The Social Security conundrum

Curt Mudgeon

March 2005

President Bush has touched the “third rail” and the Washington political world is in a tizzy. As customary when dealing with difficult problems, Capitol Hill denizens, spin-doctors, pundits, and other propagandists are spewing volumes of thick smog to muddle the atmosphere. While some advance that the system is not in crisis and does not need to be fixed, others acknowledge a crisis but argue that it can be easily repaired. Of course, all this is rubbish. The problem exists, it is serious, and solutions are not easy. But a search for a solution is a sensitive matter because it is bound to expose decades of government irresponsibility and to make the next election cycle perhaps more interesting than usual. Senior congressmen, who have a particular dislike for “interesting” reelection campaigns, are thus doing all they can to confuse the electorate. They are skilled at it, and they might well succeed in blocking any sensible reconsideration of a flawed program that has outlived its function and should have been replaced with a true pension plan some twenty years ago.

Facts, however, insist on being facts, political smog notwithstanding. Under current regime, the Social Security payments start exceeding the receipts in 2018. To meet its obligations, the program then has to dig into its surplus, which will last about twenty years. By 2038, the system is broke and begins to run a sharply growing yearly deficit. This scenario is not contrived. It is governed by reliable, highly-predictable demographic data. While 16.5 people were contributing to the program for each beneficiary in 1950, this ratio has fallen to a current 3.4 and will continue to fall. It does not take an advanced degree in demography to understand how the baby-boomers’ retirement, the lower birth rate of the following generations, the increase in life expectancy, and the ballooning payments of disability benefits can have created this situation.

So, why is the Congress so reluctant to consider the president’s invitation to reform the system, and why is there such a divergence of opinions about what to do? First, there is no Social Security surplus to be tapped in 2018. Although the program has collected more than it has paid since its inception, the excess, which currently amounts to more than a trillion dollars, has been loaned to the government---as stipulated by law. Over the decades, it has been freely used as if it were some congressional slush fund and has become part of the national debt. For example, it has helped financing the ubiquitous Robert C. Byrd buildings, the Robert C. Byrd dam, the many Robert C. Byrd centers, and other Robert C. Byrd edifices that grace the West Virginia landscape. It is easy to find many other instances of similar government extravagance, one being the Boston Big Dig, a boondoggle dear to Senator Edward Kennedy, which Washington has subsidised to the tune of nine billion dollars. Such egregious uses of federal funds, a privilege of seniority in both houses of Congress, not only buy votes, but also discourage possible challengers at reelection time. It is little wonder that “King of Pork” Robert C. Byrd, first elected to the House in 1946, has been a fixture in the Senate since 1958. For the many Congress spendthrifts, the time has come to face the music, and they would rather hide, or demagog, or, even better, grandstand about baseball and steroids.

In 2018, the federal government will owe Social Security some three trillion dollars, and that money will have to be paid back over time to fulfill the program’s obligations, while the debt will continue to grow. At that time, keeping the program alive will require a choice among the nonexclusive options of reducing the benefits, increasing the age of eligibility, raising the tax, diverting funds from nonessential programs, or increasing the national debt. Many congressmen show little taste for such options, and some would rather do nothing now and let the situation deteriorate to the point where they are “forced” to make bad choices. Others would favor measures politically unpalatable on a condition of “bipartisan” responsibility as a protection against an irate electorate pointing accusatory fingers at one party or the other. Unfortunately for them, the current political mood of Washington is more one of guerilla warfare than one of cooperative bipartisanship, as the head of the Democratic National Committee recently professed to hating Republicans, while prominent congressional Democrats promised to block any Republican proposals.

Regardless of Congress likes or dislikes, the matter of solvency, which gets worse with time, suggests that Social Security cannot be kept alive for very long. By 2030, there will be two FICA payers for each benefit recipient. Raising the 12.4% tax is impractical. The argument that an employee could sustain a modest increase of that tax because he pays “only” half of it ignores that the other half paid by his employer either comes out of this employee’s wages, or from a reduction of the number of employees, or from a higher price of products and services. In the end, the employee-consumer bears most of the burden of the tax increase, and may even find it more difficult to be employed. The “soak the rich” proposal to remove or raise the cap on wages subject to the Social Security tax is not any better. The question is not whether people who make more than $90,000 a year can or cannot afford to pay for the tax increase. The reality is that these people are likely investors in productive enterprises that help grow the economy and create jobs. Reducing the capacity to invest adversely impacts economic vitality. Finally, increasing a tax on income is one of the best ways to decrease the incentive to work hard.

In truth, the Social Security conundrum is twofold. On one side, there is the pickle in which politicians find themselves. In the face of a difficult problem to which they have largely contributed, many worry more about political image, elections, and power than about solutions. Twenty three years ago, a bipartisan commission “saved” the system in rather unimaginative ways, namely, with a tax hike, an increase in the age of eligibility, and the taxation of the benefits received by people with incomes above a certain threshold. At that time, anyone with a brain knew from reliable demographic projections that the system had not been saved and that it would fail a thirty years later. But, in politics, thirty years is a safe time stretch. Most voters do not remember what happen thirty years ago. They cannot hold a grudge that long against those who fooled them by claiming to have saved a program that should not have been saved but replaced with an honest retirement system. What was done in 1982, however ill-advised, is no longer practical, smoke and mirrors notwithstanding. Such is the politicians’ side of the conundrum.

The other side, which so far has not gotten that much congressional attention, is the plight of the younger generations. Because of the pyramidal nature of the system, tweaking the tax will not have a significant effect on the life of the program. At the same time, actuarial data will require continuous reductions of the benefits and increases of the age of eligibility. If no significant reform takes place, younger workers must expect little return for their contributions---a good case for a tax rebellion. To add insult to injury, they will have to find employment or stay employed at an age that, right or wrong, employers too often consider unsuitable. By allowing a fraction of the Social Security tax to go to a private retirement account, it is their predicament that President Bush’s proposal addresses.

Predictably, Democrats vehemently oppose the president’s idea as they oppose any idea that originates in the White House. In this case, however, their opposition has deeper motives. They see private accounts as a threat to their vision of governance, which has been consistently moving for the past forty years towards a social-democrat model that disfavours people’s independence from government. They also are more concerned with “saving” Social Security than with John Doe’s retirement because Social Security has served as the emblem of their goodness of heart since the 1930s. In that context, the president’s proposal, which might well be a first step towards the demise of the program, cannot rally much Democrat support, and neither can the prospect that the funds diverted to private accounts will escape congressional control. Since such motives cannot be brought forward in the debate, opponents of change invoke the adverse effect that reduced contributions will have on program solvency. But this effect can only be transient since workers who take the private-account option will draw Social Security benefits adjusted for their lower contributions.

The proposal for private accounts seems quite popular among the young. Surprisingly, seniors already retired or about to retire do not see it so favorably, although their benefits would remain untouched. This is partly imputable to an aggressive AARP propaganda campaign that only reflects the lobby’s leftist predilections. Perhaps as important is the sentiment widespread among those born during the Great Depression that only the government can reliably guarantee a retirement safety net. In a way, this belief is buttressed by the property unique to the government to get deep in debt with seeming impunity. In his campaign for reform, President Bush will need much help, and particularly from those in Congress who enjoy the seniors’ trust.

Now, if you think that the Social Security conundrum is a hard nut to crack, think of the coming Medicare-Medicaid crunch.