Social Security: From Ponzi Scheme to Shell Game
Privatizing Social Security
is a solution in search of a problem. Oh, the problem with Social Security is
real enough. But "privatization"--the hot policy idea of the season--simply
doesn't address the problem. It's as if you were crawling across the desert,
desperately thirsty, and you meet a fellow who says, "What you need is some
lemonade." You say water would suffice. He says, "Oh, but lemonade is much
nicer. Here"--handing you a packet of lemonade powder--"just add water and
stir."
In this
week's report by a government commission on Social Security, a majority
supported various forms of partial privatization. And lemonade (privatization)
is an appealing drink in many ways. But it's a testament to the agenda-setting
influence of conservatives these days that, on Social Security, we're debating
the merits of lemonade, when the real issue is: Where do you get the
water?
Social Security privatization was ably discussed several
weeks ago in our "Committee of Correspondence." But in this case, at least, that
discussion seems not to have provided the dialectical pathway toward ultimate
and inevitable truth that we had hoped for. So, let us try again. And--ladies
and gentlemen--I will now attempt to discuss Social Security with no numbers,
no graphs, and not a single use of the word "actuarial."
According
to polls, more members of Generation X believe in UFOs than do in Social
Security. Of course, those who delight in this factoid never tell you how many
Gen-Xers actually believe in UFOs--which might be the alarming bit. But,
because it serves their particular generational self-pity, Gen-Xers seem more
willing than older folks to grasp the essential truth about Social Security,
which is that it is a Ponzi scheme. Payments from later customers finance
payouts to earlier customers. The ratio of retirees taking money out to workers
putting money in is rising, due to 1) people having fewer children, and 2)
people living longer. This means the Ponzi scheme cannot go on. The famous
Stein's Law--an inspiration of our own Herb Stein--holds, in brief, that what
cannot go on, won't. The issue is how exactly this Ponzi scheme will stop going
on.
Discussions of the Social Security "crisis"
often confuse three different problems. First, with baby boomers in their peak
earning years, Social Security currently brings in more revenue than it pays
out in benefits. The surplus is invested in government bonds. These are special
government bonds. Statistics about the federal deficit--and both parties'
promises to balance the budget over the next few years--count the Social
Security surplus as revenue, and don't count these bonds as debt. But within a
couple of decades, the annual surplus will evaporate, and Social Security will
have to start drawing on this nest egg. For the government to honor these bonds
will require huge borrowing (essentially replacing these IOUs to itself with
real IOUs to private individuals) or a huge tax increase.
The second problem is that
even if the government honors these bonds in full--principal and interest--a
point will be reached, well into the next century, when the Social Security
"trust fund" is exhausted, and not enough money is coming in to pay the
currently promised benefits.
The third
problem is that even if today's benefit promises can somehow be kept, Social
Security represents a much worse return on "investment" (taxes paid in) for
future retirees than past and present retirees have enjoyed. This is partly
because some minor benefit reductions are scheduled already (raising the
retirement age slightly and gradually). It is mainly because younger people
will have paid much higher Social Security taxes throughout their working
lives. The average return on Gen-Xers' Social Security investments will almost
certainly be worse than they could have done by investing in the stock
market.
Whether all this adds up to a crisis is a matter of
rhetorical taste. The fact that boomers and Gen-Xers will get a worse deal from
Social Security than their parents--mainly because part of the money they put
into the system was, in effect, transferred to their parents--doesn't seem
horribly tragic to me. Even after this transfer we will still, on average, be
better off than our parents were. Where's the injustice? Problem 2, that Social
Security will run dry many decades from now, depends on essentially impossible
predictions about the distant future and, in any case, can be solved by very
minor adjustments, if they're made pretty soon.
No. 1 is a real problem. It's
hard to imagine the government actually reneging on its IOUs. But it's also
hard to see an easy way of avoiding that.
For all
three problems there are only three solutions: cut benefits, raise revenues, or
borrow. Privatization is not a solution. Privatization means allowing
individuals to invest for themselves all or part of what they and their
employers put into Social Security. Whatever the merits of this idea--and there
are some--it does not address the problem at hand. Social Security is a Ponzi
scheme. Current payers-in are financing current payers-out, not their own
retirements. Privatization assumes an end to the Ponzi scheme: Every generation
saves for its own retirement. But you can't get there from here without someone
paying twice--for the previous generation and the current one--or someone
getting less (or someone--i.e., the government--borrowing a lot of money).
Privatization enthusiasts sometimes admit to
this as a transitional problem. But it is not a transitional problem. It
is the entire problem. As Brookings economist Henry Aaron pointed out in the
"Committee" discussion, if you could pour in enough money to pay for the
"transition" to privatization, the system would no longer be out of balance.
The problem, or crisis, would be solved. Privatization would not be needed.
You have to watch closely as
the privatizers describe their schemes. They play a shell game: Take this part
of the Social Security tax and convert it into a mandatory savings
contribution; take today's benefit and divide it into two parts; give everybody
this new account and that minimum guarantee; take this shell and put it there
and bring that shell over here, and--hey presto! But no matter how you divvy it
up, the same money can't be used twice. That is the problem with Social
Security now, and it is the problem with privatization. All you've said when
you endorse privatization is that if there were water, it should be used
to make lemonade. Not obviously wrong, but not terribly helpful.
Privatization is a shell game in a second way. It is supposed to bring more
money into the system because returns on private securities are generally
higher than returns on government bonds. Even members of the recent commission
who oppose full privatization supported investing part of Social Security's
accumulated surplus in the private marketplace. But (as Stein pointed out in
the "Committee"), every dollar Social Security invests privately, instead of
lending to the Treasury (as happens now), is an extra dollar the government
must borrow from private capital markets to finance the national debt. The net
effect on national savings, and therefore on overall economic growth, is zilch.
Every dollar more for Social Security is a dollar less for someone else.
If Social Security manages to achieve a higher return, by
investing some or all of its assets privately, the rest of the economy will
achieve a lower return, by having more of its assets in government bonds. In
essence, the gain to Social Security will be like a tax on private
investors--an odd thing for conservative think tanks to be so enthusiastic
about. Also, the arrival of this huge pot of money looking for a home will
depress returns in the private economy, while the need to attract an equally
huge pot of money into the Treasury to replace the lost revenue will increase
the returns on government bonds. Result? The diversion will be at least partly
self-defeating.
The size and security of
future retirement benefits ultimately depend on the country's general
prosperity at that time in the future. Checks to be cashed in the year 2055
(whoops! there's a number) will be issued in 2055, whatever promises we make or
don't make today. The most direct way for Social Security to affect future
prosperity (as Aaron pointed out in the "Committee") is to increase national
savings, of which the Social Security reserve is part, by trimming benefits
and/or increasing revenues. Since we have to do that anyway--even as a prelude
to privatization--why don't we do it first? Then we can argue about
privatization at our leisure.
