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November 19, 2004

Fixing How We Think About Social Security

Regardless of how we got there, and understanding that reasonable people can differ, I think I can safely state that it is a fact that by 2017 we will have to make some changes to social security in order to maintain the program. That could be as simple as raising taxes (either income, payroll, or other) to cover the costs or cutting benefits to cover the costs or yet more deficit spending, but we're going to have to take some action.

President Bush seems to prefer moving to a system where people actually own their accounts (in some fashion) and the money they put in is the same money that they take out when they retire. This is a popular option on the right, as it eliminates the Ponzi scheme that is modern social security and it makes real what many people always believe: that the payroll taxes they lose now are the source of the benefits they take out later.

The Democrats dislike this idea. They point out (correctly) that shifting from the current pay as you go system to a true pension-type system involves massive transitional costs. If payroll taxes are suddenly moved from paying benefits to building retirement accounts, we have to find a new source to cover the benefits. That's not cheap. (Granted, we're going to have to pay more starting in 2017, but a big shift would probably be somewhat more traumatic, and it would mean feeling the pain now rather than fourteen years from now. And all politicians, regardless of the initial after their name, prefer deferred pain to immediate pain.) Private ownership also carries its own problems: what if someone burns through their nest egg before they die? Do we let them starve, or do we now need a secondary safety net to protect those who don't spend their pension wisely? And where do the big returns on social security investments come from? If we let individuals choose where to put their money, some of them will lose it. Which means their pension has vanished, and that secondary safety net is needed again. If we let the government invest the money, we're giving the government an awful lot of power over the private sector: some business that annoys an administration could see its capital dry up in short order as social security funds are no longer invested in its industry. Granted, we'd seek to restrict that, but it would still remain a threat.

I'm sure both sides have other reasons for preferring their solutions. I examined one Democrat's solution yesterday, in which the author criticized the President's plan for being ideological. I really should sit down and write out a defense of ideology someday, but in the short term, I'll just say ideology is just a shorthand way of referring to the system of beliefs we subscribe to. I base my opinions on my own ideology. Claiming that someone else's idea is bad because it's ideological is just another way of saying you don't like it because it's not yours. If it's a bad idea, explain why. Don't waste my time complaining about dueling ideologies.

Having said that, my own bent towards personal freedom initially steered me in favor of some variation of the President's plan. A number of issues would have to be worked out, particularly how to pay for the transition costs (I preferred shutting down a few dozen federal agencies, but I suspect that wouldn't go over well). In a more perfect world I think a system that gives people ownership over their retirement accounts is a good thing. Their money goes in, it accumulates over the course of their life, and then they draw it down in their old age to make their RV payments. That's what I'm doing now with my own retirement plan, trying to build up a nest egg that will sustain me when I do retire. Why not let everyone do that. Certainly that seems a lot better than what we have now: an intergenerational transfer tax that was built in a completely different America to do a completely different thing than is now required of it.

Then I read Jane Galt's essay on the subject. Jane is absolutely right: America long ago decided that it would use government to prevent people from starving. Ultimately, that is the difference between people like me and, well, most people. I believe strongly enough in personal responsibility that I think the government should stand aside even when someone is starving. (Actually, I certainly couldn't do that if I saw someone starving. Were I to run into a starving person on the street, I'd feed the guy. It would be too difficult to just turn my back. So I understand the impulse that drives government welfare programs. I just disagree with them. You may commence calling me a heartless bastard now.) Be that as it may, I'm in the considerable minority. Which means that if we allow people to own their accounts, some people are going to blow them, and we're going to have to come up with yet another government program to protect people from themselves.

Personal ownership carries with it personal responsibility, and we're not really willing to deal with the potential consequences of personal responsibility. We're willing to hand over the keys to the car and tell the kids that they've got to pay for the gas, but if push comes to shove and they call us to tell us they've run out of gas, we're going bail them out. Even if they crash the car, we're going to take them down to the dealer and get them another one. Call that what you want, but the kids certainly aren't being required to take responsibility for their own actions. So it is with the potential privatization of social security. Ultimately, it's a safety net for people who aren't responsible enough (or able, in the case of the truly poor) to set up their own retirement.

So if social security is ultimately a safety net, then it's time we started treating it that way rather than continuing the pretense it's some kind of retirement plan. Which means there are some other good options we can consider to resolve the problem, starting with means testing. As I noted above, I'm putting away a decent amount of money every month into various investment vehicles. I've planned for retirement on the assumption that social security will have dried up when I get there, so I'll have to pay for it all myself. That means that even if it does still exist when I retire, I shouldn't have to need it. Why should I get a chunk of it, then? Right now, the answer is that I've paid into the system, therefore I'm entitled to get money back from it, but that assumption springs from a failure to understand what social security really is.

Look at it another way: part of my paycheck goes for unemployment taxes (yours does too; don't bother looking. It comes out of the employer's side, just like half of your social security taxes, but it's still money that business is paying to employ you), and my tax dollars go to pay for welfare, but I've never used either of those services, nor do I ever plan to (knock on wood). Aren't I just as entitled to those services as to social security? Yet nobody complains if they never have to apply for unemployment compensation or a welfare check. Why not treat social security the same way? Is there really a benefit to cutting Warren Buffet and Bill Gates social security checks? Granted, by maintaining social security as a retirement plan rather than a safety net, it's a little easier from a political standpoint to convince people that it's ok to have all that money going to FICA. But if the options are to see even more money going to FICA or reducing the amount but acknowledging that some people (those who don't need it) won't get social security, I think we could work out a deal. (I could be wrong; I like following politics, but I'm not great at predicting it.)

The details are open to work. I'm not an economist and I'm not an expert on either social security or fiscal policy. But I do think that privatization would simply lead to new problems down the line when we end up saddling ourselves with yet another government program to solve the problems caused by the first one. It's time to treat social security as the last line of defense for retirees and run the program as such, rather than maintaining the fiction that it's a retirement program for everyone. It's likely to cause more pain now (which means, I suppose, that it's less likely to happen), but it will save us a great deal of pain down the road.