It used to be said that Social Security was the "third rail" of American politics: If you touched it, you were dead. Nowadays it's more like the first and second rails: You can take a stand on it with apparent impunity, until a train comes along.
Witness President Bush's Social Security commission, which was supposed to develop a plan for allowing workers to invest some of their payroll tax money. Bush campaigned on this concept, which turned out to be surprisingly popular, especially among younger Americans who expect to get a raw deal from the current system.
Now the commission's co-chairmen, former New York Sen. Daniel Patrick Moynihan and AOL Time Warner executive Richard D. Parsons, say they also plan to explore ways of ensuring Social Security's solvency as the baby boomers retire. These options, which include raising the retirement age and scaling back cost-of-living adjustments, have decidedly less political appeal than the enhanced returns promised by personal investment accounts.
"Raising the retirement age and cutting cost-of-living adjustments are both perfectly reasonable, indeed correct, policies," write National Review's John J. Miller and Ramesh Ponnuru. "But neither is going to happen any time soon, and proposing either next year would be a huge political mistake" that could cost Republicans control of the House.
Maybe so, but Moynihan and Parsons are making an important point that supporters of Social Security privatization, whether partial or complete, too often ignore. As fellow commission member John F. Cogan put it, "Personal accounts alone will not solve the Social Security problem."
Indeed, if the problem is the system's impending bankruptcy, personal accounts will do nothing at all to address it. The root of that problem is that Social Security, although widely perceived as a pension program, is actually a pay-as-you-go system in which current workers fund payments to current retirees.
With baby boomers retiring and life expectancy increasing, the ratio of retirees to workers will rise to a point, around 2016, where currently promised benefits can no longer be covered by incoming payroll taxes. The Social Security "surplus," which is held in the form of government bonds and therefore can be used only by drawing on general revenue, will evaporate by 2038 or so.
"The critical point," write Boston University economist Jeffrey A. Miron and University of Chicago economist Kevin M. Murphy in a recent paper from the libertarian Bastiat Institute, "is that privatization does not affect the stream of benefits the government has promised to pay….Properly understood, privatization has no effect on Trust Fund solvency and thus nothing to do with 'saving' Social Security."
In fact, unless privatization is accompanied by benefit cuts, it will actually worsen the system's solvency, since the money diverted to personal investment accounts will no longer be available to current retirees. With or without privatization, lower benefits or higher taxes are inevitable.
A system in which Americans saved and invested for their own retirements would avoid this dilemma. It would also, not incidentally, offer them much better returns on their money and foster personal responsibility rather than dependence on government. But that is not the system we have, and getting there will involve what reformers diplomatically call "transition costs."
As economist John Attarian observed five years ago in Reason magazine, "The brutal truth is that Social Security's prospects are so bleak, and we have evaded reality for so long, that a cheap, painless solution is not possible. Beneficiary or taxpayer suffering is inevitable and necessary. Our first task here is to look reality in the face. That means admitting that you can't get something for nothing."
Attarian also rightly insisted that reformers confront the Social Security myths propagated by FDR and virtually every politician since. Contrary to popular belief, Social Security is not a pension fund or a form of insurance; retirees do not own their benefits; and any connection between what they get and what they paid in taxes is arbitrary.
Social Security, which forces relatively poor workers to subsidize relatively affluent retirees, is not a fair system, and any attempt to fix it–or, better yet, dismantle it–will not be entirely fair either. Yet we need to start talking about how the suffering should be distributed. We can't dodge the train or stop it, but if we all get down on the track we can at least spread out the pain of its impact.