Commentary

Social Security as Its Own Enron

A growing number of politicians are trying to forge a connection between President Bush’s Social Security reform plans based on personal retirement accounts and the failure of Enron’s private pension accounts.

Senate Majority Leader Tom Daschle led the way: “I don’t want to ‘Enron’ the people of the United States,” Mr. Daschle said. “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.” Sen. Joseph Lieberman, Connecticut Democrat, was even less subtle at a recent press conference where he and fellow Senate Democrats Barbara Boxer of California and John Corzine of New Jersey beat the Enron-Social Security analogy like a drum. But guess what, senators? Social Security is already “Enron-ed.” And personal account-based reform plans are the way to prevent all Americans from losing money as many Enron workers did. Democratic strategists believe tarring personal accounts with the Enron brush can defeat President Bush’s Social Security reform plans, as well as bring electoral success in the fall. In truth, it’s not the president’s personal account reform plans that most resemble Enron — it’s the current Social Security system that draws the real parallel.

Enron’s murky “off-balance sheet” accounting practices highlighted its assets and downplayed its debts — as does Social Security’s “trust fund” accounting. While the trust fund’s trillion dollars in government bonds are “assets” to Social Security, they are debts to the rest of the government — which will have to raise taxes or cut other programs to repay them, just as if there had been no trust fund at all.

That’s why the nonpartisan Congressional Research Service stresses that, “the trust funds themselves do not hold financial resources to pay benefits.” Making matters worse, politicians regularly exclude liabilities to the trust fund when referring to the public debt; to the untrained eye, the Social Security trust fund is an asset to everyone but a liability to no one. In truth, the fund is like a private corporation financing its pension plan with bonds issued to itself — an illegal practice in the private sector.

Making matters worse, Enron’s employees were dangerously undiversified; some held all their 401(k) contributions in Enron stock, a step no financial adviser would recommend. Similarly, 60 percent of Americans receive the majority of their retirement income from Social Security benefits. One-third receive 90 percent or more from Social Security. And for almost 20 percent, 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. And Social Security’s bankruptcy 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 receive not even a single year of full promised benefits. For Social Security to pay full benefits, payroll taxes must rise by 50 percent. Yet payroll taxes are already the biggest tax burden for most households. Most analysts think those tax increases are unacceptable. The public agrees with them.

By contrast, the President’s 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 investment accounts. Workers would know exactly how much they have saved forretirement, and the government could not “raid” those funds to pay for non-Social Security spending. The commission’s plans are certified by Social Security’s actuaries to pay substantially higher benefits than the current system is capable of, and lower-income retirees would receive more than Social Security even promises, much less can afford to pay. The commission also added special protections for widows and a new anti-poverty benefit for minimum-wage workers.

Moreover, workers could invest only in highly diversified stock and bond mutual funds. That’s why the Democrats’ scare tactics are — to put it mildly — ridiculous. At Enron’s height, it constituted less than 1 percent of the $13.4 trillion U.S. equities market. Even if a worker invested in nothing but stocks, his savings would have been only minutely impacted by Enron’s demise. A worker diversifying his account with overseas equities, corporate or government bonds probably wouldn’t even have noticed.

Lack of diversification. Murky accounting. Imminent bankruptcy. These terms describe today’s Social Security much as they do Enron’s foggy finances. The president has laid his reform cards on the table. It’s time for personal account opponents to do the same. The Social Security reform debate is so far 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. And under the status quo the system goes broke. That’s the real “Enronization” of Social Security.

Andrew Biggs is a former Social Security analyst at the Cato Institute.