The pundits who deny that the crisis exists are as shrill as the prophets of doom. The liberal economist and New York Times columnist Paul Krugman claims,
Freedom, Responsibility … and What? Social Security Reform — An Explanation
This article originally appeared in the May, 2005 issue of the Atlantic.
Social Security funding, as a plot device, makes for a languidly paced political thriller. The president discovers a ticking time bomb that’s been sitting in plain view for seventy years. It must be disarmed, either with mildly risky partial privatization or with somewhat hazardous tax and benefit adjustments. Cut the blue‐state wire? Cut the red‐state wire? Only thirteen years to decide before Social Security starts paying out more than it takes in. Or thirty‐seven years, if you wait until the accumulated surplus in the Social Security Trust Fund runs out. Then the damp squib goes off, giving ever querulous Generation X something else to complain about.
“The people who hustled America into a tax cut to eliminate an imaginary budget surplus and a war to eliminate imaginary weapons are now trying another bum’s rush. If they succeed, we will dismantle Social Security, a program that is in much better financial shape than the rest of the federal government.”
In thirteen years every aspect of the universe can change — ask a thirteen‐year‐old. And “much better financial shape than the rest of the federal government” is hardly a reassuring statement. But the political side‐taking on reforming Social Security is suddenly, urgently bitter. Maybe this is a sign of health (not to mention longevity) in our democratic system. Politics is — once in a while — a forum for serious debate about political philosophy. The disputation so far:
PRO: Without responsibility there is no freedom. Social Security privatization restores individual responsibility.
CON: Some individuals are irresponsible. (An elitist argument for populists to be making — but then, that’s populism.)
PRO: Today’s worker has a promised return of less than two percent on money he or she pays into the Social Security system.
CON: Today’s Enron shareholder has a promised return of bubkes, nada, squat.
PRO: In 1950 the ratio of workers to Social Security beneficiaries was 16:1. By the time current twenty‐year‐olds retire, there will be only two workers for every retiree.
CON: Hey, that’s my dad!
CON: Pension privatization has a sketchy track record. The British got confused and cheated, and the government had to intervene. The Swedes (of all people) made too many volatile investments. Chile’s system is working — by Chilean standards.
PRO: Insurance companies have been doing this kind of thing since Antonio was a merchant of Venice, and insurance companies go broke less often than governments.
PRO: Privatization transition costs are negligible. We borrow money today to settle tomorrow’s Social Security Trust Fund liabilities. The net effect on government finances is zero.
CON: Privatization transition costs are huge. Markets aren’t frightened by tomorrow’s Social Security Trust Fund liabilities. Markets are frightened by today’s borrowing, with its flood of government bonds. (Thus believers that government is the only adequate guarantor of future benefits are arguing that nobody believes those benefits will be paid.)
This serious debate should get more serious.
The Social Security Trust Fund that’s supposed to last us until 2042 — there isn’t any money in it. There never was. Modern money, so‐called “fiat money,” is a government IOU. The government cannot create a trust fund by saving its own IOUs any more than I can create a trust fund by writing “I start getting money when I turn twenty‐one” on a piece of paper. The Social Security Trust Fund is just such a piece of paper. Except it says, “I start getting money when I turn sixty‐five — the government promises.”
Consult American Indians for a further discussion of government promises.
Is Social Security a pension scheme — a matter of freedom, responsibility, and property rights? Or is Social Security a charity — a matter of freedom, responsibility, and civic duties? Both sides want it both ways. Franklin Roosevelt, according to his grandson James, believed that Social Security should be “simple, guaranteed, fair, earned, and available to all Americans.” But something that is earned cannot be simple or guaranteed or available to all, and its fairness will be disputable. Meanwhile, no conservative is talking about abandoning the injured, the orphaned, the abject, or the hopelessly goofy.
Social Security (with later help from Medicare and other programs) reduced the poverty rate among the elderly from greater than 50 percent during the Depression to eight percent now. Why is this good deed financed with a 6.2 percent regressive tax on only the first $90,000 of income? (The tax is 12.4 percent if we drop the fiction that employers pay the other half instead of calculating this expense into wages.) An addled Robin Hood of a system waves fare‐thee‐well to the rich while taking from those of moderate means. And why isn’t this good deed means‐tested? We don’t drop coins in a man’s hat when it’s a silk topper doffed in his box at the opera.