Social Security Reform: It's On the Way

It's easy to see a shift in public opinion from the backside. Once it's already happened, it becomes simple to trace the changing moods of a policy conversation. In two years, we'll look back and nod our heads speaking sagely about how this Bush administration successfully changed the conversation about Social Security and about how the under-35's pushed for a new vision when they realized how flawed our Social Security system was. It will be easy to see because the conversation has shifted from questioning whether we should privatize to how we should privatize the system.

The people who are still stuck speaking against even partial privatization have already lost the argument. It's easy to see why the mood has shifted amongst the younger workers: Social Security, like any Ponzi scheme, is a raw deal for the people at the bottom of the pyramid and a hell of a scam for those at the top. If you want the scheme to work, the base of the pyramid has to keep expanding quickly to fund future liabilities--there need to be more workers in the system to keep it afloat since they are paying for the retirements of those who had little or nothing invested in the system. Our workforce (and population) simply isn’t expanding quickly enough to fill the system's need, and, if trends in birthrate and longevity continue, they won't ever again expand that quickly.

Partial Social Security privatization (although it would be preferable in my eyes, I don't believe that there will be a fully privatized system in place even for the youngest workers) will provide tangible benefits to our country and I will greet it with a grin and wide-open arms.

One distinct benefit will be the creation of heritable wealth. If I were to die right now, the money that I paid into the Social Security system would be lost. If those funds were at least partially owned by me, the money could go to the beneficiary of my choosing, keeping the money in the private sector. This would have a minor effect in wealthier segments of the society, but a huge effect in the poorer segments.

And frankly, if the money were put into a broad-based fund (not overly invested into any single stock or any single section of the economy), the yield from 20 or 30 or 40 years of investment will be much higher than the yield from the welfare system that workers are shunted into at retirement. The stock market in any given year or three years might retreat, but the broader market trends strongly toward growth. Social Security, on the other hand, promises little return for me and a negative return for workers just a few years younger than me. The chart that I link to doesn't actually show a negative return, but I think the negative return is foreseeable for two specific reasons: first, that the continued trend in toward longer lives will cause current Social Security projections to be insufficient to deal with a populace that outlives the current system's assumptions, and, second, that if there is no privatization that there will be adjustments in the benefits for younger workers that will include either higher rates of taxation or another bump to the retirement age.

Work harder, work longer, pay more, pay longer, and collect later--that's the deal that younger workers are being asked to accept. It's not a very good deal.

Worse, current projections of Social Security solvency and ability to pay benefits are based on a faulty assumption: that there is actually money in some Social Security fund. It ain't true. Social Security contributions are used to fund government just the way that general tax funds are used, and the Social Security "lockbox" is filled with IOUs in the form of government bonds. So those surpluses that Social Security runs don't really exist. They've been used to fund current government overspending with the promise that the government will begin paying on those bonds when the system moves into a state where it can no longer fund itself.

The problem with that should be self-evident. With the fund running out of supposed surpluses in 2017, our government will have to start paying into the system instead of taking out of it to get closer to a balanced budget. If our government now needs those social security funds to either come close to the budget or to run a modest surplus, how will it handle a situation where it not only doesn't have those funds to lean on, but also has a new drain on the budget?

One of the biggest pluses to Social Security reform will be that, properly implemented, it will force the government to face it's budget deficits a little more honestly. Not that it will necessarily force them to handle it in a more responsible manner, but the camouflage that Social Security surpluses have provided will no longer be there.

For the short term cost associated with letting workers begin to opt out of the full Social Security system while still funding retirees and older workers who won't have the opportunity to move into the privatized system, the country will see what amounts to a huge tax break that runs across all economic boundaries. That tax break will likely take nearly two decades to realize, but the change could be a dramatic positive. The country also loses the shackles of a poorly designed system that was going to become a huge drag on the economy in the very near future.

I can't see that as anything but good.