TCS Daily

It's not the government, stupid.

By Phil Kerpen - June 27, 2005 12:00 AM

Too many people involved with Social Security reform, particularly the politicians and the people who cover them, spend too much time talking about trust fund actuarial projections, solvency and other esoteric aspects of the process. Ho-hum, especially for younger workers.

The way to reach the young is to tell us the stark and unvarnished truth: grandma, grandpa and funny old Uncle Gus are ripping us off. For a young single male my age, 26, Social Security promises a real rate of return of 1.5 percent.

But that's not what it will actually be able to pay.

Because the demographic trends predict a shrinking pool of workers and a growing pool of retirees, the actual return I can expect on my so-called investment in Social Security is closer to half a percent, less than I can get in a savings account.

So the real problem, for people my age, is that benefits are too low -- way too low -- not that they're too high. And that means that any increase in taxes or cuts in benefits would lead to an already bad deal becoming much worse. Under that scenario most young people would experience a negative return on investment, paying in more to the system than they will receive in benefits.

Wrong Focus

By focusing the debate on solvency the politicians, many of whom are themselves near retirement age already, are playing a shell game. They are directing eyes away from where the pea really is to the place it isn't.

The solvency shell game is about what is best for the government, not what is best for workers. It's about making the government's books balance on paper, while spending goes unchecked and the Social Security trust fund is raided year after year after year. The current pay-as-you-go system is fundamentally unsound whether or not it's in actuarial balance.

The typical solution to every preceding Social Security crisis was to raise taxes and the retirement age while cutting benefits or changing the formula. The 1983 tax increase raised a lot more than the trust fund paid out - about $1.7 TRILLION, with a "T", or $17,000 for every U.S. household.

None, I repeat, none of that money will be used to pay benefits for today's young workers. It's already spent -- spent on projects like Alaskan berry research and international fertilizer institutes and other pork barrel projects that make politicians look good while making our prospects for a secure retirement look dim. The trust fund concept is a deeply dishonest one -- the government loans money to itself, spends it, and then claims the loan is a real asset. There's no money in the trust fund because it's already been spent.

In the next few years, as the Baby Boomers start to retire, someone will have to come up with the money to pay the benefits they were promised and, this time, accounting gimmicks won't get the job done. By the time the younger workers retire, the U.S. economy may have already collapsed under the Baby Boomer burden.

Worker's Rights

The fact that hard choices might have to be made has kept most of the politicians from tackling the issue head on even though a sensible compromise already exists and has been introduced. The DeMint plan - for the legislation's chief sponsor, Sen. Jim DeMint, R-SC -- recognizes the reality that the only way to keep Washington from spending our Social Security money is to take it away from them. The only real way to take it away from them is to put it into personal accounts.

With personal accounts, we, the working people, would own and control those accounts, and Congress wouldn't be able to touch the money. And with a safe mix of stocks and bonds, we would see real rates of return of at least 5 percent, and more likely 7 or 8 percent. We would begin, slowly at first, to accumulate real wealth and start on the road to a secure, prosperous retirement.

This approach is gradual and would give ample time for the financial markets to react and tweak administrative problems that may arise. Down the road, if things go smoothly, the accounts could be expanded to reform the entire program. In the short term, Congress is blocked from raiding any more of our money while workers can begin making a down payment on their future prosperity.

It's also good politics and it's good for the people, both current and future retirees. It doesn't make sense not to do it.


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