Pushing Prosperity for All Americans

February 6, 2003 • Commentary

President George W. Bush has made his reputation on foreign policy. But if he wants to avoid the political fate of his father, he must exhibit similar boldness on domestic issues. He’s done that by pushing to stop taxing dividends; even more important is his proposal to let Americans shift some of their Social Security taxes into private retirement accounts.

Social Security is supposed to be the third rail of politics. As is their habit, in the November election, Democrats shamelessly demagogued the issue. The Democratic National Committee even ran an ad showing President George W. Bush pushing a person in a wheelchair over a cliff. To no avail. Americans obviously understand that only fundamental reform can fix Social Security.

When it was created almost 70 years ago, the program “worked” because, like any Ponzi scheme, it was bringing in more money from new participants than it was paying out. In 1940, for instance, every retiree was supported by 42 workers. Alas, each retiree will soon be dependent on just two workers, down from about three today.

Moreover, when Social Security was created, almost half of Americans died before collecting their first check. It was the perfect government program — you promise benefits and but don’t have to pay them.

Most Americans now live to cash their Social Security checks. In fact, by 2050, Americans will be living 12 to 14 years longer, on average, than they were in 1940.

Social Security is heading for the red.

The program’s defenders point to $5.4 billion that is to be stockpiled in the “trust fund.”

But the government vault contains only IOUs to itself. Unfortunately, to pay benefits, Washington still will have to hike taxes, borrow money or cut other spending.

Borrowing money merely puts off the day of reckoning. My Cato Institute colleague Andrew Biggs figures Congress would have to hike taxes by 50 percent or cut benefits by 25 percent to keep the system afloat.

Alas, the cost just keeps growing as baby boomers retire. The annual deficit will be $74 billion in 2020 and $277 billion in 2030. And the red ink will keep rising. By one estimate, the actuarial deficit through 2041 is $6 trillion; through 2077 it’s $25 trillion.

Higher taxes would be a particularly bad deal because recipients today receive, on average, less than 2 percent on their so‐​called investment. Pay more and get less in return — such a deal!

Many younger workers will lose money. The return is also worse for minorities, who have shorter life spans, and women, who are disproportionately dependent on Social Security. Are private market returns uncertain? Sure, and the recent slump has demonstrated that anyone who counts on continuous go‐​go growth is foolish. But, over the long term, private markets win easily.

The average annual rate of return on private investment over the last 75 years, including the Great Depression, is almost 8 percent. The safest investments, such as treasury bonds, pay about 3.4 percent a year.

But simply comparing returns understates how bad a deal Social Security is. When an investor dies, his or her children get the estate. When a Social Security recipient dies, the family gets nothing. It brings to mind the line: I’m from the government, and I’m here to help you.

The answer is simple: Allow people to invest their taxes, now 12.4 percent of wages, in private, actuarially sound investments. Begin with a couple percent and increase the amount over time.

Nearly half of American families already invest in the stock market. Many of those who don’t invest would like to — but can’t, because the government is leaving them with no extra funds to invest.

The primary beneficiaries of such a reform would not be the rich. They already have ample investment portfolios. It would be the poor, who are stuck relying on a lousy government retirement program headed for insolvency.

The problem of a Ponzi‐​like public pension program is not unique to America. Many nations, including Australia, Britain, Chile and Sweden, are moving toward fully funded private systems.

Critics will complain about the transition costs of reform.

But doing nothing only means we pay later.

What are the alternatives? One is to tinker by trimming benefits and raising taxes, while praying that better economic growth puts off Social Security’s collapse. This is a plan?

The other is to wait for the system to collapse, as it inevitably will, and then enact Draconian tax hikes or benefit cuts. Unfortunately, this is a plan. A bad one.

Politicians always find it easy to come up with an excuse for not acting. But every year they do nothing is a year closer to Social Security’s collapse. Now, before next year’s presidential race begins to dominate Washington’s every move, is the time to set America’s retirees free.

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