spurs innovation, encourages productive investment and, through competition, funnels investment into the most productive activities. To negotiate open markets abroad, the president needs the power to deal with foreign nations in a comprehensive manner. The North American Free Trade Agreement and the World Trade Organization ventures underlay growth in the 1990s; a similar Free Trade for the Americas is needed now, along with vigilance against new forms of protectionism - such as unscientific attacks on the products of biotechnology.

And finally, economic growth will require government become more efficient. It must reduce its demands on private sector resources so they can produce the growth that will ultimately make the rising number of retirees affordable.

So what if Bush and OMB have a $10 billion discrepancy in their budget forecasts this year? That just doesn't matter. What matters is changing the forecast for the future - and the only way to do that is by spurring productive economic growth.

The nation needs a real agenda for growth. Higher taxes, bigger government and phony Social Security surpluses don't provide it. Lower taxes, a reformed Social Security system, smaller government and increased private investment just might. Indeed, what, really, is the alternative?

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