Retirement Plans

The untold story of the budget battle: Because "mediscare" hasn't worked, privatizing Social Security has become possible. Here's how things might shape up.

Rick Henderson from the March 1996 issue

Forget the acrimonious Beltway budget debate. Ignore the hysterics ginned up by the Democrat/union/seniors' lobbies over "extremist" Republican measures that would slash programs protecting "the elderly," "children," and "the environment." Something important has happened amid the screaming and the showdowns: Both political parties have agreed to put Medicare on an annual budget, ending its open-ended status.

The GOP's seven-year balanced-budget plan would get $270 billion of its budget savings--nearly one-third of the $815 billion the Republicans require--from reductions in projected Medicare spending. The White House initially countered with a proposal that would save $192 billion from Medicare over that seven-year period. All the Democrats' histrionics were based on a difference of $11 billion a year. You might find that much in loose change between the sofa cushions at the Department of Health and Human Services.

Before this year, had either political party proposed similar reductions in Medicare, the American Association of Retired Persons would have shut down the Capitol switchboard, led sit-ins at federal buildings, or asked its members to handcuff themselves to their representatives' desks. Weak-kneed politicians could have sought solace from welfare-state advocates on the left and right. After all, as recently as June of 1993, neoconservative icon Irving Kristol was chastising conservatives for attacking federal retirement programs. Writing in The Wall Street Journal, Kristol said "traditional conservative fiscal monomania" about entitlements "leads to political impotence and a bankrupt social policy....If the American people want to be generous to their elderly, even to the point of some extravagance, I think it is very nice of them."

Now all that's changed. Perhaps it's becoming possible (without ducking for cover) to publicly discuss major reductions in entitlements, which were believed to be the "third rail" of American politics as recently as a few months ago. As National Center for Policy Analysis President John Goodman points out, "The Republicans touched the third rail with [their Medicare reforms]. And nothing happened."

No matter how or when the current budget dispute works itself out, the failure of a few advocacy groups to use "Mediscare" tactics to cower wavering legislators bodes well for reforming Social Security, the 800-pound gorilla of retirement programs. Milton Friedman first suggested privatizing Social Security in 1962--a proposal that for two decades had few adherents outside of libertarian and other free market circles. More recently, however, advocates of privatization have been heartened as several dozen nations, including Great Britain, Chile, and Singapore have at least partially privatized their retirement programs. Goodman echoes the attitude of entitlement watchers from free market and deficit-fighting groups when he says, "By the end of this decade, I think we'll see a national consensus among Democrats and Republicans that something needs to be done about entitlement programs for the elderly in this country. And by something, I mean major privatization."

It's no secret that Social Security is a fiscal time bomb, but those facts bear repeating. While 65 has been the Social Security retirement age since 1935, average life expectancy for 65-year-olds has increased from about 13 years in 1935 to 17.5 years today. By 2040, 65-year-olds are expected to live another 20 years. In 1950 there were 16 workers for every Social Security recipient. Now there are 3.3, and it's projected that there will be fewer than two workers for every recipient by 2030. And as the baby boomers retire, the number of Americans older than 70 is expected to double, from 24.1 million today to nearly 48 million in 2030.

Social Security now runs annual surpluses of about $50 billion. But those boomers will soon prevent Social Security from paying its own way. Sometime around 2010, the program will have to finance some of its benefits from general tax revenue, and those subsidies will have to increase continuously. To keep Social Security from dipping into the general treasury, between now and 2030 payroll tax rates would have to increase from the current 11.2 percent to nearly 20 percent.

This sobering news has helped temporarily deaden the currents on the third rail. For more than a decade, a majority of opinion-poll respondents have doubted that they would receive enough benefits from Social Security to finance their retirements. Over the past four years skepticism about Social Security's future has intensified. In a March 1994 Gallup poll, for instance, 46 percent of those surveyed strongly agreed that taxes would have to be raised "dramatically" to pay Social Security benefits in the future; 74 percent said most people could get more money investing their payroll taxes privately rather than relying on Social Security; and 71 percent expected to get less out of Social Security at retirement than they put in during their working years.

In November 1995, a poll conducted by the Charlotte, North Carolina-based polling firm GrassRoots Research, found even stronger doubts about Social Security's future. When asked what changes, if any, the respondents would make to Social Security, only 24 percent would leave the program alone; nearly as many (22 percent) would make Social Security completely voluntary; another 29 percent would either raise the retirement age or cut cost-of-living increases for current retirees.

This skepticism has no doubt been fueled by the willingness of prominent individuals and organizations to harp on Social Security's long-term troubles. During the 1992 presidential campaign, former Massachusetts Sen. Paul Tsongas lectured Democrats about the possible collapse of the program. Since then, the Perot voters' obsession with deficit reduction, the Tsongas-founded Concord Coalition's focus on the entitlement time bomb, and the 1994 Bipartisan Commission on Entitlement and Tax Reform's widely reported findings that entitlement programs are the major source of the federal deficit have made it possible to suggest substantive reforms of retirement programs in polite company.

In addition, says Concord Coalition Legislative Director Demetri Coupenas, "People are becoming more cynical about government. We think cynicism is unfortunate in general, but it's fortunate for [moving the debate] on this issue." Scott Rasmussen, president of GrassRoots Research, notes that confidence in government has eroded dramatically since Franklin Roosevelt first proposed Social Security. "In the 1930s," Rasmussen says, "we were in the middle of the Depression. People didn't have any confidence in the private sector. Now people don't trust government any more. They would rather have their Social Security money invested privately."

Advocates of privatization in the United States can also look to other countries that have started reforming their retirement programs. An October 1995 NCPA study co-authored by Goodman, Peter Ferrara, and Merril Matthews lists more than 40 nations that incorporate some private component as part of their "public" retirement programs. In Singapore, for instance, the forced-savings plan incorporates retirement investments along with savings for home ownership and medical care. South Korea, Germany, and Ireland are but a few of the countries that let the self-employed opt out of the government retirement program.

And this year New Zealand will have its first parliament elected not in single-member districts but under a scheme of proportional representation. A new political party expected to lead a center-right coalition there, the Association of Consumers and Taxpayers, has made social security privatization one of its four platform planks. Republican activist Grover Norquist, who is advising the ACT, believes success in New Zealand could help reformers in the United States. "New Zealand is an English-speaking, democratic nation," says Norquist, "not a former dictatorship" like Chile, which privatized its social security program 15 years ago. If privatizing old-age entitlements can becomes a winning issue in a Western-style democracy like New Zealand, Norquist asks, why not here?

While there's hope for sweeping changes in Social Security, reformers still have some tough rows to hoe. The AARP, labor unions, and other defenders of the welfare state will remain political impediments to change. And along with winning electoral battles, reformers must satisfy three constituencies with different demands: younger workers who may face crippling payroll taxes as their parents retire; people at or near retirement age, who expect to receive the benefits promised to them; and those in between, who fear they may pay much higher taxes and still get little in return when they retire.

Privatizing Social Security isn't merely a matter of fiscal responsibility, an issue (as Irving Kristol wrote in the Journal) only for those "whose Good Book is the annual budget." The current system discourages thrift, encourages dependency, and, yes, even undermines families by breaking the economic bonds between generations. And it is based on a lie: that retirees are simply collecting money they "paid in." There is, of course, no real economic relation between the taxes working people pay and the benefits they collect as retirees. Both are simply set politically, giving all retirees a vested interest in the welfare state. Freeing Americans from dependence on Social Security would change that, giving tens of millions of people control of their own destinies. As investors in private retirement plans, each would have a stake in the success of the American economy. National Development Council Chairman Sam Beard, who has devised a privatization proposal, speaks of creating "minimum-wage millionaires."