Commentary

Don’t “Enron” Social Security?

By Andrew G. Biggs
This article was originally published in National Review Online, February 15, 2002.

The Democrats are saying “don’t ‘Enron’ Social Security” in yet another attack on President Bush’s plans to let workers invest part of their taxes in personal retirement accounts. In a press conference this week, Sen. Joseph Lieberman and fellow Senate Democrats Barbara Boxer and John Corzine beat the Enron-Social Security analogy like a drum. Leading the attack, of course, is Senate Majority Leader Tom Daschle, who equates President Bush’s personal account reform plans with the calamitous demise of the giant energy company, which took many workers’ retirement savings with it. “I don’t want to ‘Enron’ the people of the United States,” said Daschle. “I don’t want to see them holding the bag at the end of the day, just like Enron employees have held the bag. I don’t want to destroy their Social Security system.”

But guess what, Senators? Social Security is already “Enron-ed.”

By resorting to these scare tactics, Democratic strategists believe that linking personal accounts to Enron’s demise is their best bet for electoral success in the fall. In truth, however, it is today’s unreformed Social Security program that most resembles Enron. And personal account-based reform plans are the way to prevent all Americans from suffering retirement losses similar to those of Enron’s workers.

Energy giant Enron collapsed amidst allegations of financial impropriety against top company executives. In the process, many Enron employees who had invested their 401(k) contributions in Enron stock lost part or even all of their retirement savings. By tarring personal accounts with the Enron brush, Sen. Daschle believes he can defeat President Bush’s plans to introduce personal accounts as part of Social Security reform by claiming that workers with personal accounts could lose their retirement incomes just as Enron employees did.

Daschle’s claim is — to put it mildly — ridiculous. Bush’s recent reform commission, headed by former Democratic Sen. Daniel Patrick Moynihan and AOL/Time Warner head Dick Parsons, proposed letting workers invest part of their Social Security taxes in personal accounts holding highly diversified stock and bond mutual funds. Even at Enron’s height, it constituted less than one percent of the $13.4 trillion U.S. equities market. A worker holding only U.S. stocks would have been only minutely impacted by Enron’s demise; a worker diversifying with overseas equities and corporate or government bonds probably wouldn’t even have noticed.

In truth, it isn’t the president’s personal-account plans that most resemble Enron — it’s the current Social Security system he’s trying to reform that draws the real parallel.

First, Enron used murky “off balance sheet” accounting practices that highlighted its assets and downplayed its debts — as does Social Security’s “trust fund.” While the fund’s trillion dollars in government bonds are “assets” to Social Security, they are debts to the government — which will have to raise taxes or cut other spending to repay them, just as if there had been no trust fund at all. That’s why the non-partisan Congressional Research Service stresses that “the trust funds themselves do not hold financial resources to pay benefits.” The trust fund is like a private corporation funding its pension plan with bonds it issued to itself — a practice that is illegal in the private sector.

Moreover, under law a private corporation must report its unfunded pension liabilities on its balance sheet. By contrast, when the Social Security Administration releases its annual financial statement, or “Performance and Accountability Report,” any mention of the program’s multi-trillion dollar unfunded liability is absent.

Second, Enron’s employees were dangerously undiversified; some held all of their 401(k) contributions in Enron stock, a step no financial advisor would recommend. Similarly, 60% of Americans receive the majority of their retirement income from Social Security benefits; one third receive 90% or more from Social Security; and for almost 20%, Social Security is all they’ve got.

Finally, and worst of all, Enron itself went bankrupt, taking many workers’ pensions down with it. Likewise with Social Security: its own trustees declare the program insolvent. That won’t just affect the very young. A woman as old as 49 today can expect to see her benefits cut by one-quarter during her lifetime. Younger workers will not receive even a single year of full promised benefits. For Social Security to pay full benefits the payroll tax rate must rise by 50%, yet payroll taxes are already the biggest tax for most households. Most analysts think those tax hikes are unacceptable. The public agrees with them.

Personal accounts for Social Security would mitigate these problems. Under plans put forward by the President’s Commission to Strengthen Social Security, workers could invest part of their Social Security taxes in investment accounts that they would own and control. By holding these accounts, workers know exactly how much they have set aside for retirement. And the government could not “raid” those funds to pay for non-Social Security spending.

Workers could hold stocks and bonds of literally thousands of companies, plus ultra-safe Treasury bonds if they prefer. This prefunding, which earns a substantially higher rate of return than Social Security’s current “pay-as-you-go” financing, makes it easier for Social Security to pay the benefits it has promised. Many workers, particularly those with the lowest incomes, would receive more than Social Security has even promised, but without the 50% tax increase the current system needs to pay those benefits.

Lack of diversification, opaque accounting, and imminent bankruptcy. These terms describe Social Security much as they do Enron’s foggy finances. By contrast, President Bush’s Social Security commission put forward three reform plans based on personal accounts. All are certified by Social Security’s actuaries to pay higher benefits than the current system is capable of, and two of three would maintain Social Security’s solvency indefinitely, not just for the 75-year period that most plans try — but fail — to reach.

So where does this leave Senator Daschle? Good question. Daschle rejects all three commission plans and instead proposes personal accounts separate from Social Security. While this implicitly acknowledges that Daschle believes market investment isn’t too risky and that personal accounts can be efficiently administered, for Social Security these supplemental accounts are worse than nothing. They do absolutely nothing to address the Social Security problem and would swallow up billions in resources that could be used to reform the system.

Daschle also favors using surpluses to repay debt, then — in an accounting move that would make Enron proud — double-counting the interest savings and crediting them to Social Security. Preventing this, Daschle says, is that the income-tax cuts passed last year by Congress, despite the fact that Social Security has never been financed from income taxes. If Daschle wants to finance Social Security with general revenues — a step President Roosevelt specifically rejected and which both parties ruled out ever since because it would turn Social Security into a “welfare program” — he should say so.

The President has laid his reform cards on the table. So far, all Senator Daschle and anti-reform Democrats have to offer is the vain hope that Social Security can somehow rescue itself. At present, then, the Social Security reform debate is an event at which only one team has shown up. Until reform foes put forward real proposals of their own — a challenge issued by the President’s commission, which personal-account opponents failed to take up — we can only conclude that they favor the Social Security status quo. The only problem is that doing nothing allows the system to go broke. And that’s the real “Enronization” of Social Security.

Andrew Biggs is a Social Security analyst at the Cato Institute and was a staff member for the President’s Commission to Strengthen Social Security.