Moynihan's Social Security Hocus-Pocus
BROCKWAY, GEORGE P.
The Dismal Science MOYNIHAN'S SOCIAL SECURITY HOCUS-POCUS By George ? Brockway On March 16 Senator Daniel Patrick Moynihan delivered a speech titled "Social Security Saved!" at Harvard's...
...Despite this record, conservatives are likely to push for complete privatization of Social Security benefits...
...James K. Glassman of the American Enterprise Institute proposes, in the Washington Post, cutting "another few points off the payroll tax" as a step toward the happy hunting ground of complete privatization...
...They will not exist, tout court...
...so I find this outcome appalling, and I would be sorry I brought it up if it didn't reduce Senator Moynihan's scheme to the absurd...
...at Harvard's John F. Kennedy School of Government...
...With astute quasi-legal advice of the sort advertised in many journals, the principal, or most of it, could be sheltered from the inheritance tax and passed along to the worker's heirs or assigns, who could live comfortably without working at all...
...3) The stock market boom, again, mostly concerns Wall Street...
...If the Senator's average worker deposits $600 a year every year for 45 years in the bank of his or her choice, and the bank can't find people willing and able to pay interest for the use of it, the worker will reach retirement with $27,000, which ain't hay, but is a long way from the$275,000—or $350,000 at 4 percent, or $450,000 at 5 per cent—the Moynihan table promises...
...Indeed, since on these assumptions even the $ 12,000-a-year minimum-wage worker would have $1,085,000, we can safely say that after at most another generation, no one would ever have to work again...
...They will never have existed...
...take the place of the propensity or disposition to save...
...A table accompanying the text of the Senator's speech shows that a worker who earns the "average wage" of $30,000 and stashes an amount equal to 2 per cent of it away every year for 45 years in a voluntary savings account compounding at 3 per cent, will wind up with a nest egg of $275,000 at retirement...
...Reactionaries will rejoice...
...Accordingly he wrote, "The propensity to consume will...
...Since Social Security accounts for almost a quarter of what makes ours a big government (which conservatives pretend to be scared by), and since the Social Security tax, including the employers' "contribution," is indubitably a tax (which in principle conservatives object to), it may seem surprising that they wouldn't want to abolish the whole shebang...
...unfortunately, the Senator does not say anything more about it...
...Moynihan proposes to increase the "cap" to $97,500 by 2003, still leaving the top 13 per cent of wages untaxed...
...Compound interest is truly magical, but the magic won't work if there is no interest to compound...
...Suppose the whole caboodle were put in the magical voluntary savings account and compounded at 3 per cent...
...For reasons I advanced in this space last September 22, I contend that "A zero deficit means failure," and for reasons I have advanced here many times, I contend that the Social Security Trust Fund is a serious error...
...All three agree that saving equals investment...
...In contrast, Keynes observed that entrepreneurs borrow and invest, not for the fun of it (though it may be fun), but to make money by producing things people are willing and able to buy...
...They are not likely to want to eliminate the system, though, and especially not the tax that supports it...
...The Senator would cut the Social Security tax rate 1 percentage point and cut the employers' tax (officially called "contribution") likewise in order to "get the system back on a pay-as-you-go basis...
...That is why Wall Street is eager for the commissions to be earned ("the old-fashioned way") from handling the Senator's voluntary personal savings accounts...
...Said to be the Senate's authority on the subject, he has addressed it many times over the years...
...According to the Moynihan plan, workers would be given a choice: They could take their 1 per cent cut and spend it on riotous living, or they could take both their own tax cut and their employers' and put them in "voluntary personal savings accounts...
...Complete privatization is of course what we had before we had Social Security, and it was not pretty...
...But the Social Security tax is more regressive than the flat tax on two counts: (1) The Social Security tax is levied on the first dollar you earn, while the flat tax proposals, like the present income tax, exempt the first few thousand dollars you get your hands on...
...It sounds great, but anyone can do better...
...And that will be on top of his or her Social Security benefits...
...Profits, while growing, cannot grow as fast as the market...
...It was enacted because there are, in fact, limits—actual limits that we have tested more than once—to the assuredly great capabilities of private enterprise and private charity...
...This is where the compound interest comes in, and it comes in with a roar...
...It might take somewhat longer in Bangladesh...
...Even in this alleged near-balance year for the budget and near-crisis year for Social Security, the near-balance depends on an actual Social Security surplus of about $40 billion...
...They will not be sitting in bank vaults, waiting for a good deal to turn up, or available for some jolly use...
...David Rockefeller and I, being retired, now pay no Social Security tax (except as employers of servants, if any) and would pay no flat tax at all...
...As I have remarked before, the law of supply and demand works if, and only if, supply is restricted...
...Some day—at the latest when Boomers start cashing in their gains in order to live on them—the music will stop, and many people will find themselves without a chair to sit on...
...It was not, and is not, ideally suited to any of its several functions...
...In short, the Social Security tax is a flat tax that is extra hard on the poor and extra easy on the rich...
...Malcolm Forbes probably pays himself and his office boy a fair salary...
...Then the nest egg would be $1,685,000...
...The supply of stocks is indeed limited...
...The earnings of the companies on the Dow or the Standard and Poor's 500 are now less than 1.5 per cent of their stocks' market value...
...2) Corporations of every size and shape raise and spend vast sums of money to buy and sell each other...
...This time he referred to "the magic of compound interest" and presented some figures that surely seem magical at first glance...
...The present Social Security tax (employee plus employer) is 12.4 per cent...
...Flat-taxers boast that they will give poor men the honor of being taxed at the same rate as the rich...
...Bankers have books of tables that contain such calculations, and I assume the Senator has consulted one...
...At second glance, they seem more than magical...
...That is a worthy objective...
...In any case, three current events teach us that there is now no use for the tremendous savings the Senator's scheme would generate...
...1) Major corporations daily announce plans to buy back sizable blocks of their own stock, thus confessing that they don't know how to put all the money they already have to work producing goods and services...
...Anatole France observed that rich men, as well as poor, could sleep under the bridges of Paris...
...Many actively traded stocks on the NASDAQ have never earned a profit at all...
...We have now reached a point in the argument where John Maynard Keynes parts from Classical and Neoclassical economics...
...Putting these two mistakes together, we have compounded them, for we have been using the proceeds of a most regressive tax to avoid increasing the income tax, which is moderately progressive, to achieve an unnecessary and wasteful balance...
...Then the New Deal was finally able to break through the barriers to the general welfare that had been thrown up by Republicans, Dixiecrats and a states'-rights-minded Supreme Court...
...consequently, as long as—but only as long as—Baby Boomers worried about looming retirement keep pouring their savings into the market, the market will keep rising...
...The rash of mergers and takeovers may keep Wall Street busy scratching but ordinarily is intended to result in a contraction, rather than an expansion, of productive activity...
...The risk with capital gains is that when large numbers of people try to cash in their gains all at once, the market can crash very far and fast...
...Do you remember how, when IRAs were first peddled, banks advertised that they would make us all millionaires...
...Senator Moynihan's scheme continues these injustices, as well as his erroneous attack on the Consumer Price Index...
...It was not until August 14,1935, when the Great Depression was almost six years old, that the heart-rending inadequacy of private charity was ground into the public consciousness...
...The bags of money will therefore not exist, no matter what the mathematics says...
...Yet regressive as the flat tax is, it is nowhere near as regressive as the Social Security tax...
...The two of them pay Social Security taxes at the same rate, and they would both be flat-taxed at the same rate, but they wouldn't pay any tax on their incomes from the fortunes they inherited, no matter how large or small...
...The trouble here, however, is that there are not enough ways to invest the bags full of money that would theoretically accumulate...
...The resulting Social Security Act was—thanks to the long years of wrangling and compromising—pretty much like the proverbial horse designed by a committee...
...If the interest were compounded at 5 per cent (a rate sufficiently close to credibility for the Senator to include it in his table), in 45 years the$30,000-a-year average worker would be worth $2,790,000...
...The inadequacy of the unregulated free market was taught to all who had eyes to see in the months following October 29, 1929...
...There was and is nothing wrong with the mathematics...
...In the meantime, conservatives hail Senator Moynihan's scheme and urge him on...
...The conventional schools hold that saving creates investment, and they nag us about it every chance they get...
...2) The Social Security tax does not tax at all earnings over $68,400, while the flat tax goes to the last dollar...
...The reason for this inconsistency is simple...
...At age 65 or thereabouts, he or she could retire and, leaving this lordly sum in the magical account, live on the annual interest of $139,500...
...Nevertheless, it was, and remains, one of the most useful and successful and necessary public laws of the century...
...Now, I am enough of a Yankee to believe that honest labor never hurt anyone and is good for the soul...
...The two systems are similar in that each taxes only earned income...
...At least since the Social Security system was "reformed" in 1983 by Senator Moynihan and others, it has been running a surplus that has been used to bring the "unified budget" closer to a balance...
...The various flat tax schemes that Congressional Republicans are busy devising have for them the charm of being resolutely regressive...
...Why does the scheme wind up in absurdity...
...The economic sterility of capital gains, it needs to be recalled in the present context, is that they increase the price but not the productiveness of capital assets...
Vol. 81 • March 1998 • No. 4
