Think about the Children: Privatize Social Security

February 9, 1999 • Commentary
By Carrie Lips

In politics these days, just about every issue is talked about in terms of “the children.” A case in point was President Clinton’s State of the Union Address in which almost everything — from education and health care to tobacco and gun control — was rhetorically linked to this political trump card.

But “the children” were conspicuously absent from the discussion of the future of Social Security. Perhaps that’s because the president’s Social Security reform proposal does nothing to avert the financial disaster that awaits today’s children.

Everyone knows that it is not going to be easy to pay for the baby boomers’ retirement. Unless something is done today to fund future obligations, today’s children will have to pay nearly one‐​fifth of their future incomes just to support this entitlement program.

So what has the president proposed to avoid this looming financial crisis? He has proposed increasing the number of government bonds in the Social Security trust fund. He claims that doing so will make the program solvent through 2055.

In addition to paying 1/8 of their incomes in payroll taxes, today’s children can look forward to hundreds of billions of additional income tax dollars going to Social Security.

Today’s politicians and policy wonks can debate whether or not the assets in the trust fund are “real,” but today’s children will soon find out that government bonds are real only in so far as they have locked in a financial burden for future generations.

When today’s first graders enter the workforce in 2015, Social Security revenue will not be enough to pay all legislated benefits. At that time, the Social Security Administration will have to redeem bonds by pulling $42 billion from general revenue. By 2035 Social Security will require $786 billion from general revenue — almost twice what the government spends on Social Security today.

From whom will the government get that additional revenue? From the taxpayer, of course. In order to get that money, the government will have to either raise taxes, issue new debt or cut other spending to free taxpayer dollars. This means that in addition to paying 1/8 of their incomes in payroll taxes, today’s children can look forward to hundreds of billions of additional income tax dollars going to Social Security.

Under the president’s proposal, in 2045 expenditures from general revenues for Social Security would be more than one trillion dollars! But according to the president, Social Security will still be “solvent” at that time. It is only when politicians actually face the prospect of officially raising payroll taxes or slashing benefits that there is a problem for “the children,” who by that time will be approaching retirement and will have children of their own who will face an even greater financial burden.

As bad as this proposal to inflict an enormous tax burden on tomorrow’s workers is, the other element of President Clinton’s Social Security reform proposal is far worse. President Clinton recommends that the federal government invest a portion of the trust fund in the stock market. If his plan becomes law, in 2030 Generation Y will live in a country where the federal government owns almost 4 percent of the market. The president assures us that we need not worry, now or in the future, about corruption or cronyism influencing government investment choices.

Of course, this is the same president who, when questioned about corruption in his 1996 election, side‐​stepped the issue with the statement: “I don’t believe you can find any evidence of the fact that I had changed government policy solely because of a contribution.” President Clinton’s definition of “free from corruption” may be quite different from most Americans’.

In fact, Alan Greenspan, chairman of the Federal Reserve, has characterized proposals to allow the government to invest in the markets as “dangerous.”

President Clinton’s proposal served only to remind policymakers attempting to reform the Social Security system that it is possible to make the situation even worse.

The real tragedy of the current debate about Social Security is that there is a reform that could do all of the things that politicians claim they want to do for children. By giving young workers the option of redirecting their payroll taxes to privately owned, individually invested accounts, politicians would truly offer them the chance to improve their financial future by taking advantage of the power of compound interest.

It is time for President Clinton to do more than just pay lip service to “the children.” He should embrace reform that frees future generations from the taxing and spending of the past and instead offers them a financial future based on individual ownership and private investment.

About the Author
Carrie Lips is a Social Security analyst at the Cato Institute.