Social Security & Partisanship

Our politicians need to get past their partisanship, to achieve needed reforms.

By Dennis Schiffel
  • Monday, January 24, 2005

The silly season with respect to reforming the Social Security retirement program is in full swing. Democrats and liberals claim there is at worst a minor financial problem that can be fixed. Republicans and libertarians think the system is broken financially and offers perverse incentives to participants and politicians.

In the 70 years since the depression-era Social Security Act of 1935, there have been vast demographic, social, economic, financial and political changes. Leaving aside arguments that from day one the system has been a pay-as-you-go Ponzi scheme, no government program can remain unchanged in the face of such enormous societal change over so long a period.

To start, everyone needs to understand, there is no social security “trust fund.” The so-called trust fund consists of federal government bonds and promises to pay future benefits. Without reforms, those promises cannot be kept. The age composition of the population makes this inevitable. Figuring out what to do raises some knotty issues.

For example, there is a fairness question in promising future retirees rising benefits that must be paid for by (fewer) future workers. Another question is: Will future politicians be willing and able to honor the promise of future benefits, given government deficits and rising entitlements? For younger workers the question is: Why should I be forced to invest in such an inferior retirement plan?

Flying under the radar are other relevant issues. For example, the low savings rate in the U.S. is frequently cited as a national economic problem. Yet Social Security creates the illusion that individuals do not need to save for their retirement, reducing their incentive to save. Also, the national savings rate is lower because Social Security taxes are spent as received by the federal government for non-social security purposes.

The Democratic/liberal fixes for the Social Security program revolve around:

  • Indexing benefits to wages, rather than prices (as currently done), which would lower future costs through lower projected benefits,
  • Raising the income level subject to social security taxes
  • Raising the social security tax rate.

Unfortunately, even if these “fixes” should bolster the financial integrity of social security, they don’t address the issues discussed earlier.

The Republican/libertarian side argues younger workers should have the opportunity to put part of their required social security tax payments into private accounts, which they would own. This would reduce projected future social security costs. Private accounts give people an opportunity to improve their expected retirement income, while making them less dependent on the whims of future politicians. Or, as conservatives would say, such accounts would help Americans escape the nanny state where politicians know “what is best” for people. Older workers and current retirees would not face benefit cuts.

The private accounts would help redress the low national savings rate by encouraging individuals to provide for their own retirement by investing in America. As well, they would reduce the size of the Social Security taxes piggy bank that politicians and bureaucrats tap for things unrelated to social security.

Democrats/liberals argue people are not sophisticated enough to know how to manage private accounts and that private accounts would be too risky. Both arguments are vacuous. First, private accounts can be structured by law to help participants avoid bad decisions. Second, over any 30-year period, including the years of the Great Depression, the returns from the stock and bond markets have been positive—and higher than the implicit return from Social Security.

Opponents of adding a private account feature argue it would be too costly. How can that be? The cost of Social Security is simply the promised future benefits.

As a practical matter, there is probably a role for all of the things suggested by the Democrats/liberals and Republican/libertarians. Who can argue with the objectives of (1) making future benefits more secure, (2) removing disincentives to saving, (3) providing an opportunity for people to increase their future retirement income, (4) reducing politicians’ ability to raid Social Security tax revenues for other government programs and (5) providing intergenerational equity?

The burning question is: Will politicians get past their ideological blinders and partisanship, to achieve needed reforms?

One can only hope so: The debate over Social Security reform is just a warm-up for something much bigger and much more difficult: The debate on critically needed Medicare program reforms.

Dennis Schiffel is a former senior associate at the National Science Foundation and a policy fellow of the Nevada Policy Research Institute.

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