Imagine this: you and your family have had quite enough of the precarious state of the family finances. Most of the family blames your eccentric brother, a frequent houseguest, who spends half his evenings at the local tavern. Now he wants even more of your money to finance his drinking habit.
Frustrated, your spouse and children insist on a family meeting to figure out how to save more of the family's earnings. Your brother is invited to sit in on the meeting, but just as it starts, he raises his hand and speaks: "I agree. We need to save more. I'm willing to work with all of you -- on one condition. We absolutely cannot discuss my drinking. That's off the table."
As mad as this kind of logic might seem, Washington is currently replicating it on a much larger scale. The concern over our declining national savings rate was the impetus for legislation last year that established a National Summit on Retirement Savings, whose first meeting was held last month. The summit was supposed to "increase public awareness of the importance of retirement planning and to identify ways to promote greater retirement savings by all Americans." More than 200 delegates met for two days; they heard a series of presentations from politicians, business leaders and policy wonks and then produced a list of suggestions for promoting retirement savings.
There's just one catch: the participants were absolutely prohibited from discussing Social Security reform.
This is, of course, not unlike convening a national conference to discuss AIDS transmission and telling the attendees that under no circumstances are they to discuss sex.
Educating people about the importance of savings won't accomplish much if they don't have enough disposable income to invest.
Concern over our shrinking national savings rate is understandable. Savings are needed not only to provide for retirement but also to supply the capital stock that funds economic growth, jobs and production of goods. In the 1960s the savings rate was over 8 percent of national income; today, it's less than half that. And it's breathtaking to think that anyone could seriously discuss why savings are dropping without discussing Social Security.
After all, a central obstacle to private retirement savings is the fact that Social Security taxes gobble 12.4 percent of everyone's income up front; those taxes have been raised 38 times since the program's inception! Taking that big a chunk of people's earnings for Social Security sharply diminishes both their reasons to save and their available resources. It destroys any opportunity low-income workers have to save, and it sharply diminishes savings prospects for middle-income people. And since people assume that they'll get back the money they pay into Social Security, it's only natural for them to cut back on savings.
At the dawn of the program, Social Security wasn't a bad deal for people who paid in relatively little taxes but received large benefits. But requiring someone entering the workforce today to pay steep payroll taxes in return for a negative rate of return is simply outrageous -- especially when they could be earning high rates of return in private markets. (The stock market has historically delivered a 10 percent annual return over the long haul -- but Social Security doesn't allow people to decide where to invest their retirement money.)
It's not hard to understand why summit planners wanted to avoid the complex
and contentious issue of Social Security reform. After all, bringing up the reform of a program that consumes more than one-fifth of the federal budget makes any discussion far more complex. And the sentimental New Deal imagery that the program creates in the minds of many is a gigantic roadblock to reform.
On the other hand, it's a nice object lesson in what happens when people declare relevant issues off limits: things get worse. Does anyone really think that the commission's methods -- public service announcements urging people to save more and a worksheet that shows people how to figure out their retirement goals -- will solve the problem of crushing Social Security taxes that deter savings and investment?
Educating people about the importance of savings won't accomplish much if they don't have enough disposable income to invest. People need more than lectures about thrift to save: they need the opportunity to put the money they earn into private retirement accounts -- which would bring them a far higher return than our actuarially challenged Social Security system.