Come 12:01 on the morning of January 1, the Social Security tapeworm will celebrate the New Year by curling up for a delicious new feast, compliments of America's wage earners. Because of legislation passed in April 1983, ostensibly designed to stave off the bankruptcy of Social Security, the ravenous system will take an even larger bite out of paychecks than before.
For those unfortunates already paying into the system, the Social Security tax will go up from 6.7 percent to 7 percent and the maximum annual contribution (calculated for a wage base of $37,500) will rise from $2,392 to $2,625. These are only the first squiggles in a long-term upward spiral. By 1990, the Social Security tax rate is scheduled to rise to 7.65 percent and the maximum contribution to $4,200.
New Year's Day will also mark the addition of new dishes for the system's ever-growing appetite. Most notably, the paychecks of newly hired federal workers and of all employees of nonprofit organizations will be subject to the same tax—and at the same rate—as their fellow workers.
It is instructive to recall that the 1983 legislation, the tapeworm's new meal ticket, came about as a result of the Social Security Crisis. Those with long memories will recall that in early 1983, Social Security pushed nuclear weapons to a distant second in the hierarchy of crises, and that old chestnut the Energy Crisis was nowhere to be seen.
Normally when a crisis is announced, the single best policy that Washington could (but usually does not) adopt is doing absolutely nothing. What these crises really signify is that some entrenched bureaucracy is eager for a raid on the Treasury. If it gets what it wants, things will surely get no better and will probably get worse. If the worry is why Johnny can't read, the response is to toss federal dollars into education, create a new cabinet-level agency, and watch sat scores plummet to the level of a utility infielder's batting average. If OPEC connives to raise the price of oil, the government declares an energy crisis, baptizes yet another cabinet post, and produces lines at gas pumps that would gladden the stern heart of an ayatollah.
Unfortunately, when the crisis is itself the direct fruit of misguided governmental policy, the usually sound advice doesn't always apply. Such is the case with Social Security. A string of presidents and congresses have shown their compassion for America's aged (and, incidentally, for their own incumbency) by creating an actuarially unfunded debt of $6 trillion, give or take a trillion. Pundits now learnedly debate whether the system will go belly-up before 1990 or expire in a sea of red ink early in the 21st century. If you believe the former, you are officially dubbed a "pessimist," if the latter, an "optimist."
The response to this particular crisis observed all the traditions. First the president's National Commission on Social Security Reform spoke, and then a resounding echo was heard in the Congress. The results were entirely predictable. Your newly revised version of Social Security features not only higher payroll taxes but also a tap on the Treasury's general revenues, the inclusion of millions of formerly exempt warm bodies, a brief pause in cost-of-living adjustments, and some taxation of retirement benefits. Chances are now excellent that no Social Security check will bounce anytime in the next decade.
Polite folk and those who have taken to heart John Maynard Keynes's dictum, "In the long run we are all dead," will not inquire further. However, the rest of us are advised to refrain from applause just yet. In his State of the Union address last year, President Reagan warmly applauded the bipartisan spirit that generated this pact, reserving special praise for the Speaker of the House, not hitherto noteworthy as a recipient of Reagan's plaudits. Such comradely benedictions indicate either that a new spirit of statesmanlike fellowship roosts on Capitol Hill or that taxpayers should grab for their wallets.
The package is—pick one—a delusion or a disaster. The tax increases called for will slow or halt recovery. Solvency in the near term requires that optimistic economic forecasts come true—not a good bet on the past record. Nothing has been done to address the dilemma for Social Security early in the next century, when the postwar baby boom generation retires with few wage earners available to support it. Indeed, the legislation has exacerbated this problem. By dragooning government employees into the system, funds will be made available in the near term, but at the cost of many more checks to mail out a few decades hence. Most important, "reform" measures have done nothing whatsoever actually to reform the system—Social Security will continue to be a ripe target for political gamesmanship. It is a near certainty that periodic crises will remain with us. What then should be done?
In fact, there is no quick fix to the Social Security dilemma, else I would have announced it two paragraphs back. Raising the tax rate promises to produce supply-side miseries that will multiply unemployment; but to cut promised benefits to the elderly would be to default on the compact between government and citizen. Nor, in case one has failed to notice, does there exist a healthy Treasury surplus from which funds can be obtained.
Perhaps there is no very attractive solution to the Social Security mess. Then we must look to the least bad response that can be designed. The following four criteria ought to be applied to proposed strategies as a test of their political, economic, and moral soundness:
(1) Whatever plan is adopted must not leave economic carnage in its wake. Part of the reason for Social Security's current parlous state is the fact that our economy has been in the doldrums for a decade. Prolonging or increasing economic misery is no way to secure the financial foundations of Social Security or of any other government program.
(2) The fact that past congresses and presidents have lavishly promised benefits through Social Security which they have failed to fund adequately may amount to malfeasance of duty. It does not follow, though, that ill-made promises are null and void. Those now past or approaching their 65th birthday have planned for retirement with the expectation that Social Security will be there to meet a large chunk of their needs. Those expectations carry moral weight even if they rest on political legerdemain. It would be unjust to violate them at this late date.
(3) Those Americans who had the good luck to be born between 1880 and 1920 have enjoyed and will continue to enjoy benefits from the retirement provisions of the Social Security system far in excess of their contributions to it—perhaps averaging five times greater than what an actuarially sober pension plan would have afforded. To put it another way, Social Security is 20 percent pension, 80 percent Ponzi scheme. That means that younger participants must inevitably be net losers. It is too late to take back any but a negligible amount of benefits from pre-1920 generations. What can be done, however, is to spread the losses as evenly and fairly as is now possible among the various age groups. Any proposal that pretends to offer a way out that hurts no one must be viewed with a jaundiced eye.
(4) Whatever remedy is offered must realistically address the problems that actually exist and, above all, be immune to recurrent financial hemorrhages a few years down the road. Congresses and presidents have repeatedly produced legislation advertised as "solving" the problems of Social Security; as recently as 1978, President Carter announced that he had signed a bill guaranteeing the soundness of the system through 2030. The gloomy record of repeated past failures should make it clear that superficial tinkering with tax and benefit schedules can, at best, temporarily postpone the day of reckoning.
Now for the salvage operation. Paradoxically, one factor that makes rescue more plausible now than ever before is the American public's awareness of the quagmire into which Social Security has fallen. In a national survey, an astounding 84 percent of those between the ages of 18 and 44 said that they do not believe that benefits will still be available when they retire. They recognize that they are at the tail end of a chain-letter boondoggle that is about to collapse. Presumably, then, they are willing to cut their losses rather than hold out for a dubious jackpot, the prospect of which they see steadily receding.
Those 45 and younger can count on at least 20 working years remaining during which they are able to accumulate a retirement nest egg. Accordingly, I propose that those who are 45 years old be offered the option of not paying any further Social Security payroll taxes. If they choose this, they would, of course, no longer be eligible upon retirement to receive benefits. But the money they would save on tax payments would then be available to them for investment in private IRAs (individual retirement accounts) or Keogh-plan accounts.
Probably Congress would not allow people to gamble on their longevity or continued ability and willingness to work after age 65 and thus would insist on making mandatory the purchase of some minimum level of pension benefits. Strict libertarians would demur, but a legal requirement of private retirement investment is still a giant step toward voluntarism.
Those who elect to continue to pay Social Security taxes could still do so, but it would be stipulated that their retirement payments would be actuarially determined according to the present value of their lifetime tax payments, not by the largesse of Ronald Reagan and Tip O'Neill's 21st-century successors. This provision should satisfy the legitimate claims of every working 45-year-old: those who view Social Security as a sinking ship would be free to abandon it; those who are more optimistic would be guaranteed a return based on every dollar put in.
For those between the ages of 16 and 45, payroll taxes would still be collected, but on a sliding scale ranging from 100 percent of the current rate for those under age 25 down to zero once the 45th birthday is reached. That would be their cost of "buying out" of the system, and it is appropriate that they carry their fair share of the burden. Again, they would not be required to leave the Social Security system at age 45, but would be permitted to do so if they wished. The difference between the tax they would be required to pay and the current payroll tax could be directed either to a private pension plan or to a government-operated one, the latter perhaps still called "Social Security." Given the reality of government's inefficiency in almost every area it touches, one might suspect that most people would choose to take their chances in the private sector. That, however, would be up to them. Galbraithian liberals could display their allegiance to New Deal principles by continuing to send their dollars to Washington.
It would be unjust to require that all sacrifices be made by younger people. Those above 45 but not yet retired would be given two options. They could drop out of the system, in which case upon reaching age 65 they would receive from Social Security a pension based on the then-current value of the money they contributed. Or, they could stay with the system at its current benefit level but be required to make payments larger than the current payroll rate dictates in order to make the benefit levels commensurate with the system's revenues.
Finally, those now retired would not have benefits diminished. Instead, amounts would be frozen for a 3-year period. This would offset previous overly generous cost-of-living adjustments. How much this would affect pensioners would depend on the rate of inflation during this period. If inflation were kept very low, pensioners' living standards would suffer hardly at all. A useful side benefit of this reform is that, in one fell swoop, it would create a politically powerful constituency adamantly opposed to inflationary policies. Could even Teddy Kennedy and Lowell Weicker resist its demands for fiscal sobriety?
After the 3-year freeze, benefits would be adjusted, but this time by reference to the average wage level and not the Consumer Price Index. The old deserve both our respect and their fair share of the growth of real income; they are not, however, entitled to be the one group of the population entirely shielded from the baleful effects of inflation.
Should the standard retirement age be kept at 65 or raised? One beauty of the proposal outlined above is that no answer need be given—that is, no one answer would necessarily emanate from the hallowed precincts of the Social Security Administration. If pensions were fully funded, each individual could choose his own retirement date. Those who would elect to retire early (say, at age 55, which is not currently allowed under Social Security) would receive relatively small monthly payments. Those who chose to work until a ripe old age could receive, upon retirement, very substantial payments. Washington could get entirely out of the game of fixing a mandatory retirement age.
Some will object that this proposal is unfair to the young—those under age 45 would be compelled to pay into a system from which they could not subsequently receive benefits (unless they elected to fund their retirement through the government program). On what ethical grounds could they be compelled to sacrifice for the sake of older, more fortunate age groups?
It is true that the young would be net losers—losers, that is, relative to a world in which Social Security had never existed and thus a world in which no one had to fund a pay-as-you-go transfer scheme. Alas, that world ceased to exist during the New Deal. The reality that must now be confronted is that the government has vast unfunded retirement liabilities, and only two alternatives are available—defaulting on those liabilities or somehow apportioning their cost. My proposal places some of that cost on the young—and some on every other age group.
In fact, compared to their treatment by the present system, the young would be the major winners. For if Social Security were finally to expire early in the next century, those who are now young would lose a lifetime of taxes pumped into the floundering system. By then, Claude Pepper and his cronies will be in that happy realm in which fiscal mismanagement is unfelt. Better an opportunity for the young to buy out now than suffer truly disastrous consequences later.
Were it the case that Social Security could be terminated without cost to anyone, then my proposal to spread those costs equitably would be superfluous. But no such cost-free alternative is available, for the simple reason that in every transfer system in which some are gainers, others must be losers. If each of seven poker players claimed to have come out of the night's action a winner, you would suspect their veracity. For exactly the same reason, you ought to question the logic of any plan for phasing out Social Security that purports to be painless.
Congressman Ron Paul (R–Tex.) has proposed a scheme with such claims. His suggestions for funding benefits in the close-out period range from the fanciful (minting and selling American Gold Eagle coins to the public) to the sober (using the savings that would accrue with the elimination of military and economic foreign expenditures). Suppose that such devices would suffice to pay extant claims. Would this place any less of a real burden on taxpayers than the proposals I have outlined? The answer is clearly no.
Let us grant, for the sake of argument, that foreign expenditures ought to be terminated. This should provide relief to taxpayers no longer coerced into paying for foreign involvements. That is all to the good. But Paul does not propose leaving that money in the hands of its rightful possessors; instead, he would divert it to Social Security.
Note that this is real money that has been extracted indiscriminately from all taxpayers. It is plainly dishonest to pretend that such tax money is "found" revenue, a kind of manna from heaven. Moreover, it is unfair to rely on taxpayers to save Social Security. Although everyone would be burdened by this strategy, high-income earners and the young would suffer most—the former, because they have higher tax rates; the latter, because their taxpaying would last the longest.
These considerations apply to the other revenue devices Paul proposes. If one believes that the US tax code is so scrupulously fair that no attempt to distribute the Social Security burden can improve on it, then one ought to favor his proposal. Otherwise, one should admit that we can do better. The big "advantage" of the Paul proposal over my proposal is that his attempts to hide the true cost borne by different parties, while mine makes such information public.
The observant reader will have noted that the immediate effect of adopting my proposal would be a very slight decrease in Social Security benefits paid out and a large decrease in receipts. Since the retirement fund is already running a deficit, it may appear that the otherwise laudable features of the proposal are obliterated by that imbalance.
There is an answer to this objection. My proposal would result in a deficit on the order of $50 billion per year over the next two decades. This could be made up largely by selling off the federal government's vast land holdings, including subsurface rights. (National parks could be exempted.)
The value of the national domain is hard to calculate. Several current estimates are near the $500-billion figure. They are biased downward, however, by the fact that governmental restrictions on use of this land cause great inefficiency in its exploitation, as well as the fact that this land has not been carefully surveyed for potential commercial opportunities. Thus, its market value may actually be closer to $1 trillion. If it were sold off over a period of 10 years, proceeds could be diverted to funding Social Security.
Once the land is in private hands, it would be subject to property tax, and profitable commercial ventures would generate income also subject to taxation. These taxes could be applied to the payment of retirement benefits until Social Security is once again a solvent concern. Subsequently, disgorged property would be taxable by local jurisdictions, another constituency that should welcome this proposal.
Of course, selling federal land would impose burdens on citizens. You would lose "your claim" to a share of the national domain. It is unlikely, though, that this not-very-liquid asset ever figured prominently in your estimation of your own net worth. Environmentalists would surely howl. Against them, an effective rhetorical retort might be, "Which do you value more—landscapes, or your parents and grandparents?" If this does not pacify the Sierra Club, perhaps it will be mollified by the thought that every tree sold off is a tree that the politically buffeted federal government can't touch. Others, of course, regard the privatization of the national domain as a positive benefit, as desirable in its way as the restoration of solvency to Social Security.
It may be feared that the money spent by private interests in buying up the national domain would diminish the already low supply of capital available for investment. If investment in plant and equipment ground to a halt while land was being auctioned off, the economic consequences would indeed be catastrophic.
But what this objection overlooks is that my proposal calls for a shift to a regime of fully funded pension programs. Workers who put their earnings into such pension accounts would thereby be supplying capital that the United States needs to achieve real economic growth once again. On balance, the two would roughly cancel out during the transition period. And following the complete privatization of the national domain, pension funds would provide an enormous infusion of capital.
Finally, some will complain that this proposal "saves" Social Security by destroying it. The program that would remain in government hands would not be mandatory, would not feature near-universal participation, and would not be able to transfer huge sums between generations.
All that is true, but it misses the point. My proposal cannot destroy Social Security, because Social Security has already been destroyed by decades of political profligacy. Congresses have shown themselves thoroughly unable to restrain themselves from dangling goodies before voters, goodies to be paid for later.
Proponents of a mandatory government retirement program have often employed the paternalistic argument that individuals cannot be trusted to provide for their own retirement; the all-wise overseers in Washington must do it for them. But if you don't save today, then it's you who will be impoverished 20 or 40 years hence. A congressman who votes today to increase benefits, however, will be safely out of office 20 years from now-and probably enjoying a fat congressional pension. Ironically, it is government that cannot be trusted to provide for individuals' retirement.
Loren Lomasky teaches philosophy at the University of Minnesota at Duluth.
This article originally appeared in print under the headline "Buying Out of Social Security".