Addressing students of the John F. Kennedy School of Government on March 16, Democratic Sen. Patrick Moynihan of New York conceded that “the call for privatization of Social Security all but drowned out the more traditional views.” Judging from the senator’s rhetoric, and from the acclaim he has received from many advocates of privatization, you might think that his Social Security reform legislation was actually a step toward allowing individuals to pay into personal retirement accounts instead of the government’s demographically implausible program.
Unfortunately, the Moynihan proposal is little more than a mirage.
His legislation, the Social Security Solvency Act, is choked with the tactics that have been used to “fix” the program throughout its history. The fine print of the legislation‐which includes increasing the tax on Social Security benefits, changing the consumer price index, raising the retirement age and dramatically increasing the amount of wages subject to taxation‐boils down to nothing more than cleverly disguised tax hikes and benefit cuts.
So what was all that talk about privatization? After all, Moynihan acknowledged that “energetic and innovative minds had turned away from government programs-‘the nanny state’-toward individual enterprise, self‐reliance, free markets.” Although that is a nice bit of libertarian rhetoric, Moynihan is apparently more comfortable as a central planner. It turns out that “individual enterprise, self‐reliance, and free markets” mean a measly 2 percentage point reduction in payroll taxes if you place the money in a personal savings account. If you prefer to spend your money on things like education or housing, the government will allow you to have only 1 percent back.
That baby step toward privatization might be seen as movement in the right direction, but Moynihan quickly ends the incentive to contribute to a personal savings account by ratcheting the payroll tax up even higher than it is at present. It is true that, if the Board of Trustees of the Social Security Trust Funds does not need additional revenue earlier, the proposal avoids increasing the payroll tax beyond the current 12.4 percent for 50 years. But that’s a big if. Remember, in 1983 the Greenspan Commission asserted that Social Security had been made solvent for 75 years. With just another few “tiny adjustments,” the centerpiece tax cuts of Moynihan’s legislation could disappear even more quickly, leaving only the skeleton of higher taxes and paltry benefits.
If Moynihan’s legislation is to be praised for anything, it is for ending the ruse of the trust fund. Since 1983 the government has been overcharging American workers for Social Security and, theoretically, saving the excess for future use. In reality, law requires excess revenue from the program to be used to purchase government bonds. While the proceeds from the sale of bonds inflate general revenues, the trust fund is filled with government IOUs, which can only be redeemed in the future with revenue raised through taxation. Moynihan’s tax cuts, which are based on eliminating the trust fund, demonstrate his intellectual honesty by putting an end to those accounting tricks.
In the end, however, Moynihan’s plan does nothing to address the system’s fundamentally flawed design. The senator would leave in place the government‐enforced Ponzi scheme, in which today’s workers pay for the benefits of retirees and have to hope enough can be collected from future generations to pay their own retirement benefits. The rate of return on contributions into the Social Security program will get even worse as benefits are cut and taxes creep back up. Moynihan’s token attempt to encourage investment in private accounts withers away after a few decades, leaving tomorrow’s workers trapped in the same system we face today.
There is a better way. Senator Moynihan had it right when he suggested that the call for privatization is deafening. Throughout the world‐in Chile, Great Britain, Australia and throughout South America and Eastern Europe‐governments are adopting systems of personal retirement accounts. Workers are learning how wealth is created by saving and investing in productive enterprises. Moynihan needs only to listen to his own rhetoric‐individual enterprise, self‐reliance and free markets‐and propose privatization legislation that lives up to its name.