The latest problem with the Social Security system—a surplus of nearly $40 billion—could be far more dangerous than previous Social Security cliffhangers. In the past, the system repeatedly tottered on the edge of bankruptcy; in the future, a massive surplus in the Social Security trust fund could give politicians the ammunition to take over the American economy.
This is the fourth major Social Security crisis in 16 years. In 1972, 1977, and 1983, Congress rushed through bailout packages to rescue a Social Security system that was in imminent danger of defaulting on benefit payments. Congress decided in 1983 to massively increase the Social Security system's reserves over the next half century to "finance" baby boomers' retirement. The Social Security Commission thus raised Social Security taxes sharply, wiping out the 1981 income-tax cuts for most wage-earning Americans.
The paranoid Social Security experts on the commission and in Congress wanted a surplus, but they failed to predict that the one they were creating would balloon to $12 trillion by the year 2035. Says Sen. Bob Packwood (R–Oreg.) now, "The information was available, but I don't think anyone paid much attention to it." Sen. Pete Domenici (R–N.M.) observes, "I don't think we focused on it because it was rather incredible."
Social Security is based on the idea that government can "save" money—thus building up a nest egg for each citizen's retirement. But the government doesn't bury young workers' money in the back yard and then dig it up when the workers reach retirement age. If Social Security payroll taxes exceed benefit obligations, politicians "invest" the surplus in Treasury bills.
As a result of the Social Security tax hike of 1983, the system's revenue now far exceeds benefit obligations—and the surplus will mushroom to $93 billion by 1993 and $500 billion by 2020. This surplus could mean that no big-spending politician need go frustrated anytime between now and 2040.
Giving politicians a half-trillion-dollar surplus to play with is like giving a six-year-old an Uzi. Washington analyst Tom Miller puts it succinctly: "As the Teamsters used to say, 'But the pension fund was just sitting there.'" Social Security in the future could be a double-whammy for the American economy: first, Congress will drain the economy's lifeblood by pulling out billions of dollars a year in payroll taxes; then, Congress will turn around and use that hoard to throw wrenches into the economy.
After the Social Security surplus piles so high that politicians have exhausted their capacity to waste money in the public sector, there will likely be a big push for government to invest in the private sector. On the surface, this would be preferable to allowing politicians to spend all the money on the day it arrives in the Treasury. But with trillions of dollars of surplus piling up, government could soon be able to dominate the economy.
Pension fund socialism is a likely result. Money would be available for a thousand Chrysler bailouts, for massive subsidies to unproductive farms, and for "saving" every inept corporation between Miami and Seattle. Government could buy a share of private companies—and then, a few years later, politicians could easily take over daily management of companies, dictating social goals, labor policies, and investment strategies. The Zairean model of development would finally arrive in America.
On the bright side, the surplus provides a golden opportunity for citizens to escape from the floundering Social Security system. If the feds can't bring themselves to privatize Social Security, thereby restoring Americans' free choice about investing for their own retirement, at least they could reduce payroll taxes to only what Social Security needs to pay current benefits—and then require citizens to deposit the remainder of what they previously paid in taxes in a private savings account.
The new private accounts would be citizens' own property, though they'd be denied access to their stash until age 62. This would greatly reduce Social Security's drain on capital accumulation and would stimulate the savings rate. Making the savings accounts mandatory, though reprehensible to libertarians, would satisfy frightened voters' belief that they need to be saved from themselves.
Social Security will never be more trustworthy than the average member of Congress. Social Security makes life in America less secure by forcing people to rely on politicians who have no idea in hell what they are doing. The growing Social Security trust-fund surplus could either bankrupt the nation or provide an escape from political bondage.
James Bovard is an adjunct analyst for the Competitive Enterprise Institute in Washington, D.C.
This article originally appeared in print under the headline "Viewpoint: Trillion-Dollar Trouble".