TCS Daily

Realizing FDR's Vision

By Duane D. Freese - November 22, 2002 12:00 AM

Editor's note: This is the third part in a three-part series on political structures and political reform.

"In the important field of security for our old people, it seems necessary to adopt three principles: First, noncontributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps 30 years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities that in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans."
- Franklin Delano Roosevelt, Message to Congress on Social Security, Jan. 17, 1935.

When it comes to debating Social Security, the Republican Party might turn the tables on liberal Democratic critics by simply adopting FDR's principles. What it wants for Social Security isn't to destroy it, as those critics contend, but what FDR wanted: that the system be "self supporting," and include provisions for both compulsory "self-supporting" contributory annuities and voluntary annuities "by which individual initiative can increase the amounts received in old age."

The fact is that today Social Security is far from what its founder - FDR - hoped. Contributory rates at the start in 1937 were low - a combined employee-employer rate of only 2 percent on only the first $3,000. Today workers are compelled to pay out a seventh - 12.4 percent employer-employee combined - of the first $85,000 of their income for annuities that are insufficient for the long run.

As another Democrat, former Sen. Daniel Patrick Moynihan, D-NY, and Richard D. Parsons, COO of AOL TimeWarner, said on completion of the work of the President's Commission on Strengthening Social Security that they co-chaired: "The system is broken. Unless we move boldly and quickly, the promise of Social Security to future retirees cannot be met without eventual resort to benefit cuts, tax increases, or massive borrowing. The time to act is now."

The Republican Party has the opportunity with its control of both houses of Congress and the White House to do what the Democrats when they controlled the White House and Congress refused to do - save Social Security.

But many in the party appear frightened by shadows, such as Democratic National Committee Chairman Terry McAuliffe, who dismissed the bipartisan commission's findings as "classic Chicken Little politics."

The only Chicken Little around is McAuliffe. Following his advice, Democratic candidates ran election ads during the final weeks of the campaign attempting to frighten voters about the commission's recommendations that people be allowed to put some of their Social Security taxes into personal accounts that could be invested in the stock market.

The result was no victory for Democratic candidates, though. It's true that some GOP candidates - at the urging of Virginia Rep. Tom Davis, who headed the GOP House campaign effort - ran away from the findings of the president's commission rather than embracing their reality. But as conservative columnist Robert Novak noted in a recent article, Social Security proved to be "no third rail" for Republicans who addressed the issue squarely.

The reason is as plain as the reality of Social Security's long-term fiscal difficulties. The stock market may have gone down over the last two years, but over the last 30 years, its grown more than eightfold in value. A dollar invested in 1972 would be worth eight today. And money put into Social Security accounts is put in for the long haul, not the short bumps and bounces.

Meanwhile, Congress has forced ever bigger taxes upon the public to keep Social Security from foundering under a sea of red ink. The result: Middle income taxpayers who contribute today to Social Security will never get their contributions out even as the higher taxes make it harder for them to adequately prepare for retirement.

Paul Krugman, an economist and New York Times columnist, can claim, "There isn't any crisis: the system looks good for 40 years, and with a bit of extra resources can survive indefinitely." But he relies on Social Security accounting gimmicks that would make Enron and WorldCom blush. The system has "trust funds" that get nonnegotiable securities receiving special interest rates from the Treasury. It also gets tax revenues assigned to its income stream from the income tax on half of Social Security benefits. They make its books look balanced.

But all that amounts to is the government writing IOUs to itself.

As John C. Goodman and Matt Moore at the National Center for Policy Analysis point out: "Every payroll tax check written by employers is written to the U.S. Treasury. Every Social Security benefit check comes from the U.S. Treasury. The trust funds themselves do not receive, spend or borrow money. Every asset of the trust funds is a liability of the Treasury. Summing accounts over all agencies of government (the trust funds plus the Treasury), the balance is zero. For the Treasury to write a check, the government must first tax or borrow."

Social Security's solvency, under this scheme, can be guaranteed simply by the government promising higher rates that increase its revenues. Raise the interest rate for Social Security bonds high enough, and, voila, it's solvent forever. No crisis. Yea!

But since the only thing guaranteeing those claims isn't negotiable assets but the willingness of future taxpayers to pay higher taxes, it's fraud. Those taxpayers could insist on benefit cuts, rather than pay more. Krugman and Democrats know that. And that makes them blatant liars.

People, especially younger people, are beginning to realize the truth. That's why a Zogby poll sponsored by the Cato Institute, which supports Social Security choice, found overwhelming support for the notion of investing a portion of Social Security payments in private accounts. It's a step toward making Social Security truly self-funded - just as FDR wanted..

Still, some Democrats, such as pollster Geoffrey Garin, warn: "Younger people may have an opinion on Social Security; older people actually vote on Social Security - and that's a big difference."

The problem is that if Republicans listen to that siren song and do nothing, as Garin would have them do, then it is likely that some reform-minded Democrat will take advantage of their cowardice. And in two, four or six years, will arise to implement FDR's original vision and save Social Security for real.

The Republican Party has control of the House, Senate and White House. If it fails now to structurally change Social Security so it becomes fully self-funded, makes no structural changes in the income tax and supports monopolies over structural changes supporting competition in telecommunications, the Grand Old Party will likely head into the wilderness of minority status as happened 70 years ago when FDR came to power. It needs to live by its principles, because it will die without them.



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