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Repealing, Not Reforming, Social Security, Part 2

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What, then, do we do about Social Security? There are three general alternatives. The first is to tinker, while keeping Social Security essentially as it is. The second is to privatize the system by paying off current retirees and mandating private retirement contributions. The third is to simply repeal Social Security.

First, tinkering with the Titanic. Most establishment defenders of Social Security advocate some combination of higher taxes and lower benefits. One could raise the retirement age (currently set to go to 67 in the year 2027), adjust the Consumer Price Index (which some economists argue overstates the cost of living by .5% to 1.5% a year), abolish early retirement (now available at age 62), or reduce benefits (cap the cost of living adjustment, for instance). Alternatively (or simultaneously), one could hike taxes, either raising the FICA levy or increasing income taxes on Social Security benefits (currently half of payments are subject to the income tax).

Other possibilities include bringing state and municipal workers into the system and means-testing benefits, that is, reducing or eliminating checks to wealthier retirees. More recently have come proposals to allow the government to invest some tax payments in the stock market.

Almost all Social Security defenders want to take some combination of these steps. The chief argument for doing so is that it would allow the system to stagger along for some period of time. The downside is rather serious, however: most of these reforms would reduce the return received by retirees while only postponing the crisis. At the same time, some of them would be almost as politically difficult to enact as more comprehensive reform. If the government is prepared to either invest taxpayers’ payments in the stock market or means-test benefits, then why not go the next step and privatize the system?

Moreover, none of the suggested half-steps addresses the moral issues — the inappropriateness of taking money from workers in the first place and of shifting responsibility for the elderly to the government. As long as those issues are not addressed, the system will remain fundamentally immoral.

Second, privatizing the bankrupt concern. A more serious option is to privatize Social Security. Proposals for doing so abound. The Cato Institute has offered one of the most comprehensive plans, though groups such as the National Center for Policy Analysis and the Heritage Foundation have developed similar initiatives. The basic approach is simple: allow workers to opt out through “contributions” to IRAs.

The best model in practice is Chile. In 1981, it inaugurated its private system. Starting in 1982, new workers “contributed” to one of 21 approved private pension funds rather than the state system. Current workers were allowed to choose, and upwards of 95% voluntarily shifted to private investments. The experience has proved to be an extraordinarily good deal for the people of Chile. The average compound annual rate of return has run 10%, and the economy, flush with investment funds, has grown at an inflation-adjusted rate of 6% a year.

The advantages of taking such an approach in America are obvious. People would regain control over their own retirement and earn a much higher rate of return on their “contributions.” They would be investing in real retirement programs, rather than dumping their money into a Ponzi scheme — one that would be illegal were it privately run.

Nevertheless, this sort of privatization has two major problems. The first is the short-term cost. If one allows workers to redirect their taxes while the government continues to pay current beneficiaries, the transition will be costly. Thus, unless this sort of reform is coupled with, say, means-testing, it would require either higher taxes or large spending cuts elsewhere in the budget, neither of which typically appeals to the legislators who would have to approve such a program.

The second problem is that such a system continues to preserve an important role for government in Americans’ retirement. Washington would still mandate savings, regulate plans, and otherwise intrude in the retirement system.

In short, privatization would be a major leap forward and may be the best one can hope for politically. But it should nevertheless be seen as a second-best-one that avoids confronting the basic moral wrong in continuing to force existing taxpayers to fund current retirees.

Most retirees believe that the government is obligated to them because they “put their money in” and are entitled to get it back (even though many receive the full amount they paid within just a couple of years and yet continue receiving benefits). But while one can understand why they feel that way, that doesn’t justify the system.

Even though Social Security recipients have been victimized by previous generations, is it morally justifiable for them to victimize succeeding generations of innocent people? In the conflict between current taxpayers and current retirees, do not the former have the stronger moral claim? Truthful answers to these questions suggest that we search for a more radical alternative.

Third, abolishing the failed Ponzi scheme. The simplest and most just solution is abolition. Social Security should simply be repealed. We should eliminate the bureaucracy, taxes, and benefits-in toto. Nothing should be left. And it should be done at once, with no transition payments or anything else.

This is obviously a tough-minded approach, but the moral, political, and economic crisis presented by Social Security calls for a tough solution. The protests would be overwhelming, but we need to look at the issue from the standpoint of three different groups — young workers, old workers, and retirees.

Young workers below a certain age, probably in their 40s, depending upon income level, would benefit from an immediate shift to a private retirement system. They would have no complaint, since they would be able to invest what would have been future taxes and receive a better return. Although the specific results would vary by age, they would all be better off.

Workers older than the break-even point could still invest but would lose on net. Since they would earn the higher returns from a private system for at least some period of time, however, they would be able to moderate their loss.

Retirees, those currently relying on Social Security benefits, would lose the most (though some would actually have received far more than they and their employers had “contributed”).

Only the latter two groups should concern radical reformers. How would they cope with the loss of income on which they had counted? First, they could rely more on their children. The latter would be saving on taxes and earning a greater return, allowing them to make good on their moral obligations to their parents. Of course, it may take some effort to recreate that ethic, since today almost everyone naturally relies on the government, but such an ethic is precisely what moral leaders — especially in religion and business — are for.

Similarly, charities should take on a greater role where the financial needs are serious. Dropping a 15% levy on people’s incomes overnight would not only free up money for charitable giving but would also encourage economic growth that itself would yield more revenues available for charity in the future. Those elderly left in need (even today, many have sizable retirement incomes in excess of their Social Security benefits) would undoubtedly be considered a priority by many philanthropic organizations (including new ones that would be formed for the sole purpose of assisting former Social Security recipients).

At the same time, the federal government should undertake a massive asset sale. A half billion acres of forest and range land, massive business enterprises such as the Postal Service and Power Marketing Administrations, office buildings around the United States and abroad (unnecessary embassies and consulates, in particular), and more could be placed on the market. In addition, government should privatize services and sell off the relevant agencies’ facilities. There is no need for a Federal Aviation Administration, for instance, or Coast Guard inspections of private yachts, and more. A serious sale could generate hundreds of billions and probably trillions of dollars. Needy retirees and those approaching retirement would obviously share in this revenue when it comes time to distribute the proceeds to the American people.

Finally, able-bodied seniors might choose to remain in or return to the workplace. Even today, some older Americans prefer to work, despite the financial disincentives created by Social Security (benefits are reduced as income is earned). They welcome not only their pay but also their interaction with others in the workplace, including young people.

Social Security is widely hailed as the best and most successful government program. But what could be worse and more immoral — or even evil — than a program which:

  • takes workers’ money, making it harder for them to provide for themselves and their parents;
  • weakens family and community ties;
  • discourages work and saving;
  • makes people more dependent on government;
  • imposes enormous losses on workers in the name of security;
  • creates enormous doubts about its own survival; and
  • risks potential intergenerational war as the system slides towards insolvency?

This is a successful government program? One has to wonder what people who think this way would consider to be signs of failure.

Our government and our ancestors in 1935, the year Social Security was enacted in the United States, made a mistake. We are all now paying for it. Instead of trying to salvage that mistake, we should rid ourselves of it. Then, as Americans have proved themselves so able to do in the past, we should act compassionately and creatively — on a voluntary basis — to overcome adversity and build a better future together. Tinkering with Social Security is not enough. Privatization proposals which preserve a role for government would, in contrast, offer a vast improvement over the current system, but even they don’t go far enough. The right answer is repeal.

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    Doug Bandow is vice president of policy at Citizen Outreach, the Cobden Fellow in International Economics at the Institute for Policy Innovation, a senior fellow at the Cato Institute, and serves as adjunct scholar for The Future of Freedom Foundation. He is a former special assistant to President Reagan; he is also a graduate of Stanford Law School and a member of the California and D.C. bars. BOOKS BY DOUG BANDOW: Leviathan Unchained: Washington’s Bipartisan Big Government Consensus (forthcoming) Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996) Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994) The Politics of Envy : Statism As Theology (1994) The U.S.-South Korean Alliance : Time for a Change (1992) The Politics of Plunder : Misgovernment in Washington (1990) Beyond Good Intentions : A Biblical View of Politics (1988)