Commentary

Social Security And Real Leadership

This article originally appeared in the Investor’s Business Daily.

A true “vital center” in Washington would seek to solve our government’s true problems, starting with Social Security’s impending collapse.

Social Security can’t be fixed. It is the largest and most expensive Ponzi scheme ever created: It pays for benefits for today’s retirees by taxing today’s workers, and promises to pay for their benefits with future taxes on tomorrow’s workers.

This pay-as-you-go system will collapse early next century, thanks to demographics: More people live much longer, and so collect more. Even huge tax hikes on tomorrow’s workers won’t be enough to meet the program’s promises.

Social Security’s return already has turned negative for some retirees, and any combination of benefit cuts and tax hikes will only make the system more unfair while barely postponing financial Armageddon.

The only way out is to do what Chile did in 1981: Switch to a private retirement system. Workers would not turn their (and their employers) Social Security taxes over to the government to pay out to current retirees, but would instead invest their own money for their own retirement, in individual retirement accounts.

Social Security payments would diminish as fewer and fewer people (current retirees and those now close to retirement) relied on the system.

The hitch in what would otherwise; be a great deal for retirees and taxpayers alike is the transition: Washington would have to cover benefits to those still covered by the old system but without the money diverted from Social Security taxes to private IRAs.

If we did not cut other spending programs to raise the funds, this would require tax hikes of $60 billion to $80 billion a year (or more).

The trick is to identify politically saleable budget cuts. Congress should fund the transition by killing subsidies to business.

The biggest winners of privatization would be workers, who would enjoy a wealthier and more secure future. But business, too, would profit. Securities firms, sure to handle most people’s retirement portfolios, would do very well. But virtually every enterprise in America stands to win: Economist Martin Feldstein estimates the potential economic gain of privatization to be $10 trillion to $20 trillion. (In contrast, the unfunded Social Security liability today stands at $9 trillion.)

Yet many companies today live off of the taxpayer. The 125 most egregious federal corporate welfare programs account for some $65 billion a year. Some $15 billion of that goes to agriculture—research, conservation production and export subsidies. The Market Promotion Program, for instance, pays to advertise Gallo wine, Dole bananas, Mars candies, and Campbell Soup foods overseas.

There’s another $15 billion a year in Defense Department programs. Sematech, for instance, subsidizes major computer makers. The Energy Department spends some $6 billion on R&D programs and other subsidies.

The Commerce Department is loaded with corporate welfare. In fact, it exists mainly to subsidize behemoths such as General Electric. The Transportation Department has put the entire maritime industry on the federal dole. And agencies like the Export-Import Bank enrich Boeing Co. and Westinghouse Electric Corp. shareholders.

Killing these programs won’t be easy. In fact, the GOP Congress upped outlays for some even as it enacted “welfare” reform.

A political opportunity beckons, however. None of these programs has much popular support. U.S. taxpayers may be generous, but they don’t see why their money should be used to enrich the Fortune 500.

Thus, Democrats who claim to represent the poor and Republicans who claim to favor frugality should be able to agree on the need to cut corporate welfare. If the proceeds go to help finance the transition to a genuinely private retirement system which would benefit business so dramatically, the private sector should be willing to go along.

Indeed, no subject is better for a bipartisan agreement among President Bill Clinton, House Speaker Newt Gingrich, and Senate Majority Leader Trent Lott. The three could call on leading business executives to solicit their support for the plan. They could also threaten to lead a public campaign against corporate America if it won’t go along.

Social Security should be privatized. Business should be kicked off the dole. Separately, the two ideas are intellectually powerful. Together, they are a political winner.

Doug Bandow is a senior fellow at the Cato Institute.