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Social Security looks to Wall Streetfrom NewsLink, Vol. 1, No. 2, Winter 1997 Promises
to Keep: Savings Social Security's Dream |
Fixing Social Security is not a new act in Washington. Over the course of its 62-year history, Social Security has seen more than its share of fixes, usually in the form of tax hikes.
Unfortunately, the tax hikes failed by destroying jobs and ultimately by failing to solve Social Security's fundamental problems.
In 1977, President Carter said his tax hike would make Social Security "sound" for another five decades. He was wrong. In 1983, President Reagan said his bipartisan reforms would protect "the financial integrity of Social Security." House Speaker Tip O'Neill then said, "This is a happy day for America." Both men, raised on FDR's grand promise, were wrong.
Since its birth in 1935, Social Security has benefited from more than 20 tax increases all in the name of sustaining its solvency, all in response to continuing crises. Much as FDR intended, Social Security's reputation as a pay-as-you go system lends itself to such patchwork and late-night stop-gap measures. "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions," FDR said. "With those taxes in there, no damn politician can ever scrap my Social Security program."
Guardians of the system were reassuring. "What you get from the Government plan will always be more than you have paid in taxes and usually more than you can get for yourself by putting away the same amount of money each week in some other way," declared one Social Security bulletin in 1940 when there were 42 workers for every beneficiary.
Today there are three workers for each beneficiary. By 2030 the ratio will be two to one. The Great Reckoning will arrive.
Late last year, the 1994-1996 Advisory Council on Social Security proposed three remedies to what will avail the system in 2020 when the trust balance begins to decline. The first option, Maintenance of Benefits (MB), calls for a "small increase in the contribution rate" sooner and a 1.6% payroll tax increase later - proving that a tax-to-fix strategy hasn't been fully extinguished.
The advisory council offers a second idea: constrained, publicly-held individual accounts. And, pushing the envelope further, the advisory council's third option, Personal Savings Accounts, is a two-tiered system that would rely on the markets.
While the advisory council could not agree on a unifying solution, it examined the role equity markets can play in bringing the program into balance. Even the MB option examines how Social Security can secure a higher return than by the current practice of investing only in government bonds. To underscore the point, Robert Ball, the former Social Security commissioner, is backing a plan for the government to invest an inflation-adjusted $800 billion of Social Security funds in the market.
In making such a call, America's premier social insurance plan is now turning to Wall Street in what is the most significant paradigm shift in public policy since the inception of Social Security itself.
This shift is due mostly to the kind of intellectual groundwork laid out in Promises to Keep: Saving Social Security's Dream, by Marshall N. Carter, CEO of State Street Bank in Boston and William G. Shipman of State Street Global Advisors. Shipman is co-chairman of the Cato Institute's Project on Social Security Privatization.
The authors are part of a growing movement that's not only sounding the alarm but crafting a market solution to the wobbly leg of America's three-legged retirement stool. Their assessment of the problem is accurate; their compassion toward current recipients is laudable.
Their bottom line is clear: Over time, the markets have done much better than the contributions workers make to the current system. And given market history, even with wild fluctuations, the market is the best bet for future retirees.
Carter and Shipman reject out of hand the conventional wisdom of raising payroll taxes. Such taxes depress wages and employment. A family earning the national median of $52,039 that pays 40.5% of its income in taxes simply cannot pay more. This form of taxation strongly discourages savings. "Americans are trapped in a classic Catch-22. Social Security's high taxes lessen their ability to invest wage income in earning assets for retirement savings."
Carter and Shipman's vehicle is the Personal Social Security Account (PSSA), not unlike the advisory council's third PSA option. PSSAs would run parallel to the existing system up to the point where they would eventually, over the long term, replace government Social Security as we know it. Current recipients would receive their benefits.
Like Social Security, PSSAs would be mandatory. And while they would be "forced," participants would invest their FICA taxes in financial assets - stocks, bonds or mutual funds - solely for the purpose of retirement. Given the ability of investors to hedge their funds with global investment opportunities, and given the immense personal computing power in the hands of individuals, such private accounts are less risky than they appear.
Not to be discounted is the massive surge in productive investments. "A larger capital supply means lower borrowing rates for businesses and entrepreneurs wanting to expand, modernize, undertake research and development or introduce new products or services," write the authors.
The strength of an idea is often measured by hostile reaction to it. Already, adherents of Social Security are preparing to mount a counter-offensive.
"Even if [favorable returns] were achievable, do you trust your retirement security to the buyout bandits, merger maniacs, derivative speculators, down-sizers, deindustrializers, and take-back artists who have brought workers and the labor movement to their present sorry state?'' asks Michael Eisenscher, a 25-year veteran union organizer. "Organized labor played a critical role in the struggle to establish the Social Security system. It must now play a leading role in the struggle to defend and improve it, not to turn it into yet another source of capital for speculation and profiteering."
Such reaction is sure to be deafening in the months ahead. Social Security, bulwark of the modern welfare state, is incapable of meeting the demographic, technological and global challenges ahead. That it is called into question by advocates of rational alternatives such as Carter and Shipman's highlights the twilight of the entitlement mentality in American politics.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2005. All rights reserved.
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