Sun City for Social Security
Bandow, Doug
SUN CITY FOR SOCIAL SECURITY Bipartisan quick fixes won't keep the checks coming. A wo years ago House Speaker Tip O'Neill and Rules Committee Chairman Claude Pepper, along with Senate Majority...
...As a result, he says, he doesn't "regard solvency as something to worry about...
...With the American public's general acceptance of IRAs, the opportunity now exists to sell a major reform plan to stem the red ink...
...the AARP's Fiori says that there will always be a great deal of anxiety among beneficiaries to preserve the system, which creates "built-in resistance to change...
...Others express doubts about the bipartisan remedy as well...
...A wo years ago House Speaker Tip O'Neill and Rules Committee Chairman Claude Pepper, along with Senate Majority Leader Robert Dole and a herd of other congressional leaders, stood smiling at each other in the Rose Garden as President Reagan signed into law a $165 billion Social Security tax increase...
...productivity grew only 1.2 percent annually during the 1970s...
...The Washington Post enthused that the process was something to reflect upon "if you get discouraged from time to time about government's inability to deal with the hard problems...
...Ferrara would also eventually allow an additional 10-percent credit for IRA contributions with which to purchase life insurance...
...Congressman Pepper's aides say that he is not concerned about another solvency crisis, and Senator Dole says that the trust fund reserves, though low, "should be sufficient to ensure that benefits are paid through the 1980s...
...Now that he no longer has to worry about another election, he has the best opportunity yet to defuse an issue that has bedeviled him since he first suggested, two decades ago, that the system be made voluntary...
...What was then the largest tax increase in American history—$227 billion worth—was also Doug Bandow is a senior fellow with the Cato Institute, and a former Special Assistant to the President for Policy Development...
...There is evidence," he says, "that the young are worried and might be open" to such an idea...
...unemployment hasn't been as low as 5.5 percent since 1973...
...The nineties will be more comfortable," says one Administration official...
...More important, by cutting Social Security payments in the long run, the plan would eventually reduce government spending...
...The worker's future Social Security benefits would be reduced proportionally by his IRA investment...
...In that case, the huge Social Security deficits projected by the Commission to occur in the next century will go unfunded that much sooner...
...And shortly after the 1983 measure was passed, Richard S. Foster, the system's deputy chief actuary, distributed a memorandum which declared: If actual growth is more rapid in 1983, but then restricted by another recession within the next few years, the trust funds would be in a worse financial position than indicated under the pessimistic assumptions...
...But in the future a plan relying on IRAs, like Ferrara's, to separate the retirement and welfare functions of Social Security at least partially, may become a serious option...
...The reason the system could get in trouble for the third time in barely more than a decade is that the 1983 legislation was designed not to remedy the severe defects in the design of the system, but to save the political hides of the President and Congress...
...Even if the Commission's assumptions hold up, the surplus that is to accumulate before the end of this century may not last long enough to fund benefits in the next century...
...To resolve the longer range financial problems, the tax rate would have to rise considerably above its currently scheduled level...
...nearly one-third of all Social Security payments currently go to families with incomes above $30,000 a year...
...Yet that comfort may last only a few years...
...One of the most realistic proposals along this line comes from Peter Ferrara, author of Social Security: The Inherent Contradiction...
...the COLA provision, Moseley says, is not necessarily enough...
...It is, in his view, far more salable politically than earlier proposals to phase out the system entirely...
...The fertility- and death-rate projections underlying the 1983 bail-out are also suspect...
...A sympathetic White House aide, who asked not to be identified, says that if the IRA idea had been proposed in 1937, or even 1950, it would have been "terrific...
...Workers now entering the system apparently harbor few illusions about the value of their forced "contributions...
...The legislation, Reagan said, "demonstrates for all time our nation's ironclad commitment to Social Security...
...Laurie Fiori of the American Association of Retired People says that at the time there was a "great deal of anxiety" at the AARP over whether the bailout package would be sufficient...
...If the 20-percent retirement option were in effect this year, and people on average took advantage of half the permissible level (which is probably optimistic), the government would "lose" $14.5 billion...
...Ferrara's plan, because it would do none of these, would stand a good chance of being taken seriously...
...The votes were just not there for enacting larger benefit reductions, larger tax increases, or general revenue financing...
...The Commission predicted the fertility rate would climb in the future, even though it has fallen over the past two centuries...
...Another problem is the deficit...
...Adds the AARP's Fiori, "Obviously, incremental changes in the program are easier to achieve than radical changes," and according to Susan Dower, formerly with the House Republican Conference, a "grassroots educational program" could prepare the groundwork for such reform...
...Nonetheless, Ferrara remains optimistic...
...The much-discussed freeze on this year's COLA increase—.which appears dead—would not ensure the long-term solvency of the system...
...For example, the Commission's recommendations were based on mildly "pessimistic" predictions of the inflation rate falling to 4 percent—forever...
...A. Haeworth Robinson, a former chief actuary of the system, told Congress in 1983 that its proposals did "not even come close to resolving Social Security's financial problems— except those...
...Indeed, former White House aide Peter Ferrara, whose proposal for Social Security reform was rejected out of hand by the Administration last fall, points out that even the 1984 Annual Report of the Board of Trustees for Social .Security acknowledges that another recession could wreck the system...
...It is not surprising that Social Security reform had no chance of going anywhere last election year...
...The early investors—the elderly now on Social Security—are getting between 2.7 and five times as much as they and their employers contributed, plus interest...
...Brenda L. Becker...
...But he doubts that any politician is willing to worry about making the system more sound in fifty years—which Ferrara's plan would do—when he has to worry about the revenue loss from the income tax credit next year...
...Social Security remains a pay-as-you-go program with an aging population, a potential fiscal disaster when the baby boom generation reaches retirement age...
...He concluded that "what we need to do is a revamping of the program," though "we must never pull the rug out from current beneficiaries...
...One Administration official observed that there is a distinct split even between conservative intellectuals and conservative politicians, and that "among the latter there is no constituency for a radical transformation of Social Security...
...If nothing else, it might be used to bail out Medicare, which will face an estimated $250 billion cumulative deficit by 1995...
...What's more, for the young today to collect anything, coming generations could well have to contribute far more in taxes to Social Security than is currently planned—potentially 35 to 40 percent of their incomes—just to keep the system afloat...
...By contrast, what will the young get back when they retire...
...Unfortunately, politicians foolish enough to use the words "Social Security" and "voluntary" in the same sentence—Barry Goldwater in 1964 and Ronald Reagan in 1976, in particular—were punished at the polls...
...they could direct their employers to make a similar contribution, with the employer receiving the tax credit...
...As for Congress, which is, if anything, more reluctant than Reagan to target benefits, the plan offers a relatively painless solution to a very painful problem...
...Given the political nature of the system, and the pressure to increase benefits (pressure that caused Congress and President Nixon to approve a 20-percent benefit hike in 1972 and Reagan and Congress to waive the 3-percent COLA threshold in late 1983), any surplus probably will be spent...
...Unfortunately, what politicians have yet to address is that as long as Social Security is not set up on an actuarially sound basis, it will remain vulnerable to economic and demographic changes...
...Chamber of Commerce, argues that as barriers to women entering the work force, particularly in high wage jobs, continue to be removed—thus increasing the "opportunity cost of women dropping out to have a child"—the birthrate will further decline...
...Senator Dole said he supported the 1983 bail-out package because he was "not aware of any major financing proposal or alternative financing package that could have gained bipartisan support...
...Ultimately, of course, prospects for genuine reform will depend on Ronald Reagan...
...Yet-just five years ago we had back-to-back years of double-digit inflation...
...Depletion of the . . . trust funds would be very likely under these conditions and could conceivably occur within a few years from now...
...Lost insiders seem to hope that the system will scrape by through 1990, when scheduled higher tax rates are expected to build up a substantial surplus that will carry the system into the next century...
...The first is simply the sense that America's retirement lifeline is being severed...
...Can we reform the system before it destroys us...
...In fact, the solution "for all time" is likely to last little longer than the bail-out legislation of 1977, which was to have safeguarded the financial soundness of Social Security through the year 2030...
...The reserve margins are dangerously thin, she adds, and should the economy not perform, "we could be in the soup again...
...According to a report by the Committee for Economic Development, a New York-based organization composed of business executives, university presidents, and other civic leaders, if the economy performs even slightly less robustly than Congress assumed it would perform when it passed the 1983 legislation, the system may "be threatened again with insolvency before the end of this decade...
...Ferrara would guarantee benefits to current retirees by issuing them a government bond, allaying fears that their retirement lifeline will be cut...
...But that was before the proliferation of individual retirement accounts —IRAs—in this country, which has given new meaning to the term "voluntary...
...Alas, the year 2030 came some 47 years early, and we should not be surprised if "for all time" comes to an end sooner than expected as well...
...Allowing the young to get out of Social Security, at least partially, would provide them a better return on their retirement investment while reducing the future obligations of the system...
...Archer first raised this concern while serving on the Commission in 1983...
...1 he only long-term solution to the crisis is to split the welfare and retirement aspects of Social Security...
...The Commission also assumed that the increase in life expectancy will slow down (Americans live an average of fourteen years longer than when Social Security was first enacted...
...And, despite the widespread myth to the contrary, the recipients of this windfall are not poor...
...On the other hand, Phil Moseley, an aide to Republican Congressman William Archer, says that another financial crisis remains a real possibility...
...Washington's political establishment was supremely smug about having saved the system: House Ways and Means Committee Chairman Dan Rostenkowski modestly declared that "we have reason to be very proud of ourselves...
...proposals to privatize Social Security's retirement function and to shift its welfare role to general assistance programs go back more than twenty years...
...Similarly, OMB's Dale maintains that "anything that increases the budget deficit would have a couple strikes against it...
...And a knowledgeable Senate Finance Committee staffer, who asked not to be named, agrees, saying that in a bad enough recession even a COLA freeze won't save the system...
...Ferrara sees the "Super IRA" as the only reform package likely to appeal to the young of all ideological stripes...
...Workers would be allowed to invest in a "Super IRA" and to take a credit against their income tax equivalent to 20 percent of their Social Security taxes paid...
...The distinguishing feature of Fer-rara's proposal—which is being promoted by such groups as Citizens for a Sound Economy and the Heritage Foundation—is that Social Security taxes would be left untouched, to forestall any public perception that the system was being tampered with...
...That's not much of a return on an average of $300,000 in forced contributions...
...Rahn, of the Chamber of Commerce, thinks a plan like Ferrara's is "probably too complex to explain simply in a political world," but that it may be adopted in an ad hoc fashion as IRAs are gradually expanded and Social Security benefit growth is slowed in real terms...
...Last year, before the campaign heated up, Reagan called the 1983 tax increase a "temporary fix," and warned the system may eventually confront a "day of reckoning...
...And the unemployment rate dropping to 5.5 percent, real wage growth increasing at one percent annually, and productivity climbing 1.9 percent—all forever...
...a drop in real wage rates alone could double the projected deficit...
...But many roadblocks remain...
...But medical advances continue to accelerate...
...This is not a new idea...
...hailed as a bipartisan triumph...
...Anthony Pellachio, the Deputy Assistant Secretary of Health and Human Services for Income Security, calculates that depending on the beneficiary's salary history, a 25-year-old male will lose between $9,780 and $80,175 (in current dollars), and a similarly situated female will at best gain $2,857 and could lose as much as $56,920...
...This uncertainty caused the Commission great difficulty even in estimating the magnitude of the problem in 1983...
...His proposal would increase the overall budget deficit only by a relatively small amount, and only in the short-term...
...Thus, if past experience is any indication, the system will continue to face deficits, not surpluses, and the red ink could become truly catastrophic...
...Real wages have declined slightly over the past 15 years and fell 1.6 percent between 1978 and 1982 alone...
...Richard Rahn, chief economist for the U.S...
...Younger Americans, in other words, are realizing that they are the final losers in a fifty-year Ponzi scheme...
...Can this message be transmitted not only to the young, but to everyone concerned about generational fairness...
...A he prime architects of the "for all time" solution, of course, remain optimistic...
...Indeed, in one sense it is the Administration's only option: Unless Reagan plans to do nothing, thereby joining the usual gaggle of Social Security groupies and pollyannas in ignoring the system's slow slide over a financial cliff, the Ferrara plan is the only way around the President's pledge last year not to cut benefits or to raise taxes...
...the cumulative deficit forecasts for 1990 ranged between $50 billion and $450 billion, causing Commission Chairman Alan Greenspan to declare: It's very easy to move this cumulative deficit by $100 billion, and so it's possible to get, you know, really very substantial numbers which I don't think we ought to as a commission try to close, and that's sort of why I would come out subscribing to the way Bob Beck [a fellow commissioner] puts it, that we sort of stipulate that the number is 150 to 200 billion dollars...
...Even if the Commission made the best guess then possible when it chose to "sort of stipulate" the size of the deficit, reality may turn out to be far different, depending on the performance of the economy...
...one Administration official admits there is widespread skepticism among the young about whether they will ever receive any Social Security benefits...
...With the Social Security system facing imminent insolvency, a bipartisan whirlwind had pushed through the recommendations of the National Commission on Social Security Reform in just three months...
...For example, the young could be allowed to use expanded IRAs, or some other actuarial-ly sound vehicle, to guarantee their retirement incomes, while a pay-as-you-go income transfer system, like welfare, was used to protect those unable to save for the future or to take care of themselves when they became elderly...
...OMB spokesman Ed Dale says that it would take a drastic worsening of the economy to get the system into trouble, particularly because of the automatic cut in the cost-of-living adjustment (COLA) if the trust fund reserves drop severely...
...for the next seven years...
...The question, then, is not whether Social Security will go under—but when...
Vol. 18 • October 1985 • No. 10
