Throughout this post, when I refer to Social Security I mean the program of old-age benefits and tax “contributions” provided for in the Social Security Act of 1935. A key element of this discussion is the Social Security trust fund, which I render thus for consistency througout the post. Comments on this post may be sent to the following email address: the Germanic nickname for Friedrich followed by the last name of the 1974 Nobel laureate in economics followed by the 3rd and 4th digits of his birth year followed by the usual typographic symbol followed by gmail.com .
THE UNCONSTITUTIONALITY OF SOCIAL SECURITY
The Social Security Administration tries to whitewash the unconstitutionality of the old-age provisions of the Social Security Act (links added):
Three Social Security cases made their way to the Supreme Court during its October 1936 term. One challenged the old-age insurance program (Helvering v. Davis)….
George P. Davis was a minor stockholder in the Edison Electric Illuminating Company. Edison, like every industrial employer in the nation, was readying itself to start paying the employers' share of the payroll tax in January 1937. Mr. Davis objected to this arguing that by making this expenditure Edison was robbing him of part of his equity, so he sued Edison to prevent their compliance with the Social Security Act. The government intervened on Edison's behalf and the Commissioner of the IRS ([Guy] Helvering) took on the lawsuit.
The attorneys for Davis argued that the payroll tax was a new type of tax not listed in the Constitution's tally of taxes, and so it was unconstitutional….
On May 24, 1937 the Supreme Court handed down its decision in the three cases. Justice Cardozo wrote the majority opinion [Helvering v. Davis]....
Mirroring the situation in Congress when the legislation was considered, the old-age insurance program met relatively little disagreement. The Court ruled 7 to 2 in support of the old-age insurance program….
Justice Cardozo wrote the opinion[] in Helvering v. Davis…. [He] made clear the Court's view on the scope of the government's spending authority: "There have been statesman in our history who have stood for other views…. We will not resurrect the contest. It is now settled by decision. The conception of the spending power advocated by Hamilton … has prevailed over that of Madison…."[He] extended the reasoning [in upholding the unemployment-insurance program] to the old-age insurance program: "The purge of nation-wide calamity that began in 1929 has taught us many lessons…. Spreading from state to state, unemployment is an ill not particular but general, which may be checked, if Congress so determines, by the resources of the nation…. But the ill is all one or at least not greatly different whether men are thrown out of work because there is no longer work to do or because the disabilities of age make them incapable of doing it. Rescue becomes necessary irrespective of the cause. The hope behind this statute is to save men and women from the rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey's end is near."
It is no coincidence that the Supreme Court reversed its record of opposition to the New Deal when faced with the certainty that Congress would approve Roosevelt's court-packing plan and dilute the authority of the sitting justices. As SSA tells it:
Despite the intense controversy the court-packing plan provoked, and the divided loyalties it produced even among the President's supporters, the legislation appeared headed for passage, when the Court itself made a sudden shift that took the wind out of the President's sails. In March 1937, in a pivotal case, Justice Roberts unexpectedly changed his allegiance from the conservatives to the liberals, shifting the balance on the Court from 5-4 against to 5-4 in favor of most New Deal legislation. In the March case Justice Roberts voted to uphold a minimum wage law in Washington state just like the one he had earlier found to be unconstitutional in New York state. Two weeks later he voted to uphold the National Labor Relations Act, and in May he voted to uphold the Social Security Act. This sudden change in the Court's center of gravity meant that the pressure on the New Deal's supporters lessened and they felt free to oppose the President's plan. This sudden switch by Justice Roberts was forever after referred to as "the switch in time that saved nine."
In the end, the Court decided wrongly to legalize Social Security by invoking Hamilton's supposedly looser view of the powers vested in Congress, and by improperly interpreting the "general welfare" clause. In its slipperiness and lack of constitutional grounding, Justice Cardozo’s opinion foreshadowed Justice Blackmun’s opinion in Roe v. Wade.
Regarding the general welfare, Madison -- the "Father of the Constitution" -- had this to say in Federalist No. 41:
Some who have denied the necessity of the power of taxation [to the Federal government] have grounded a very fierce attack against the Constitution, on the language on which it is defined. It has been urged and echoed that the power to "lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States" amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction....
For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural or more common than first to use a general phrase, and then to explain and qualify by an enumeration of the particulars. But the idea of an enumeration of particulars which neither explain nor qualify the general meaning, and can have no other effect than to confound and mislead, is an absurdity ... what would have been thought of that assembly, if, attaching themselves to these general expressions and disregarding the specifications which limit their import, they had exercised an unlimited power of providing for the general welfare?...
Was Hamilton of a different mind? Apparently not:
The Federalist Papers are one of our soundest guides to what the Constitution actually means. And in No. 84, Alexander Hamilton indirectly confirmed Madison’s point.
Hamilton argued that a bill of rights, which many were clamoring for, would be not only “unnecessary,” but “dangerous.” Since the federal government was given only a few specific powers, there was no need to add prohibitions: it was implicitly prohibited by the listed powers. If a proposed law — a relief act, for instance — wasn’t covered by any of these powers, it was ipso facto unconstitutional.
Adding a bill of rights, said Hamilton, would only confuse matters. It would imply, in many people’s minds, that the federal government was entitled to do anything it wasn’t positively forbidden to do, whereas the principle of the Constitution was that the federal government is forbidden to do anything it isn’t positively authorized to do.
Hamilton too posed some rhetorical questions: “For why declare that things shall not be done which there is no power to do? Why, for instance, should it be said, that the liberty of the press shall not be restrained when no power is given by which restrictions may be imposed?” Such a provision “would furnish, to men disposed to usurp, a plausible pretence for claiming that power” — that is, a power to regulate the press, short of actually shutting it down.
We now suffer from the sort of confusion Hamilton foresaw. But what interests me about his argument, for today’s purpose, is that he implicitly agreed with Madison about the narrow meaning of “general welfare.”
After all, if the phrase covered every power the federal government might choose to claim under it, the “general welfare” might be invoked to justify government control of the press for the sake of national security in time of war. For that matter, press control might be justified under “common defense.” Come to think of it, the broad reading of “general welfare” would logically include “common defense,” and to speak of “the common defense and general welfare of the United States” would be superfluous, since defense is presumably essential to the general welfare.
So Madison, Hamilton, and — more important — the people they were trying to persuade agreed: the Constitution conferred only a few specific powers on the federal government, all others being denied to it (as the Tenth Amendment would make plain).
(For more on the general welfare, see “The Constitution: Myths and Realities”.)
Unlike the “right” to an abortion, the Court’s decision upholding Social Security is so far in the past and has created so much dependency among the populace that it will never be undone. Nor is it likely that Social Security’s old-age benefit will ever be privatized, even in part. But hope springs eternal, and so I address privatization later in this post.
BUT ISN’T SOCIAL SECURITY A KIND OF “SOCIAL INSURANCE”?
I put quotation marks around “social insurance” because it isn’t insurance. What is it? Just another set of programs designed to redistribute income, mainly from those who’ve earned more to those who’ve earned less (or nothing). “Social insurance” is a trickle-down transfer-payment scheme, wherein some of the money reaches its intended targets after passing through the sticky fingers of the overpaid bureaucrats who live in and around Washington, D.C.
What’s the difference between “social insurance” and real insurance?
Consider Social Security. Unlike an automobile accident, retirement is not an undesirable event that might occur; it is a desirable event toward which almost everyone strives. Social Security is merely a government-imposed substitute for the prudent act of saving toward one’s retirement and then drawing on the accumulated nest-egg to finance that retirement. The usual excuse for Social Security is that a lot of people, especially low-income persons, can’t or won’t save enough to maintain some (arbitrary) standard of living during retirement. In other words, Social Security isn’t insurance against an unpredictable event, it’s a mechanism for subsidizing low-income and imprudent persons at the expense of their opposites.
The same analysis applies to Medicare, Medicaid, and other forms of federal and State “social insurance”. The risk pools are huge and ill-defined. The premiums are either nominal (Medicare) or non-existent (Medicaid and other programs). All such programs are nothing more than non-contractual “promises” to pay certain amounts for certain events, regardless of the probability of those events and their associated costs.
Even programs that mimic insurance — unemployment benefits and workers’ compensation, for example — are really subsidies because of their all-encompassing nature and the forcible extraction of “premiums” from employers (and, indirectly, employees). Those who are at risk for unemployment and on-the-job injuries have no say in the matter of how much insurance they wish to purchase and how much they are willing to pay for it. Unemployment “insurance” is an especially weird kind of “insurance,” in that the benefits expand and contract according to the whims of government actors.
Enough said about “social insurance” as insurance. It simply isn’t insurance.
Health insurance, despite heavy regulation and the distortions produced by tax breaks, retains some of the characteristics of true insurance. But the point of Medicare (as modified by Obamacare) isn’t insurance, it’s tantamount to universal, government-controlled health care for persons over 65. (And, combined with Medicaid the size of the program strongly affects the provision of and insurance coverage for persons under 65.) Medicare forces Americans to buy or subsidize “insurance” that covers events that aren’t health risks; for example: so-called preventive care, the use of contraceptives, abortion, various kinds of maternity and pediatric care, and the coverage of “children” up to the age of 26.
What about mandatory coverage of pre-existing conditions? Here’s Greg Mankiw on the subject:
A large part of the motivation of the Affordable Care Act [Obamacare]is to provide insurance to those with pre-existing conditions. Under the law, insurance is offered to everyone at a price based on overall community risk, not the risk estimated by the insurance company based on a person’s particular characteristics. That has been deemed “fair” by advocates of the law.
I wonder whether advocates of this view are concerned with other insurance markets. Teenage drivers pay a lot more for auto insurance. The old pay a lot more for life insurance. Life insurance companies require health screening before granting a policy. Is this a problem, or the natural and desirable functioning of markets?
The answer to Mankiw’s question is that advocates of Obamacare weren’t really trying to insure anyone, they were trying (with some success) to ram socialized medicine down the throats of Americans.
Scott Gallipo, writing at The American [Pseudo-] Conservative. In a patent attempt to defend Obamacare, Gallipo begs real conservatives to “Stop Comparing Health Insurance to Car Insurance”. Gallipo’s “argument” is fatally confused; for example:
It’s helpful to step back and remind ourselves why we ask doctors to perform “preventative maintenance” on our bodies. If diseases are caught early, they’re often cheaper to treat or cure. If we stay in good physical shape, we reduce the chances of developing many diseases in the first place. When we preventatively maintain our cars, however, we are merely forestalling problems that we would have to pay out-of-pocket for anyway. If you don’t change your oil, your car insurance plan isn’t going to cover the cost of fixing a seized engine.
Gallipo is trying to distinguish preventive health care from preventive auto care, but he fails to do so. For one thing, he wrongly asserts that preventive maintenance forestalls problems that would have to be paid for out-of-pocket. Not necessarily. That’s why warranties (insurance) and their costs are baked into the price of new autos. And that’s why many auto buyers obtain extended warranties. As it happens, I once bought a mechanical-breakdown insurance from GEICO instead of buying the manufacturer’s extended warranty. It was additional coverage under my auto policy, and it commanded an additional premium.
More fundamentally, Gallipo makes some heroic assumptions about preventive care. Yes, routine tests will sometimes result in the detection and treatment of conditions that would otherwise be detected at a later stage. But the cost of checkups and lab tests, when ordered wholesale by doctors because they’re “free”, far exceeds the benefits. (See this, for example.)
Most fundamentally, Gallipo begs the question. In his (incorrect) view, preventive “care” on a massive scale is a “good thing”. Therefore, it should be covered by insurance. But the massive overuse of “free” checkups and lab tests has nothing to do with insurance, and everything to do with the nationalization of health care. Those “free” checkups and tests will not be paid for by risk-related premiums; they will be paid for by taxpayers and the millions of Americans whose Medicare “premiums” are really taxes exacted to help support an open-ended national health-care plan.
THE PONZI SCHEME UNRAVELS
Social Security is now running in the red; that is, benefits and expenses exceed payroll taxes collected. It is being kept afloat by the Social Security trust fund, which holds U.S. government debt from which full benefits will continue to be paid until the trust fund is depleted around 2034. When the trust fund is depleted, benefits (by law) are supposed to be cut to a level supportable by current revneues. If nothing is done before 2034 to adjust benefits or payroll taxes Social Security beneficiaries would be facing a permanent drop of about 21 percent in their benefit checks.
In any event, like a Ponzi scheme, Social Security rewarded early entrants, who were paid artificially high “returns” from the “contributions” made by later entrants.
But the inevitable happened. The number of late entrants has become too few to pay the taxes required to support earlier entrants in the style to which they have become accustomed. Congress, as is its wont, is relying on the trust fund to cover the deficit, rather than face up to the difficult political choice of cutting benefits or raising taxes.
I quote from an op-ed piece in The Washington Post (July 31, 2001), by Olivia Mitchell and Thomas R. Saving:
When Social Security ran annual surpluses in the past, it enabled other parts of government to spend more. The trust fund measures how much the government has borrowed from Social Security over the years, just as your credit card balance indicates how much you have borrowed. The only way to get the money to pay off your credit balance is to earn more, spend less or take out a loan. Likewise, the only way for the government to redeem trust fund IOUs is to raise taxes, cut spending or borrow....
We are surprised that this perspective on the trust fund is controversial. The commission's interim report quotes credible sources -- the Congressional Budget Office, the General Accounting Office and the Congressional Research Service -- supporting the view that the trust fund is an asset to Social Security but a liability to the rest of the government. The Clinton administration's fiscal year 2000 budget indicated a similar perspective:
"These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures -- but only in a bookkeeping sense. . . . They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government's ability to pay benefits."...
[T]he nation has only three ways to redeem trust fund bonds: raising taxes, cutting spending or increasing government borrowing. If there is some alternative source of funds, no one has yet suggested it....
Nevertheless, the trust fund has some true believers, among them Paul Krugman, who made this effort to rebut the commission's position:
The Social Security system has been running surpluses since 1983, when the payroll tax was increased in order to build up a trust fund out of which future benefits could be paid. These surpluses could have been invested in stocks or corporate bonds, but it seemed safer and less problematic to buy U.S. government debt instead. The system now has $1.2 trillion in its rapidly growing trust fund. But the commission says that the government bonds in that trust fund aren't real assets....
Every dollar that the Social Security system puts in government bonds — as opposed to investing in other assets, such as corporate bonds — is a dollar that the federal government doesn't have to borrow from other sources. If the Social Security trust fund hadn't used its accumulated surpluses to buy $1.2 trillion in government bonds, the government would have had to borrow those funds elsewhere. And instead of crediting the trust fund with $65 billion in interest this year, the government would have had to cough up at least that much extra in actual, cash interest payments to private bondholders. So the trust fund makes a real contribution to the federal budget. Doesn't that make it a real asset?...
No. Here's why: As Krugman admits, the government didn't invest Social Security surpluses in stocks and corporate bonds, it squandered the surpluses. The surpluses simply fed Washington's big-spending addiction. If the surpluses had been invested in real assets, even conservative ones like investment-grade corporate bonds, the trust fund would represent real claims on the economy. But it doesn’t represent such claims. It represents nothing more than government debt incurred for spending more than it received in taxes. The Social Security trust fund is exactly offset by indebtedness incurred by the rest of the federal government.
ANOTHER LOOK AT THE MYTHICAL TRUST FUND AND RELATED MATTERS
Notwithstanding what I have just said, many of those who wish to preserve Social Security as they know and love it will insist that the Social Security trust fund is real. The usual argument goes like this: Yes, the trust fund holds government bonds. But if government bonds are a real asset to private investors, they must be a real asset to the trust fund. Wrong.
If the Social Security Administration (SSA) had invested net Social Security receipts in stocks, corporate bonds, and private mortgages — or if it had stashed the receipts in many, many passbook savings accounts, à la W.C. Fields — the trust fund could be a real asset. Why? Because SSA would have simply done for individuals what they could have done for themselves, namely, held their savings in the form of claims on real assets (business equipment, homes, and automobiles, for instance) and the future income produced by those assets.
But the problem is bigger than SSA's failure to invest forced savings in claims on real assets. SSA is just a branch of the U.S. government. Even if SSA had wanted to take its net receipts to the bank, it couldn't have. A robber would have intercepted SSA on the way to the bank, taken the money, and blown it on booze. Actually, what happened was that the rest of the U.S. government grabbed SSA's net receipts and blew them on this welfare program, that regulatory effort, and other "public services". Unlike the typical thief, the U.S. government then handed SSA a bunch of IOUs.
Now, tell me where the real asset is. It's not to be found in the creation of government programs or even in the physical assets employed by government in those programs. For, the economic benefits that sometimes flow from government activities are far more than offset by the economic disbenefits of government activities.
But what about all those private investors who hold government bonds? Aren't they holding real assets? Well, they're holding financial assets, which give them the ability to buy real things. Let's take Citizen Kane as an example. Suppose he has scrimped and saved $1 million. He could place that amount in some combination of stocks, corporate bonds, mortgages, and savings accounts, but instead he chooses to buy government bonds. Now, Citizen Kane has already done his bit for the creation of real assets merely by saving $1 million in the first place. That is, through the magic of macroeconomics, the $1 million that he forbore to spend on this bauble, that bangle, and another bead enabled the creation of $1 million in real capital (plant, equipment, business software, etc.), which fosters economic growth.
Thus, in the first approximation, where Citizen Kane actually puts his $1 million is less important than the fact the he has saved (not consumed) $1 million, so that others (businesses, to be precise) can direct $1 million worth of resources into the creation of capital. If he chooses to put the $1 million in government bonds, that's his lookout. Those bonds have a market value, which will fluctuate just like the market value of all financial assets. But the marketability of the bonds simply means that he can claim his share of the wealth that was created when he saved $1 million in the first place.
Government bonds held by government entities, on the other hand, can’t even pretend to be claims on real assets. They're nothing but pieces of paper whose value can be realized only through taxation. Well, government can tax us without going through the charade of creating government bonds. Thus the bonds held by the SSA amount to nothing more than a superfluous excuse to raise our taxes. The power to tax is a real asset only to those who are net recipients of the taxes that are collected. By the same token, the power to tax is a real liability to those who are net payers of the taxes that are collected. Asset = liability = zero.
So much for those "real assets" in the Social Security trust fund.
But I'm not through discussing the shell game that goes by the exalted name of "public finance." There's a lot more to it than the mythical Social Security trust fund.
Government spending, however it is financed, is a way of commandeering resources that otherwise would flow to private consumption and investment (i.e., capital formation). To the extent that government activities fail to pay their own way by yielding goods and services of equivalent value -- and they don't (otherwise they would be provided by the private sector) — the resources used by government are simply wasted -- thrown down a rat hole. And worse, they drag down the economy.
Government nevertheless goes through the charade of taxing and borrowing to finance its activities, instead of simply sending goon squads to impress those resources into government service. To the extent that it borrows and that borrowing is underwritten by the Fed, there is more money in circulation than there would be if the government financied its follies through taxation. At the same time, the total output of real goods and services (including capital assets) is reduced as government commandeers resources. The result, of course, is inflationary.
THE CASE FOR PRIVATIZATION
The trust fund is mythical and can’t be salvaged. Social Security is a drag on the economy, pure and simple. Complete privatization (i.e., abolition) of Social Security is a political non-starter but the only economically sensible option:
It would increase incentives to work and invest, thus boosting employment in the short run and economic growth in the long run.
Armed with greater prosperity, we could do a better job (privately and publicly) of helping the aged, their survivors, and the disabled who are truly in need.
But when the idea of privatization was floated by President G.W. Bush, the wagons were circled around the golden calf. E.J. Dionne Jr., writing in The Washington Post, opined that
The big cost of privatization comes from allowing individuals to keep a share of the Social Security taxes they now pay into the system and use it for private investment accounts. This reduces the amount of money available to pay current beneficiaries. Since Bush has promised the retired and those near retirement that their benefits won't be cut, he needs to find cash somewhere. The only options are to raid the rest of the budget, to raise taxes or to borrow big time....
[During the 2000 presidential campaign] Gore ... challenged Bush on his numbers. "He has promised a trillion dollars out of the Social Security trust fund for young working adults to invest and save on their own, but he's promised seniors that their Social Security benefits will not be cut and he's promised the same trillion dollars to them," Gore said at that third presidential debate. "Which one of those promises will you keep and which will you break, Governor?"
... Bush is about to offer an easy answer to Gore's challenge: More borrowing....
... Last week The Post's Jonathan Weisman reported that Republicans were considering moving the costs of social security reform "off-budget" so that, on paper at least, they wouldn't inflate the deficit. And Joshua B. Bolten, the director of the White House's Office of Management and Budget, let the cat out of the bag over the weekend in an interview with Richard W. Stevenson of the New York Times. "The president does support personal accounts, which need not add over all to the cost of the program but could in the short run require additional borrowing to finance the transition," Bolten said. "I believe there's a strong case that this approach not only makes sense as a matter of savings policy, but is also fiscally prudent."
A huge new borrowing -- "from hundreds of billions to trillions of dollars over a decade," as Stevenson notes -- is suddenly "fiscally prudent" in the administration's eyes....
Dionne betrays such stupendous misunderstanding of the issue that the only way to deal with his ignorance is to explain the whole megillah, step-by-step:
1. The cost of Social Security is the cost of the benefits paid out, not the payroll taxes or borrowing required to finance those benefits. There are two basic issues: how much to pay in benefits and how to finance those benefits.
2. Assuming, for the moment, that benefits will be paid to future retirees (today's workers) in accordance with the present formula for computing benefits -- which today's workers believe is a "promise" they have been made -- something must "give" when payroll taxes no longer cover benefits.
3. No matter how you slice it, someone will pay for those future benefits. The question is: who and when? There are three conventional ways to do it:
Raise future workers' payroll taxes by enough to cover benefits.
Borrow enough to cover benefits, thus shifting the immediate burden from future workers to willing lenders, who are also the "future generations" that "bear the burden" of the debt. The cost of borrowing (i.e., interest) raises the cost of the program a bit, but interest is also income to those who lend money to the government. In other words, borrowing -- on balance -- doesn't create a burden, it merely shifts it, voluntarily. (Unless the Fed monetizes government deficits, which involuntarily shifts the burden by contributing to inflation.)
Raise taxes and borrow, in combination.
4. There's an "unconventional" way to deal with the Social Security deficit: Invest payroll taxes in real assets (i.e., stocks, corporate bonds, mortgage-backed securities). Why? Because money invested in real assets yields a real return that's far higher than the phony "return" today's workers will receive on their payroll taxes (a tax on future workers isn’t a real return on investment). There are three ways to "privatize" Social Security by investing in real assets:
Abolish Social Security and make individuals responsible for their retirement (perhaps with a minimal "safety net" funded by general revenues).
Let the government do it, through a "blind trust" run by an independent agency.
Let individuals do it, through mandatory private accounts.
5. I assume that the first option is off the table, for now, even though Social Security (like so many other government programs and activities) is unconstitutional. Given the large sums of money involved, the second and third options would yield about the same result, on average. I'll continue by outlining the third option, which is the proposal that drew the ire of E.J. Dionne and so many other anti-privatization leftists.
6. Workers would invest some (or all) of their payroll taxes in real assets (investments in the private sector). Those same workers would receive lower Social Security benefits when they retire. The precise tradeoff would depend on the age at which a worker opens a private account and how much the worker has already paid into Social Security. Workers who are over a certain age -- say 50 or 55 -- when privatization begins wouldn't be allowed to drop out, but would receive the Social Security benefits they expect to receive.
That leads to a series of questions and answers:
Q: What happens when the shift of payroll taxes to private accounts results in a deficit, that is, when payroll tax receipts are less than benefit payments? A: The government borrows to make up the difference, just as it does now but on a smaller scale.
Q: What happens to the money invested in private accounts? A: It would belong to the workers who invested it. They'd receive smaller payments from "regular" Social Security, but those smaller payments would be more than made up for by the income they'd receive from their private accounts. (The mix of allowable investments would range from mostly stocks for younger workers to only investment-grade corporate bonds for older workers.)
Q: When does it all end? A: It would depend on how much workers are allowed to invest in private accounts and how much those private accounts earn. If workers were allowed to invest all of their payroll taxes in private accounts, and if all workers elected to do so, Social Security -- as we know it -- would wither away. Every worker would have his or her own source of retirement income. That income would come from earnings on real assets, not from taxes paid by those who are then working. And that income would exceed what the retiree would have received in Social Security benefits -- even for private accounts invested "safely" in investment-grade corporate bonds..
Nay-sayers like Dionne are simply unable to grasp the notion that by diverting payroll taxes to real investments, with real returns, no one would be made worse off, and many would be better off. They're hung up on the borrowing that must take place in the initial stage of privatization, and they overlook the return on that borrowing, namely, higher income for future retirees and lower payroll taxes on future workers.
They also overlook (or fear) the fact that the money which flows to real investments wouldn’t flow to the U.S. Treasury. (Privatization should be privatization.) That change (amounting to trillions of dollars in lost government revenue) would make it harder for the government to do stupid things.
In sum, the privatization of Social Security, in whole or in part, would have five beneficial effects:
Future retirees would be more self-sufficient, thus reducing the burden on future taxpayers.
The economy would grow more rapidly because of the increase in investments in stocks, etc.
Future taxpayers would therefore find it easier to bear the remaining burden of Social Security and other government programs.
More Americans -- perhaps the vast majority of them -- would acquire a stake in a robust private sector.
There would, accordingly, be less support for government programs and less money available to fund them.
CODA
Privatization is wishful thinking on my part. Timothy Taylor offers a more realistic view:
Congress is unlikely to take action before the Social Security funding crisis is upon us [around 2034]. After all, the previous time that the Social Security trust fund was about to run out of money, in the early 1980s, Congress waited until the last minute and then appointed a commission … to propose a solution. [Douglas] Arnold [in this book] points out that there are special rules in the federal budget process which require that any changes to Social Security will need to get 60 votes in the US Senate–that is, the changes cannot be made by a simple majority as part of the budget process. Thus, both parties will likely need to sign off.
When Congress decide[s] to show its bravery by appointing another commission in about 2034, what choices will at that point be on the table?
There is a subgroup in both parties that would like to make relatively substantive changes to Social Security. On the Republican side, there is a group that is eager to transform much or all of Social Security into a set of individual retirement accounts, where the federal government would top up the accounts for those with low incomes. For example, if a proposal along these lines had been implemented about 15 years ago, so that holders of these retirement accounts could have benefited from the long run-up in the stock market since about 2010, a lot of people would be feeling a lot better about their retirements just now. But individual accounts would also create a need for a snake’s nest of rules about how such accounts could be invested, if one could use them as collateral for loans, if people would be allowed to dip into them for “worthy” purposes like house down-payments or college tuition for their children or paying legal settlements–and so on and so on.
Most Democrats are resolutely against altering Social Security in this way, but a certain subset of Democrats would like to see the benefits of the system substantially expanded. Because Social Security payments are linked to the taxes a person (or a spouse) paid into a system during a working, those who didn’t pay much into the system can end up in deep poverty when they are older. Of course, when a system is already on a track for a financial crash, a substantial addition to the benefits it would pay out would make the financial crunch worse….
… What is likely to happen [when the trust fund is depleted around 2034]?
Well, it would presumably be political suicide for politicians if Social Security benefit rates declined. Thus, while one can imagine longer-term changes in benefits, like a slow phase-in of a later retirement age, or changes in the details of how benefits are calculated. Over a few decades, these can make a big difference. But in the moment of the crisis in 2034 it’s unlikely that current benefits will be cut in any meaningful way.
On the tax side, a number of current Republicans have staked out ground that they will not support an increase in payroll taxes. Again, one can imagine policies that might have the effect of a slow phase-in of higher taxes–say, increasing the income taxes that those with high incomes might pay on Social Security benefit–but in the moment of crisis in 2034, a jagged upward jump in taxes for the system also seems unlikely….
[A] plausible prediction for 2034 is that Social Security will be “fixed” by turning to general fund tax revenues–rather than the payroll tax–as a source of funding. I suspect this would be done with a lot of strong statements about how it was only a temporary change, but it’s the kind of temporary change that can easily become permanent. As Arnold points out, this outcome is plausible–and would also represent a major change to the operation of Social Security:
Policymakers have had good reasons for not using general funds to subsidize Social Security. President [Franklin]Roosevelt argued that a tight link between taxes and benefits served two important ends. It would protect Social Security from hostile actors — “No damn politician can ever scrap my Social Security program” — but it would also protect the program from unreasonable expansion. Legislators could not expand the program unless they were also willing to increase taxes.
This tight link has worked for nearly a century. The program’s detractors have never found a way to dismantle Social Security because workers earn their benefits by paying a dedicated tax [which was never invested and no longer covers their benefits]. But neither have the program’s champions been able to expand benefits since 1972 because legislators have been unwilling to increase taxes.
Everyone would be better off if Social Security were abolished and replaced by means-tested welfare and self-reliance. But that’s no longer the American way.