Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
My name is Tom Miller. I am director of Economic Policy Studies at the Competitive Enterprise Institute (CEI). CEI is a non-partisan public interest group committed to advancing the principles of free enterprise and limited government.
I am pleased to be here today to address the future of Social Security, which is the largest "entitlement" program in the federal budget and touches the lives of almost everyone in this country. This subcommittee's hearings on how payroll tax revenue collected for the Old-Age, Survivors and Disability Insurance (OASDI) programs is managed and invested are very timely. They focus on a key ingredient in ensuring the ability of those programs to meet their promises to millions of Americans. Earlier this year, I had the opportunity to both edit and contribute to the Report of the Task Force on Social Security, published by Citizens Against Government Waste, another organization dedicated to educating the American public about waste, mismanagement and inefficiency in the federal government. Many of my remarks today are drawn from my chapter in that report, which was released in August. It recommended that we allow future retirees to gradually turn an increasing share of their payroll taxes into personal savings opportunities that capture higher rates of return in the private sector.
SOCIAL SECURITY'S FISCAL DILEMMA
The inherent contradictions within the long-term financial structure of the Social Security program have taken on different forms over time, but they remain inescapable. Virtually irrevocable political commitments to pay increasingly generous levels of benefits in future years have become more and more difficult to finance—either through last-minute pay-as-you-go financing or through the fiscal illusion of a "pre-funded" trust fund whose only assets are the IOUs of a debt-ridden federal government.
Periodic rounds of political squabbling in recent decades over both the retirement program's financial instability and its effects on overall federal government borrowing needs have raised growing doubts about its long-term sustainability. A brief review of recent history would note the following:
In 1972, Social Security benefit payments were given a huge election-year boost and automatically indexed against inflation. But by 1977, the retirement system's finances were in trouble. Congress responded with a massive payroll tax hike and promised that everything was "fixed." Within five years, however, the Social Security system's Old-Age and Survivors Insurance (OASI) Trust Fund was back in the red.
By that time, the OASI retirement program faced more than short-term financial problems. The Social Security system's ability to fund generous benefit promises when the huge baby boom generation entered its retirement years was also in jeopardy. The compromise "solution" finally approved by Congress in 1983 included a mixture of tax hikes and reductions in benefit increases. Most notably, whereas Social Security's retirement program had previously been financed on a roughly pay-as-you-go basis, the proposed schedule of steep payroll tax increases in the 1983 legislation could be construed as an attempt to pre-fund the future retirement claims of baby boomers.
However, the myth of "saving" Social Security reserves in a trust fund for future retirees soon collapsed under the harsh arithmetic of soaring budget deficits, multiple claims on each additional tax dollar and the incapacity of politically controlled money managers to invest earmarked funds productively. By 1990, growing objections were raised to apparent squandering of the mounting sums of these recently collected trust fund reserves. A number of members of Congress, led by Sen. Daniel Patrick Moynihan (D-NY), argued that Social Security taxes should be cut to stop the "surplus" revenue from being spent on other government programs.
Opponents of the Moynihan initiative were able to block any payroll tax rollback by publicly arguing that it would undermine the long-term solvency of the combined Social Security trust funds for old-age, survivorship and disability insurance (the OASDI trust funds). The more powerful political factor, however, may have been that the Moynihan measure would also aggravate the growing gap between revenue and expenditures in the deficit-ridden federal budget.
In 1993, President Clinton briefly entertained the notion of reducing cost-of-living adjustments promised to current retirees. He finally proposed to increase taxation of Social Security benefits, and Congress approved the idea later that year. Both proposals, however, were driven by the goal of reducing the overall federal budget deficit rather than assuring the long-term solvency of the OASDI trust funds.
Earlier this year, the 1994 Annual Report of the Board of Trustees for the OASDI trust funds renewed concerns about the long-term financial solvency of the OASDI programs. Rep. Dan Rostenkowski (D-IL), then-chairman of the House Ways and Means Committee, was the first of several members of Congress to propose legislation that would attempt to bring OASDI back into actuarial balance. His bill would rely on a series of tax hikes and benefit reductions.
Well into its sixth decade of operation as a mature social insurance scheme, Social Security increasingly faces a two-front war. The program's own long-term need to accumulate greater reserves in order to remain in actuarial balance often conflicts with short-term pressure to ease the financing of current budget deficits for overall federal government operations.
On the first front, the burden of funding Social Security benefits through payroll taxes has grown tremendously and promises to become even more onerous in the decades ahead. The total amount of such taxes collected annually rose more than tenfold during the 1970s and 1980s -- nearly twice as fast as the rise in nominal wages. The basic payroll tax rate for the non-Medicare portion of Social Security rose from 4.0 percent in 1955 to 7.6 percent in 1968 to 8.4 in 1970 to the current level of 12.4 percent.
These tax hikes reflected the growing fiscal strains on Social Security's financial formula. Under pay-as-you-go funding, overall costs (average benefit levels multiplied by the number of retired beneficiaries) grew faster than the revenue base (average taxable wages multiplied by the number of working contributors). The difference had to be made up by higher payroll tax rates.
Part of those mounting pressures could be explained, on the cost side, by the liberalization of initial benefit levels and overly generous indexing against inflation. In addition, as the OASDI program traveled several generations down its pyramid structure, it was no longer simply paying out windfall gains to a small number of early participants. On the revenue side, the slowing of real wage growth in recent decades limited expansion of the payroll tax base.
The greatest financial squeeze on Social Security, however, came from long-term demographic trends such as longer life spans and fewer children per couple that shrunk the ratio of payroll tax paying workers to check-cashing retirees.
Primarily because of further projected increases in the number of beneficiaries relative to workers covered by the payroll tax, OASDI's "cost rate" (the ratio of program expenditures to taxable payroll) will start to climb rapidly after about 2010 and will not stabilize until after 2030. At the same time, OASDI's "income rate" (the ratio of revenue to taxable payroll) is expected to grow much more modestly from current levels. The resulting gap between annual program expenditures and revenue that starts to develop after 2012 reaches 2 percent of taxable payroll by 2020 and 4.1 percent by 2030. These unfunded annual balances for the OASDI trust funds continue to grow to 5.7 percent by 2070.
In other words, the OASDI program is due to hit a financial wall of rapidly escalating costs in about 25 years that will quickly outstrip both its projected base of taxable earnings and scheduled payroll tax rates. If we simply waited to the last minute to deal with this problem, the U.S. economy would start to lose ground on an accelerating treadmill of higher and higher taxes on a relatively smaller and smaller work force. The prospects for economic growth and job creation would be seriously jeopardized.
Some observers have argued that the best way to handle the steep run-up in benefit payments to the next century's retirees is not to impose a series of punishing tax hikes several decades from now, but to instead spread out the burden by requiring the OASDI trust funds to take in a lot more cash than they pay out over the next three decades. Whether or not it consciously intended to do so, Congress in effect partly set us on this path when it approved the 1983 Social Security bailout and its series of payroll tax hikes. By the end of the year 2010, the OASDI trust funds will have accumulated more than $2.1 trillion ($1.2 trillion in constant 1994 dollars) in assets above and beyond the amount that they needed to pay out in benefits. All but a small fraction of those funds will come from payroll taxes collected from U.S. workers. (Interest income credited on the trust funds' assets, plus income taxes on OASDI benefit payments account for the remaining surplus revenue).
Under current rules, however, this reserve of money cannot be saved and invested productively. As long as the federal government spends more than it takes in, so-called surplus revenue in the OASDI trust funds is diverted to pay for other government programs, makes the official budget deficit look smaller and reduces the pressure to control federal spending. All that the trust funds hold in return is a stack of special Treasury bonds. These are not real income-producing assets but rather political promises to pay off IOUs to future retirees with higher taxes on the next generation of workers.
Thus, using such surplus payroll tax funds to help cover some of the federal government's current operating expenses will not only encourage additional wasteful deficit spending, it will pass up the gains offered by productive, long-term investment and simply recreate the need to finance future benefit obligations at a later date.
Accumulation of such surplus funds also poses several other dangerous temptations. The revenue could be squandered on politically attractive liberalization of existing Social Security benefits or new social insurance programs launched under the "Social Security" brand name. Or we could explore the folly of pension fund socialism, in which federal government managers would "invest" tens of billions of dollars in politically-favored projects throughout the private economy. One should expect such politicized investments to perform relatively poorly, but the greater danger is that they would further blur the boundary lines between the public and private sectors, create conflicts of interest, encourage corrupt dealings and distort private capital markets.
It's no wonder that most Americans have grave doubts about the Social Security system's financial viability and expect to receive smaller benefits than they are being promised. Recent polls have found that nearly half of all Americans don't even believe that Social Security will be able to pay them any benefits when they retire.
Today, we remain at a crossroads in Social Security policy. Americans increasingly realize that the mounting paper surpluses in the system's OASDI trust funds will be squandered and lost unless they can be saved for their original purpose. The apparent policy contradiction we must resolve is how to end the repeated turmoil in Social Security finances by building up sufficient reserves for the future, but prevent further political manipulation of these funds.
THE POLITICS OF SOCIAL SECURITY REFORM
Before coming to terms with these fiscal conflicts, it would be useful to establish some fundamental realities of Social Security reform politics.
(1) Most Americans have yet to let go of illusions that treat Social Security as a contradictory hybrid—a vested pension program when it comes to protecting promised payouts, but a welfare program when it comes to how much each worker pays for his or her future benefits.
On the one hand, Americans think of Social Security as a fully funded personal annuity program which provides benefits that merely represent repayment of each worker's "contributions" made during his or her wage-earning years. Thus, the system's reserves for its OASI retirement program are supposed to be carefully protected in a separate trust fund that will fully finance the entire amount of "earned" (and hence unalterable) benefits.
On the other hand, Americans love the fact that, until now, most retirees could expect to receive much more from the program than their lifetime payroll tax payments. They will resist either increasing each worker's tax contributions to ensure full actuarial funding of the worker's own future benefits, or means testing the resulting windfall benefits.
Conventional welfare state politics closes the gap between benefits and costs by separating rights from responsibilities across generations. Each round of check-dispensing politicians must seek out another generation of young workers to entice or coerce into higher payroll tax payments that will keep the revenue base of the pyramid growing.
(2) No matter how expensive the cost to the U.S. economy, our political system is very reluctant to fundamentally reexamine projected levels of retiree benefits (although marginal cutbacks, particularly when phased in over several decades for younger generations and thus made less visible, may succeed in part). The predominant result of any imminent fiscal apocalypse for Social Security in future decades will most assuredly be drastic tax hikes, not abrupt benefit reductions.
When broad-based safety nets for middle-class Americans suddenly spring giant leaks, beneficiaries do not have time to plan their escape routes. They crawl on top of taxpayers instead. Even to the extent that a serious collapse of the OASDI program is addressed somewhat in advance, the claims of current and prospective beneficiaries who have "paid their dues" and spent most of their working years in reliance on promised retirement benefits will still have to be accommodated politically, particularly when buttressed by the fears of younger workers that their own parents might be at risk.
(3) With no change in long-term spending commitments under OASDI, reducing payroll tax rates today simply means raising them even higher tomorrow. This merely transfers part of the baby boom generation's expected retirement costs to another group of taxpayers. But the same Americans of a particular generation who receive generous retirement benefits should have to pay for them as much as possible on their own and in advance—by saving during their working lifetimes, instead of shoving a large part of the cost onto a future generation that had no voice in the original political bargain. Such advance funding would not only match rights and responsibilities more equitably; it would also help make current Social Security tax "contributors" more sensitive to the long-term cost implications of today's retirement benefit promises.
(4) Getting out of the intergenerational chain letter behind Social Security will require a long and expensive process of transition, but now, not tomorrow, is the time to start. Today, baby boomers see themselves as oppressed taxpayers. In several decades, they will view Social Security from a different perspective, as the largest class of politically dependent retirees in U.S. history. We cannot escape the "double payment" cost of financing the unalterable promises to current retirees while beginning to fund more honestly future rounds of benefit payments to succeeding generations—but the price tag only gets higher the further we travel down the Ponzi scheme of Social Security. While the current use of the surplus Social Security revenue stream is up for grabs, it should be captured for a down payment on long-term reform before it is squandered away or taken off the table. The general public objects to misuse of higher payroll taxes, but will keep supporting current rates as long as the revenue is truly earmarked for retirement security purposes.
Tax-cutting proposals alone will simply defer coming to terms with the future demographic problems in pay-as-you-go financing until the last policy exit doors are closed, and the U.S. economy is crushed by onerous tax increases in the next century.
At the same time, we are caught on a treadmill in which seductive promises of the past are to be paid by others in higher and higher taxes tomorrow. To the extent that we collect some more of those taxes in advance today, however, they will be squandered by political middlemen on additional wasteful public spending.
Since we cannot hope to reduce significantly the future benefit levels that will make payroll tax financing of such retirement promises increasingly onerous on a "deferred" pay-as-you-go basis yet futile on an "advance" pre-funded basis, it is essential that we find a private-sector-oriented escape key from the chain-letter handcuffs of Social Security. The trick is to commit at least the same level of resources to the political objective of retirement security, but invest those funds more wisely through voluntary, market-driven means and get more bang for our bucks.
After more than half a century's experience with Social Security, we cannot transform our national retirement policy overnight. Moreover, even a long-range reform plan cannot succeed without first calming the short-term fears of current retirees that their expected benefit payments might be jeopardized. Thus, the initial step in a fundamental overhaul of Social Security ironically requires making a virtue out of necessity via an unbreakable promise that current retirees will receive each and every benefit dollar once pledged to them. That means unequivocally committing the "full faith and credit" of the U.S. government behind payment of such obligations. Under current law, such payment promises are revocable at will by Congress.
Such a commitment will help move the focus of the reform debate away from the false issue of whether we are going to keep our financial commitments to the retirees of today and tomorrow. The crucial issue is how we can afford to do so while preserving economic growth, personal freedom and fairness to future generations.
Structuring a market-oriented overhaul of Social Security should respect five guiding principles:
(1) The long-term liabilities of the Social Security system will require stable, long-term financing. Stop-and-go fine tuning of the payroll tax rate leads to periodic financial crises, jeopardizing both benefit payments and continued economic growth.
(2) Each generation of workers should pay over time for as much of its own future retirement benefits as possible, rather than passing bills on to future generations. The first step on the long road to intergenerational equity is to encourage individual workers to invest today for their own retirement tomorrow.
(3) Although we cannot avoid the transitional double payment burden of fully funding OASDI in this manner, we can make it more manageable by both starting the process sooner and stretching it out longer. No single generation should shoulder the entire burden of such institutional reform.
(4) By gradually turning payroll tax obligations into personal savings opportunities, we can allow the next generation of retirees to rely less on the future tax collecting ability of the federal government and more on investments in real economic growth within the private sector. If future retirees can liberate an increasing share of their payroll taxes to capture higher rates of return in the private sector, the resulting growth dividend can guarantee their financial security and independence.
(5) In making the transition from a tax-funded to a savings-financed retirement system, individual workers should be allowed to set the pace of change once new options are presented to them, with the assurance that past promises will be honored and Americans who cannot provide for themselves will not be left behind.
Here's how a Personal Security reform program might operate:
The current policy of overfunding the OASDI program for the next two decades and creating dangerous political temptations would end. Instead, workers would be given an option. Each year, they would receive an immediate rebate of their pro rata share of the amount by which payroll taxes had exceeded the sums needed to finance ongoing benefit promises to retirees over the previous year (after also allowing for the initial accumulation of a modest reserve cushion for short-term contingencies).
If a worker chose to receive the rebate in cash through a tax credit on his or her income tax (or a reverse tax credit if no taxes were owed), the resulting payment would be offset by an actuarial reduction in the worker's future Social Security benefits. (The General Accounting Office has suggested two methods for actuarial adjustments of benefits. Benefits could be reduced by the amount of the annuity that a worker's diverted contributions and accompanying interest earnings would have purchased from Social Security—based on the rate of return received for the worker's age group as a whole. Or benefit adjustments could use the interest rate earned on the OASI Trust Fund in calculating interest on diverted contributions.)
But the worker could choose instead to reinvest the rebate in a specially earmarked Personal Security account—which could earn higher, tax-free rates of return in a wide range of private sector investment opportunities like AAA corporate bonds, blue-chip stocks, and diversified mutual funds—with the assistance of qualified, private-sector investment managers.
To make this new option of market-based saving and investment even more politically attractive, there would also be no actuarial reduction of future Social Security benefits for those who invested in such accounts. The front-end budgetary cost is not only justified as a fiscal sweetener to encourage the initial stage of reform, but as fundamentally sound pro-saving, pro-capital formation tax reform. (In more practical budget terms, most of the surplus Social Security revenue otherwise is not going to be "saved" anyway. It will be squandered instead on lower-priority general government spending programs.)
Providing this self-help option via Personal Security accounts would guarantee that at least a portion of workers' payroll taxes would no longer be involuntarily siphoned off to finance the rest of the federal government (in exchange for a political promise to pay for those workers' future retirement benefits with even higher taxes on the proportionately smaller work force of the future). More importantly, it would make more transparent the manner in which the fiction of an OASI Trust Fund produces an unnecessarily poor rate of return on payroll taxes "saved" for retirement purposes.
Current law requires all reserve Social Security funds to be "invested" in special obligation Treasury notes that will pay, on average, the equivalent of a real annual rate of return of about 2.3 percent. By privatizing instead that surplus revenue in individual Personal Security accounts, those funds could be invested by professional money managers in real assets that would earn much higher, tax-free rates of return. Such investments in private-sector opportunities through a modern private pension portfolio would, conservatively, earn two or three times as much, in exchange for assuming a slightly higher level of financial risk. In the real world of voluntary choices and competitive markets, no private pension manager would invest exclusively in Treasury securities indefinitely. Yet while upper-income people enjoy the benefits of professional money management and far higher rates of return in building their private retirement nest eggs, the current Trust Fund system of Social Security penalizes all beneficiaries (but particularly the lower-income retirees who rely the most upon it) by requiring them to be exclusively in federal government bonds and thus receive below-market returns on their past payroll tax investments.
Different versions of this concept have previously been proposed by Rep. John Porter (R-IL), former Sen. Steve Symms (R-ID) and retirement policy analysts Anne Canfield and Stuart Sweet. The common element in each of their plans involves liberating a portion of workers' payroll taxes to capture higher rates of return in the private sector and treating the resulting sums of savings as private property rather than politically controlled handouts.
In the best of all worlds, each worker would be left completely free to do whatever he or she chose with the rebated funds and would invest them prudently for future retirement needs. Given continuing political phobias about the possibility of workers' squandering their money on short-term consumption or unsound investment schemes, it could become necessary to require that the rebates be reinvested in long-term savings vehicles that workers cannot draw down until they reach retirement age. Such a mandated savings plan could still be seen as "deferred compensation" instead of taxation, because the sums accumulated in each individual account would be fully vested, privately owned and transferable upon death to one's heirs.
In addition, reasonable ERISA (Employee Retirement Income Security Act)-style guidelines concerning what is a prudent investment and who is eligible to compete as a qualified investment manager well might be attached as safeguards.
At a minimum, in encouraging each year's rebate of excess Social Security taxes to become seed money for more savings and investment, we could enhance economic growth, prevent political mischief with make-believe trust funds and thereby strengthen our ability to meet future obligations to retirees.
Nevertheless, the projected payroll tax surplus is not unlimited. Barring further adjustments in Social Security benefit or tax schedules, it will eventually fade away as a source for privatized retirement savings in less than twenty years. In fact, the duration of projected annual surpluses in the OASDI trust funds has shortened by five years just since the 1993 Board of Trustees Annual Report was completed less than eighteen months ago.
Therefore, as soon as American workers became comfortable with this initial stage of comparing the concrete results of investing in private-sector growth with the uncertain promises of politicians to collect more payroll taxes in the future, an additional set of options would be offered. Workers could choose to redirect additional amounts of their annual payroll taxes into their Personal Security savings and investment accounts, but this time only in return for offsetting actuarial reductions in their future retirement benefits (to maintain long-term budget neutrality).
Ideally, American workers would soon become so comfortable with the comparative results that they would increasingly welcome the opportunity to redirect additional amounts of their annual payroll taxes into such individual accounts, in return for greater actuarial reductions in their traditional Social Security benefits. Private investment of Social Security taxes for the benefit of individuals instead of politicians would also help build a real foundation of private savings under the U.S. economy and give all workers and their families a greater stake in growth-oriented policies. Instead of propping up Treasury bond prices for affluent investors with their payroll taxes, lower-income workers could begin to share in the long-term benefits of stock and bond ownership themselves.
Moreover, federal budget makers could even reduce "official" Social Security outlays while increasing overall benefits to retirees with the "growth dividend" of market-driven investment. However, no one would be allowed to run out the exit door without first covering the Social Security system's existing obligations to other retirees and relinquishing the pro rata portion of his or her future benefit claims that would become unfunded.
If we started to put individual Americans back in control of their own retirement savings and cut the political middlemen out of further trust fund shell games, future generations would be empowered to break free of further dependency on underfinanced promises. Prospective retirees of the next century would rely less on the future tax collecting ability of the federal government and more on investments in real economic growth within the private sector.
DEALING WITH OBJECTIONS
Critics of such fundamental reform of Social Security raise a number of concerns which may be grouped into two categories of "fairness" and "transition costs." The first focuses on the widely varying returns earned on privatized retirement accounts, greater financial risk imposed on future retirees and diminished progressivity in the benefit structure. The second centers on worries about prohibitive transition costs, administrative complexities and uncertain long-range financial projections, buttressed by an all-encompassing fear of drastic change. A number of those concerns can also be found in the recent Congressional Budget Office (CBO) paper that analyzes proposals to change the investment policy of the Social Security system.
Most of these anxieties are overblown. To the extent that special provisions are required to address them politically, however, future efficiency gains in retirement policy may be compromised and overall costs will rise further.
In order to reap the full potential of the more attractive investment options offered through Personal Security accounts, prospective retirees will have to accept increased levels of financial market risk while letting go of the false security offered by future federal taxing power and politically promised benefits. Earnings on those private retirement accounts will differ according to the choices each individual makes regarding how his or her savings portfolio is invested. Returns will also vary across different time periods. Younger workers, therefore, will have a longer stretch of time to ride out and smooth short-term fluctuations in financial market performance.
The inevitable political impulse will arise to try to equalize future retirement benefits and make any reformed Social Security system "more fair." However, the pursuit of "free lunches" will only deliver junk food snacks that are cross-subsidized at greater net cost to society as a whole. Moreover, even under the current Social Security system, different classes of retirees receive different rates of return on their original payroll tax payments according to their income level, marital status, longevity, race and age.
Social Security's progressive benefit formula is explicitly weighted to provide low-earner workers, upon retirement, with a relatively higher subsidy than high-earner workers receive. The formula also subsidizes people who work in covered employment for relatively brief periods, even at substantial earnings.
The benefit supplement for non-working spouses subsidizes the once-traditional single-earner family at the expense of single people and the two-earner couple.
The system subsidizes people who retire at 65 or earlier at the expense of those who retire later. In addition, retirees who live the longest after first becoming eligible for Social Security will receive the greatest amount of lifetime benefits among their generational peers. Workers who do not reach retirement age, on the other hand, receive no return whatsoever on their lifetime payments of payroll taxes.
The taxation of benefits subsidizes people who do not save or work to generate private retirement income in excess of the tax thresholds at the expense of those who do.
It also pays to be older rather than younger under the current Social Security schedules of taxes versus benefits. Younger workers are finding that their projected net lifetime "profits" are shrinking and, for some, will soon disappear.
Political demands for a "fairer" or more "equitable" benefit structure can be accommodated in part under a reformed Social Security system. For example, the retirement benefit formula could be adjusted to reestablish a more progressive distribution of payments relative to wage levels for lower-income workers who choose to remain within the old system's set of promises (as suggested by retirement policy analysts Anne Canfield and Stuart Sweet). Other financial modifications might include ensuring adequate funding of Social Security's current level of "welfare" benefits (Disability Insurance, Survivors Insurance, Supplemental Security Income) that are not as closely linked to a beneficiary's lifetime record of wages and accompanying payroll tax payments. All of those adjustments, however, will come at the price of reducing the full returns that could be earned otherwise by workers more willing to rely on market-determined rates of return on their retirement savings. They will necessarily limit the amount of payroll taxes that can be redirected into private-sector investments. That will extend the period of time required to restore Social Security to a sounder financial footing in which a given generation's retirement savings better match its benefit expectations. Such adjustments may even require an increase in the overall level of payroll taxes collected to finance accrued Social Security obligations. Even then, however, the real burden on working Americans could still be reduced in part if the option of individually controlled Personal Security accounts allowed greater amounts of tax-advantaged saving for retirement.
In a similar manner, instituting more cautious safeguards regarding the ways in which privatized Personal Security account assets may be invested or converted into cash would simply ensure that while no principal is lost, little is earned on it as well. The whole point of opening up a new range of private sector investment options is to allow individual workers to voluntarily seek out the best deals to meet their own unique needs in a highly competitive and dynamic money market.
Risk-averse worriers anticipating stock market crashes and waves of private bond defaults must remember that if the private sector collapses, the federal government's projected revenue streams will disappear as well. Mere taxing authority alone cannot collect the revenue needed for Social Security benefit payments in the absence of real economic growth, expanding employment levels and healthy business profits.
As to "transition costs" concerns, several responses are in order.
First, those costs increase every day that we delay coming to terms with the fundamental generational and demographic imbalance in Social Security financing.
Second, the best way to reduce them is to refrain from overloading a phased, long-term transition with secondary and tangential policy preferences that add costs and complications. Simply avoiding political micromanagement of what should be individual, voluntary decisions regarding the best retirement planning vehicle choices available will bypass many pitfalls.
Third, the current structure of Social Security locks all Americans into a rigid set of lifetime arrangements only faintly in touch with the economic future. Private markets have proven to be much better forecasters of long-range risk and reward tradeoffs than officeholders who look only as far ahead as the next election while spending other people's money. Periodic adjustments of economic assumptions will be required in any event, but they are made more quickly and accurately through market-based mechanisms.
Fourth, the proposed Personal Security account reform allows individual workers to apply their own brakes and accelerators in a limited process of trial and error, while ensuring that retirees who have already spent their working years in reliance on past political promises are not cut adrift.
CBO'S SHORT-SIGHTED ANALYSIS
Before concluding, I would like to make a few brief but specific points regarding the CBO analysis of various alternative investment proposals for Social Security reserves:
(1) The true financial condition of the OASDI trust funds is worse than CBO suggests. Once one removes the fiscal illusion of interest earnings and accumulated assets from the trust funds, OASDI actually is projected by 2013 to run short of sufficient operating revenue (payroll taxes, income taxes on benefits) to cover all of its benefit obligations. Even allowing for the current system of trust fund accounting, the duration of long-term solvency for OASDI, as projected by its own Board of Trustees, has repeatedly moved up closer in time over the last decade, from 2058 (in 1983) to 2046 (in 1989) to 2041 (in 1991) to 2036 (in 1993) to 2029 (in the latest Annual Report of Trustees). This trend does not inspire long-term confidence.
(2) Long-term shortfalls in OASDI revenue relative to expenditures will have to be dealt with in any case, but even more so if trust fund surpluses are not allowed to be invested in the private sector. If policymakers decide to tackle the expenditure side of OASDI directly, then the real rate of increase in projected benefits (they will more than double over the next 75 years) will need to be scaled back. This can best be done by a combination of increases in the normal retirement age plus a switch from wage indexing to price indexing in determining initial benefit levels.
(3) The CBO paper mistakenly assumes that the level and cost of Treasury borrowing, and the pool of savings to fund it, will be unaffected by changes in Treasury's ability to automatically capture the benefit of "surplus" OASDI revenue. Even the U.S. government faces economic and political limits in the degree to which it can either increase borrowing levels beyond GDP growth rates or raise taxes higher instead. The cushion for both fiscal and political comfort has been narrowing. Cutting off the cash flow "float" via the OASDI trust funds would squeeze both budget policy makers and managers of Treasury debt at the margin.
(4) CBO focuses on the effect of the rate of national saving (its quantity) regarding productivity growth, but it neglects the importance of the quality of the investments funded by this saving (i.e. market-oriented and private-sector-based investments versus politically determined investment allocations).
The Congressional Budget Office provides a variety of excuses for procrastinating and preserving an untenable status quo. There is a clear alternative. By liberating Social Security funds from political manipulation, we can turn burdensome tax obligations into productive investment opportunities, convert shaky political promises into vested property rights, let individual Americans become owners of their personal retirement savings instead of tenants living off other workers' taxes, stimulate private sector growth instead of public sector sloth and take the insecurity out of Social Security.
As our population ages and life spans lengthen, we need to save and invest more for our retirement needs. But we can no longer afford to do it entirely by means of the same old intergenerational chain letter that got us through most of this century. A simple return to pay-as-you-go financing would leave in place a gigantic benefits program headed for a crash two to three decades ahead without any prospect for serious reform.
Nor can we afford to continue business as usual in Social Security's OASDI program. Raising taxes under false pretenses, while leaving future generations of retirees at risk, is unconscionable.
It's time to ensure the stake of all Americans in a secure retirement by starting to put each one of them back in control of his or her own Social Security savings. Cutting the political middlemen out of further trust fund shell games will protect our solemn obligations to current retirees and empower future generations to break free of further dependency on underfinanced promises.
We can save and be independent, or be taxed and remain dependent. We'll be cheating ourselves if we pass up the chance to convert the controversial Social Security surplus into a down payment on retirement policy reform, financial stability, economic growth, personal independence and individual empowerment.
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