Jewish World Review August 28, 2001 / 9 Elul, 5761
http://www.jewishworldreview.com -- THE legendary third rail of American politics, Social Security, is lighting up. Only a serious administration commitment will overcome the Democrats' determination to keep Americans locked in an inferior retirement system.
Social Security was long viewed as America's most successful social program. Alas, all Ponzi schemes must come to an end. Demographics is playing a critical role: By 2050, Americans will be living 12 to 14 years longer, on average, than they were in 1940. Indeed, when the system was created, almost half of people died before collecting their first check. No longer, however.
As Americans live longer and have fewer children, the population itself is aging. Every retiree will eventually become dependent on just two workers, down from three today. Indeed, in 15 years, Social Security will be paying out more than it is taking in.
The program's defenders argue that $5.4 billion will be stockpiled in the Social Security "trust fund," but the money doesn't exist. All that sits in Social Security's vault are government IOUs to itself; Washington will have to hike taxes, borrow money, or cut spending to redeem them. Program deficits will grow as the Baby Boom retiree bulge grows.
Here Social Security defender Paul Krugman, a fine economist when he is not pimping for the Democrats, is a bit more honest than many of his political allies. Don't worry about the meaningless trust fund, he says. Just use general tax revenues to pay the bill. But the tab won't be cheap, rising from $93 billion in 2020 to $271 billion in 2030 to $318 billion in 2035, in today's dollars.
The resulting tax hike might not bother a well-compensated academic such as Krugman. It would probably bother most other Americans. Higher taxes wouldn't seem quite so bad if the system's return was good. But today, the average return is less than 2 percent. Many younger workers will actually lose money. Minorities, who have shorter life spans, and women, who are disproportionately dependent on Social Security, do even worse.
In contrast, the average annual rate of return on private investment over the last 75 years, through the Great Depression, is almost 8 percent. Safe investments such as treasury bonds pay about 3.4 percent.
It has taken only two decades for Social Security to go from Sure Thing to Rip-Off. In 1980, the average worker received back his and his employer's taxes, plus interest, in just 2.8 years. It will take 16.8 years in 2001. In 2030, assuming no tax hikes or benefit cuts, it will take 23.5 years. But, of course, those, along with borrowing, are the only alternatives to "save" the system.
Using the intermediate projections of the Social Security Trustees, Congress would have to hike taxes by 37 percent or cut benefits by 26 percent to meet the system's obligations in 2040. Or Washington could engage in an orgy of borrowing - about $47 trillion by 2075, in current dollars. The end result would be a larger debt, as a share of GDP, than at the end of World War II.
But Social Security's deal is even worse. When recipients die, their heirs receive nothing. A private investment, in contrast, passes on. Social Security is in crisis - today. The answer is obvious. Allow people to put their taxes into private, actuarially sound investments, rather than into Social Security's black hole. This is no radical concept.
Nearly half of American families now invest in the stock market. Countries ranging from Chile to Britain to Sweden to Australia have moved toward fully funded private pension programs in place of such government Ponzi schemes as Social Security. Indeed, even President Bill Clinton was prepared to push for private accounts before the Monica Lewinsky scandal struck, forcing him to rely on left-wing interests to survive. And House Minority Leader Richard Gephardt, notable for the demagogic abuse he recently poured on the President's National Commission on Social Security Reform, three years ago suggested that private accounts "can be part of the answer."
The alternative is what Democratic commission member Robert Pozen calls the "do-nothing plan." Sit around while the system crashes, then enact Draconian tax hikes or benefit cuts. Social Security represents a battle between ideologues and pragmatists. The ideologues, such as Paul Krugman, believe in income redistribution and social engineering. Thus, Social Security must be preserved, irrespective of how antiquated it has become and how much it harms those it is supposed to aid.
Pragmatists suggest changing the system to put retirees before politics. Allow people, especially the poor, to save for their own retirement, accumulate financial worth, earn a better return, and escape the vagaries of politics.
The decision is up to the American people. Whom do they
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