TCS Daily

Genuine Welfare Queens

By Nathan Smith - July 29, 2005 12:00 AM

When Reagan launched his populist charge against welfare queens, a lot of women may indeed have been enjoying a regal standard of living on AFDC money, by the standards of Reagan's own Depression-era young adulthood, or by the standards of contemporary Indians, Chinese, or Africans. But few, if any, were living like queens by the standards of the 1980s. Reagan was certainly right in attacking the AFDC welfare program, which, by relieving a lot of people of the need to work, deprived them of the moral and human benefits that flow from serving one's fellow men, isolating and degrading them into a culture of dependency, low self-esteem, and often crime. But liberals had a point, too, when they complained that the welfare queen was a myth.

By contrast, many recipients of Social Security today really do live in regal style. Seniors are far wealthier than younger people. In 2001, the median net worth of over-65s, at $92,399, was more than 12 times greater than that of under-35s, at $7,428. They have slightly lower cash incomes, on average: elderly men's income were 74% of the national average, and elderly women's 69% of the national average. However, the elderly get to participate in Medicare, and many elderly have paid off the mortgages on their homes.

There are, of course, some elderly for whom Social Security stands between them and economic hardship. But a Hudson Institute study finds that "households with incomes over $100,000 receive twice as much in senior benefits as do households with incomes under $10,000." Why should people with incomes over $100,000 be getting any social support from the government, let alone more than poor people? The great scandal of Social Security is that much of the redistribution that takes place through the program is of the Robin-Hood-in-reverse kind. Every month the Social Security Administration collects a certain amount of money from several single mothers working at minimum wage. It then sends a check for this amount to Warren Buffett.

Welfare-liberals and libertarian-conservatives disagree on whether it is morally right to tax the rich in order to help the poor. But we should all agree that it is wrong to tax the poor to help the rich. That's why it shouldn't be any surprise that the most scathing philippic against Social Security I've read is from a left-wing economist, Lester Thurow, in his 1996 book The Future of Capitalism. Thurow's liberal principles compel him to argue that "There is simply no justification for a social welfare system that taxes those with lower incomes (the young) to give it to people with higher incomes (the elderly)." (p. 109-10) (Thurow's measure of income included the market value of in-kind income, making the elderly better off than the national average.) This left-wing attack should be embraced by the right as well.

Of course, if we were taxing poor people to make payments to wealthy bondholders, I wouldn't be protesting. Property rights take priority over distributional considerations. But Social Security benefits are no one's property. If property represents one species of relationship between persons and resources, and welfare represents another species, then Social Security is a hybrid, and a hybrid with highly undesirable traits. Property rights are attached to labor, entrepreneurship, trade and contract, and by respecting them we reward those socially beneficial behaviors. Welfare has a poverty-alleviation rationale, and although it is often detrimental to its recipients and to the economy and society, the stigma that attaches to it keeps it from gobbling up too much of the government budget. But because it attenuates the link between resources and the work that creates them, while avoiding the stigma that attaches to welfare, Social Security becomes a fiscal cancer. And it is the playing field for an inter-generational tug-of-war for social resources. So far this class warfare has been one-sided. The elderly have taken more and more, and the workingman has kept less and less, of his wages.

You've probably heard by now that the Republicans have lost ground on Social Security reform, that Bush's multi-city tour of the US has failed to win over public opinion, etc. It's true that the solidarity of the Democrats and the mainstream media against Bush's proposals has put the brakes on public support. Social Security reform is a complex, technical issue which few people can be expected to understand, particularly since the press has chosen not to play its self-appointed role by explaining the issues to the public in an accurate and informative way. (Probably they are unable to do so because journalists are generally ignorant of economics.) The public, therefore, rationally defers to the views of whichever authorities they trust most, and on the Social Security issue, much of the public trusts the Democrats for historical reasons. So the crucial fact of the Social Security fight so far is the non-existence of moderate Democrats on this issue. If moderate Democrats were available to embrace reform, they could bring public opinion with them. Instead, seeing united Democratic opposition to reform, the public rationally, albeit wrongly, assumes that Democrats must have a good reason to adore the status quo.

What you may not have heard is that Republicans are finally on top of their game when it comes to the best policy fix. Instead of the carve-out private accounts Bush initially championed, Republicans are now focusing on the DeMint plan, which will create personal accounts by placing the payroll tax surplus in personal accounts, in the form of Treasury bonds.

The ultimate goal is still the same: carve-out private accounts, i.e. a forced savings program with the savings channeled into private-sector assets, stocks and bonds. This is simply the only good way for society to reconcile good living standards for the elderly with the saving and investment needs of a wealthy and growing economy. When pundits from the left tackle the issue, they reach the same conclusion.

As Lester Thurow writes:

        "History will record that Lee Kuan Yew got it right in Singapore with his 
        Provident Fund (self-financed social welfare benefits), while Bismarck got 
        it wrong in Germany with his social welfare system of intergenerational 
        transfers. In Singapore every person must contribute 20 percent of their wages 
        to a personal savings account where it is matched by 20 percent from employers. 
        The account's investments are half managed by the individual and half managed 
        by the government and can only be used for health care, education, 
        housing, and one's old age. Taxes are not levied on the young to pay for the 
        old. The old live on what they have been forced to save and the additional 
        saving that they have voluntarily done." (p. 108)

Or take the pop-economics writer from the anti-globalization left, William Greider, who, in a recent article in The Nation, approvingly cited the ideas of Chicago economist Robert Fogel:

        "[Fogel] proposes a savings rate of 14.7 percent (though taking Social Security 
        benefits and taxes into account, a lower rate would suffice for a start). The 
        contributions would be mandatory but set aside as true personal savings, not 
        as a government tax. The accumulating nest eggs would belong to the individual 
        workers and become a portable pension that goes with them if they change 
        jobs, but the wealth would be invested for them through a broadly 
        diversified pension fund. Employers would no longer be in charge (though they 
        could still contribute to worker savings to attract employees). The government 
        or independent private institutions would manage the money, investing 
        conservatively in stocks, bonds and other income-generating assets while 
        allowing workers only limited, generalized choices on their investment 

The details differ, and Greider doesn't acknowledge it, but his concept is the same as Bush's.

What is different in the DeMint Plan is how we'll get there. Bush's plan for carve-out private accounts would have amounted, institutionally, to a sort of Great Leap Forward. DeMint's plan will set in motion incremental changes which may be compared to knocking down a row of dominoes. The first domino to fall is the payroll tax surplus in the Trust Fund. The second domino will be the excessive scheduled benefits that drive the program into long-term bankruptcy. The third domino will be the restriction of personal retirement accounts (initially created as lockboxes to stop the raid on the Trust Fund) to T-bonds. When that falls, all Bush's Social Security reform goals will have been accomplished, and we'll have a system of forced savings and private accounts.

Suppose that the DeMint plan passes and personal accounts are created from the surplus, then fast-forward two years. Now every working person under 55 -- well over 100 million Americans -- will own a personal retirement account consisting of US Treasury bonds. Since everyone and his brother knows that Social Security can't pay promised benefits in the long run, most young people will see these accounts as their sole source of real retirement security. But they'll also realize that the personal accounts are too small to underwrite a comfortable retirement. Moreover, they will learn that new money will cease being deposited in their accounts after about 2018, when the Baby Boomers' retirement puts an end to the surpluses.

At this point, there will be pressure from younger voters to increase the size of their personal retirement accounts. If, up until now, the Social Security program has consisted of one-sided class warfare, with the old fighting against the young and the young not defending themselves, personal accounts will clarify younger generations' stake in the fight.

In this scenario, reform plans like those of Utah Senator Robert Bennett and South Carolina Senator Lindsay Graham will acquire a new appeal.

During the debate this year, Senator Bennett (among others) proposed to bring the Social Security system nearer to long-run solvency through progressive indexation, by which high-end benefits will be indexed to inflation, maintaining but not increasing their real value, while low-end benefits will continue to be wage-indexed. Senator Graham proposed a move towards solvency through raising the payroll tax cap above the current $90,000. As long as personal accounts are not in place, these are bad ideas, because they will lead to larger and more lasting payroll tax surpluses, and channel more money into the Trust Fund, where it would be spent by the government on other programs now, and would have to be paid off with tax hikes and/or spending cuts by younger generations. But if DeMint's personal accounts were in place, larger payroll tax surpluses would be good, because they would turn into retirement assets that people would own. Politically, with personal accounts in place, people will have a concrete stake in solvency reforms: they'll get more T-bonds in their retirement accounts.

So suppose that some variation of the Bennett and Graham plans is passed -- the payroll tax cap is raised a bit, and progressive indexation is introduced -- and then fast-forward another six or seven years. It's the mid-2010s, the economy is continuing with what is turning out to be a surprisingly long boom, and the government faces an unusual though not unprecedented problem: budget surpluses.

Is this pie in the sky? Not at all. The budget deficit seemed like an intractable problem in the early 1990s. By the end of the decade we were running surpluses. Already this year the deficit will be $100 billion less than expected. I'm not necessarily predicting the return of surpluses, but it's certainly possible. And personal accounts will make it more likely. If you give tens of millions of voters retirement accounts consisting of US Treasury bonds, those people have a big stake in the government's long-term fiscal position.

The government will be required to create a certain number of T-bonds every year to deposit into personal retirement accounts. To create T-bonds, it will have to spend more money than it takes in in taxes. But with tax revenues buoyant, and with the economy in no need of fiscal stimulus, the government would not otherwise have chosen to do this. And Republicans and Democrats alike will be reluctant to squander the surpluses on tax cuts and/or spending increases the way George W. Bush did in his first term. Meanwhile, private portfolio managers and foreign central banks will be demanding more T-bonds than the government wants to issue.

At this point, a simple fix will suggest itself. Tens of millions of Americans will now own substantial stocks of T-bonds. The smart ones will know that stocks are the best long-run investment, and will be eager to sell their T-bonds and buy shares. So there will be willing sellers of T-bonds - citizens -- and willing buyers -- portfolio managers, foreign central banks, and the surplus-running federal government itself. But the statute which restricts personal accounts to T-bonds will prevent willing buyers and willing sellers from doing business. Why not -- pundits, citizens, journalists and legislators will ask -- allow individuals to invest, say, 20% of their personal retirement accounts in stocks? And if that works, why not 40%?

Each of these changes, meanwhile, is a step in the evolution of Social Security welfare-queens into personal-account-owning retiree-capitalists. The welfare-property hybrid will be dissolved into its constituent parts. The traditional Social Security benefit will become a social safety net for impoverished retirees, while middle-class and affluent retirees will come to rely on personal accounts for support in old age.

But even the DeMint plan is not likely to pass. What then?

The Social Security issue can't go away for long, because its much-debunked "crisis" is not a political ploy, but a reality. The red ink will come knocking.

If Democrats want to protect the ever-rising scheduled benefits, they'll have to raise taxes. When they try to do that, the bells will ring for a Republican revolt. It worked in 1994. Moreover, Republicans can make use of the precedent of irresponsible obstructionist demagoguery that the Democrats set in 2005, if necessary. The Democrats will have to get sixty Senate seats to have any hope of passing their preferred Social Security fix.

Meanwhile, today's Social Security welfare queens should know this and be warned: Social Security reform will happen, sooner or later. And what's on the table now is the best deal they're likely to get. Bush has promised there will be no changes for those over 55, which is more than generous. Their benefits are not guaranteed by law. Nor are their benefits objectively deserved, based on what they contributed. Still less do they represent a "compact between the generations" in any sense. They are merely the ill-gotten gains from electoral class warfare against younger generations. Only the voting clout of the elderly protects current benefit levels. But every year, the generations for whom the New Deal is the Old Ripoff increase their share of the vote. A fair fix now will stick. But if resistance from today's elderly forces us to postpone the fix, the legitimacy of the system will continue to unravel, and when the issue comes up again, the benefits of current and near-retirees may no longer be sacrosanct, and they shouldn't be. If the welfare queens block reform now, they'll deserve whatever's coming to them.

Nathan Smith is a writer living in Washington.



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