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December 30, 2004

Social Security: BS for Everyone

It would appear that both sides have determined their talking points for the coming fight over Social Security.

On the right: we have in Social Security a program that is in crisis due to its pay-as-you-go system and its failure to tie contributions made to the earnings taken away from people during their working years. Beginning in 2017 or 2018, Social Security will start sending out more money than it takes in, requiring either more and more borrowing, reduced benefits, or higher and higher taxes to cover the benefits. Furthermore, Social Security is a fundamentally unjust system: what you take out of the system has only the slightest connection to what you take out. If you die at age 60, your family has no claim on what would have been your Social Security benefits. This unjustly harms the poor and minorities, both of whom have shorter life expectancies than whites. By shifting to a system of private accounts, the system would eventually be funded in advance, avoiding the need for benefit cuts or increased taxes. By making the accounts real property of workers, we would guarantee that workers could pass something on to their families even in the event of an early death. Why not shift Social Security from a program that will always face the potential for a crisis because of its funding structure to one that will be far more secure?

On the left: Social Security is not in a crisis. Once 2017 arrives, the excess monies will be paid out of the trust fund, which was the plan since the 1986 Social Security reform. Yes, the trust fund is scheduled to run dry in 2042, but trying to predict what the economy will do in the intervening 38 years is impossible. The projected date the fund will run out has already moved back several times, suggesting that the fund could easily last even longer if strong economic growth continues. A change now means increasing taxes, borrowing more, or cutting benefits anyhow, because we have to make up for the shifting of Social Security taxes from paying current benefits to creating the private accounts. Private accounts also fail to address the issue of what to do for people whose private accounts are insufficient to get them through retirement. Social Security goes as long as you live, but long-lived people could easily burn through their private accounts long before they die. Private accounts would also not provide a guaranteed return: what do we do with people who fail to invest wisely, or whose investments take a bad turn? Private accounts also fail to address another aspect of Social Security: helping the disabled. Social Security currently also provides a safety net for disabled people. Private accounts would do nothing for those people, either leaving them out in the cold or requiring a new system be put in place to cover them. Why shift to a system that would present so many known risks based simply on the projection of crisis 38 years from now?

As readers can probably tell, I can sympathize with both sides. I think we'd be much better off if most of Social Security was treated as real property under the control of the beneficiaries rather than promises always at the mercy of Congress. Funding the accounts now for the future, rather than counting on ever-rising tax revenues to cover payments also seems a much more sensible base on which to build the program, although there would clearly have to be some type of additional safety net in place to address Social Security's other functions and the vagaries of the market. Conversely, the Democrats are correct that the program is not currently in crisis, and while the money for the so-called 'trust fund' will have to come from somewhere, it strikes me as highly implausible that the government will default on the bonds. On the other hand, I'd be more impressed with the lefties if they'd admit that we are going to have to find some way of paying for those bonds, rather than their more common glib dismissals of the problem. Of course, I'd feel a lot better about the arguments on the right if someone could explain to me how we're going to come up with all the money to pay the transition costs to a system of personal accounts. I understand that those costs are going to have to be paid sooner or later, as Arnold Kling points out, but the costs will be spread out over a significantly greater period simply by sticking with the status quo.

Neither side has impressed me with a willingness to honestly discuss the problems Instead both sides have marshalled their talking points in hopes of winning the political argument. I suppose that's a logical decision; whoever wins that battle is going to get what they want, regardless of the merits of the respective arguments. Yet it remains frustrating for those of us who enjoy trying to chew on the arguments in the hope of nugging out a better solution.

As to this battle, my sentiments will almost certainly be with the Democrats, since I think the Republican plan will cause more problems than it will solve.