Review & Outlook
Mr. Security got fat.
Lead Editorial
July 12, 2000, Page A26
You should have seen me in 1940.
I was the most perfectly tailored suit you could imagine: the wide shoulders of my jacket made a
fetching drape across my back, my trousers fell in soft pleats and broke in the
middle of my shoes. My name is Social
Security and I could not have asked for a better fit.
I
was crafted especially for the times.
The country was slowly coming out of the Great Depression. People everywhere were poor, but old people
were especially hard hit and had little chance of recouping what they had lost
over the past decade. There was
widespread pessimism about the future and, of course, anxiety about saving for
the future. But people were out of
luck. Not only was there no such thing
as computers, the Internet and day traders, but nobody had even heard of
money-market accounts, jumbo CDs, mutual funds, index funds, competitively
priced stock commissions, 401(k)s or IRAs;
indeed, few companies had pension plans.
Something had to be done and I was
that something. Philosophically, of
course, I was right in line with reigning belief that government was the proper
agent to provide the answers and wherewithal to any problem. The idea was to nick a little off of
everybody’s paycheck with a payroll tax and then give that money to the impoverished
elderly. Even better, to disguise this
welfare program and cheer everybody up, the tax money was to be redistributed
to anybody over the retirement age, and the in-out mechanism was to be called a
Trust Fund.
It worked like gangbusters. Mostly because there were plenty of workers to
support this scheme -- 41 workers for every one retiree -- and the payroll tax
was set at about 2% up to the first $3,000 of earnings, allowing an average
benefit of $272.50 a year. And, boy, was
I a good deal. The real rate of return
for the average single male retiring in 1940, according to Gareth Davis at the
Heritage Foundation, was 114% a year.
Some people got really good
deals. Take my friend Ida May Fuller, an
unmarried legal secretary living in Vermont, who got my first check in
1940. Ida May paid a total of $24.75 in
Social Security taxes and, when she died in 1975, had received lifetime
benefits of $22,889. By 1970, poverty
among the elderly was reduced to under 25% from around 50% during the Depression
(and is currently at 9%).
But, oh, I forgot to tell you about
my hat -- a handsome snap-brim fedora that was supposed to keep the lid (as it
were) on benefits. Well, somewhere
around the 1950 [sic], my hat blew away, and Congress started increasing
benefits. For example, the definition of
who was qualified to receive Social Security was expanded and the money value
of the benefits was increased. The
result was that the average benefit in 1998 had climbed to $9,050. (Today, 45 million people are covered by
Social Security and annual expenditures top -- hold onto your hat -- $400
billion.)
At the same time that benefits and
beneficiaries were expanding, life expectancy was rising -- to 77 years today
from 63 years in 1940. And, more
importantly, fertility rates were declining:
in 1940, there were 2.2 children per female, but by 1998 there were
fewer than two children (except for the 1950s when families had an average of
more than three children -- an outburst that created the boomer
generation; more on that later).
Accordingly, the number of workers
supporting each Social Security dependent has dropped like a stone. It was 41 in 1940; then fell to 16 in 1950, and to 3.4 workers
in 1998. Economists estimate the number
is going to fall to 2.1 by 2030. Fewer
workers supporting more dependents meant that workers have had to ante up more
and more of their wages. Way back when,
the payroll tax was 2% on income of $3,000;
it’s now 12.4% on income of $68,400.
And the real rate of return for a single male born in 1960 and retiring
in 2025 has collapsed to 0.97%.
At the moment, I am running a
surplus because the boomers are working like mad, and I am consuming a huge
chunk of their earnings. As they start
to retire, however, we are in for a big problema. Around 2015, I will have a cash shortfall; 10 years later I will have to borrow from
general revenues, and by 2033 there’s only enough money coming in to pay
three-quarters of my obligations.
In a word, I have become a huge
tax-funded Ponzi scheme that is
starting to go seedy -- and I am starting to look it, too. All the beneficiaries are bulging my belly
over my waistband, the declining number of workers supporting the dependents
are making my jacket bag around the shoulders and the increasingly skimpy rates
of return are creating a gap between my cuffs and my shoes. [emphasis
added]
Now what?
Well, we can recognize that a lot
has changed since 1935. For starters,
the notion that people need to be protected and indemnified against risk by the
government has been replaced by a more energetic sense of personal responsibility.
This is pretty clear from a review
of various polls on attitudes toward the government compiled by Karlyn Bowman
at the American Enterprise Institute.
Over the past 30 years, American opinion has changed dramatically from
trust in government competence to, well, distrust. Likewise, a majority of Americans, especially
younger ones, are expressing increased self-confidence about providing for
their own future retirement.
Self-reliance is in, government dependency is out.
And this self-reliance is not
misplaced. Sure, it’s true that more
than half of American households now own stock and that’s cool all by
itself. But a more important point is that
the past 25 years of deregulation of the financial sector and the resulting
unleashing of competition have generated an array of investment and savings
vehicles. Now people do have
401(k) and IRA plans, mutual and index funds, money-market accounts and access
to the options and futures markets. This
is as much a part of the New Economy as dot-com zillionaires.
And that’s why market-based reform,
or privatizing Social Security, is so appealing. It is tailored to the realities of today, not
those of 65 years ago. Most people are
already investors -- whether they are allocating funds in their
company-sponsored pension plans, opening brokerage accounts to save for their
kids’ education or racing home after work to day-trade their mad money.
Granted, investing involves risk,
but it also generates returns and, in this case, returns are doubly
attractive. First, rates of return from
even a conservatively diversified portfolio will out-pace returns to be had
from Social Security over the long term.
Second, the assets from which those returns flow are owned by the
investor, not subject to political exigencies of government “ownership.” (Yikes!
Talk about risk.)
No question, privatizing Social
Security will be a new set of clothes.
(I’d like to think of myself in an all-spandex roller-blade
outfit.) It is a recognition that the
retirement plan of the Old Economy is not only too ponderous to respond to a
changed world, but has yielded up, today, a system that is oppressing young
workers. Why not replace it with one
that can empower current workers, enrich future retirees, propel economic
growth and cement the change in the political climate? It’s not only the stylish thing to do, it’s
the fair thing.
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