Wednesday, March 23, 2005

what's that? 2041 instead of 2042??

As promised, President Bush has pushed the Social Security debate to the forefront of his domestic agenda. It is difficult to avoid editorials denying or alleging its impending implosion, as there is no other topic more appropriate to discuss in the realm of disasters than Social Security.

The Social Security Sham

Social Security will bleed red in 2017. The Social Security Board of Trustees reports that the program will run short of funds in 2041 and, in the words of the director of the White House’s Strategic Initiatives Peter Wehner, “the current system is headed for an iceberg.” And while the Bush Administration and Republicans are accused of scrambling amok, frantically screaming that the sky is falling like Chicken Little, the Democrats prefer to deny the inevitable, burrowing their heads into the ground like ostriches at the first sign of danger.

Most of America is in the dark when it comes to Social Security, believing that the government deposits their payroll taxes into an actual trust fund. This is not true. Social Security is a transfer payment system where today’s workers fund today’s retirees—it is literally a pay-as-you-go system. When Franklin Delano Roosevelt imposed the socialistic New Deal as a means to a better psychological end, the ratio of workers to retirees was 16 to 1. Today, it is 3 to 1 and, once the Baby Boomer generation officially retires, it will dwindle to 2 to 1.

No one actually owns the funds contributed via payroll taxes (currently pegged at 12.4 percent of income), and can only hope to recover an equivalent amount. If Social Security continues on its downtrodden path, the current generation will have the onerous burden of paying for today’s retirees while facing the increasing likelihood of paying even more in payroll taxes to fund future retirees, inevitably collecting less than contributed by the time they retire.

A Push for Private Accounts

There are several proposed solutions to rectify this looming threat: Increase the retirement age, index inflation to prices instead of wages, raise payroll taxes or simply do nothing at all. Consistent with his plans for an ownership society, Bush has proposed personal retirement accounts, which would divert up to 4 percent of what workers currently pay in payroll taxes into private accounts.

One such model of the private account is the federal government’s Thrift Savings Plan, which allows workers to save up to $12,000 in a personal account that they actually own. Most likely, these private accounts will function like IRAs, where withdrawals take place as a lump-sum or an annuity with taxes on withdrawals.

Private accounts are inherently different from Social Security. Funds from a personal account are invested in the market and create an inflow of capital, resulting in accumulated wealth from which the holder can receive benefits. In contrast, the government does not invest payroll taxes into anything and can spend the money on entitlements or general government programs. An even greater fundamental difference is that the contributor fully owns the private accounts. Instead of paying taxes to the government, expecting it back decades later, the contributor owns his or her assets from day one—you actually get what you put in.

The problem with private accounts and diverting 4 percent of taxes is the transition cost. Since Social Security is a pay-as-you-go system, someone must cover the benefits promised to current and soon-to-be retirees. If Congress had its way, it would simply raise payroll taxes again or ignore the problem completely. Even a certain number of conservatives, the so-called “free lunch” group who believe that private accounts will be enough to sustain the transition, are ignoring a key structural problem: How benefits are calculated and paid.

Currently, the wage index adjusts benefits for inflation. However, the wage index grows faster than inflation, meaning that Social Security benefits grow just as fast. Bush has suggested indexing to prices (a far better measure of inflation) than to wages. Although there will be borrowing costs, conservatively estimated between $1 to $2 trillion to cover the transition period, that figure is less than the estimated $10 trillion in unfunded liabilities for benefits the government will have to foot.

Moreover, additional borrowing in lieu of budget deficits will make the case even more politically difficult to pitch, but it is unlikely that Bush or Republicans will support any tax increases to partially offset the transition. There will be costs, but there are far greater consequences in inaction than action.

The Liberal Opposition

Opponents feigning ignorance to the inevitable do so by hiding behind the liberal wall of denial. In claiming that individuals are incapable of managing their own private accounts, much less own their retirement assets, opponents realize this is an ideological life-or-death struggle. If Bush succeeds, the New Deal-era and its socialistic attitudes and programs will finally fade into the annals of history. The United States can finally move into the 21st Century.

What troubles modern liberals so much, and what they refuse to admit, is that knocking down one of their great pillars of political demagoguery will make them irrelevant. It will signal an ideological shift of what government can and cannot do, and it will have as much of an effect on our lives and on public policy as the New Deal did for the 20th Century.

Social Security reform is just the beginning of the ideological realignment. The current generation of workers, who are well aware of the inadequacies and limitations of big government, are asking to replace paternalistic social engineering programs like the New Deal with a Just Deal. As Bush said in his Second Inaugural Address:

We will widen the ownership of homes and businesses, retirement savings and health insurance, preparing our people for the challenges of life in a free society. By making every citizen an agent of his or her own destiny, we will give our fellow Americans greater freedom, and make our society more prosperous and just and equal.

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