In his recent article “Blocking Move,” Jonathan Chait made a case for
obstructing Social Security reform. Although Chait displays some
honesty bordering on cynicism (more on that here), his case rests heavily on the idea that
(1) reformers want to dismantle the entire Social Security system;
(2) reformers are overselling the likely return on personal
accounts; and (3) Social Security was intended to be “social
insurance,” not an investment program. Let’s take these in
order.
Chait argues that Democrats must oppose all forms of
privatization because “conservatives essentially want to do away
with Social Security.” To support that contention Chait gets out
the paintbrush marked “Cato=Extremists” that was last used in late
2001. “Bush has raided the libertarian Cato Institute to stock his
staff of Social Security advisers,” Chait warns. He quotes
liberally from former Cato employee Peter Ferrara: “A lot of
conservatives thought Social Security was an unjustified invasion
into the private sector,” Chait quotes Ferrara as saying. “But they
weren’t getting anywhere, because that was all negative
politics…. Personal accounts would work because that’s positive
politics.”
Ferrara is an odd choice for making the case that conservatives
want to eliminate Social Security since he was recently quoted in
the Washington Post as as saying, “Cato wants to get rid of the entire
Social Security system, and I don’t.” Indeed, Ferrara supports the
Ryan-Sununu reform plan that creates large accounts that are
progressive, includes safeguards for unsophisticated investors, and
provides a guarantee based on current-law benefits. “That reform is
some secret plot to abolish the social safety net is belied by the
development of this plan,” Ferrara told me in an interview. “It
serves the social goals of Social Security far better than Social
Security can.”
The reality is that there is a wide array of opinion among
conservatives on how far Social Security reform should go. Many,
like Ferrara, want to preserve key aspects of the current system.
Still others, like Bill Kristol and Irwin M. Stelzer, aren’t even enthusiastic about
reform. To suggest that Cato’s thinking on Social Security informs
everyone on the right is misleading.
Chait next claims that reform proponents are incorrect when they
argue that personal accounts would earn a greater return than
Social Security:
Now, any generation could decide to stop paying into
the system and keep their contributions in private accounts for
their own retirement. These private accounts would appear to earn a
higher rate of return going forward — but only if you ignore the
cost of trillions of dollars that must then be borrowed to pay off
current Social Security obligations. When these transition costs
are factored in, private accounts don’t earn a market rate of
return either.
Chait’s analysis fails to take into account the key fact that
any generation that “stopped paying into the system” would also
surrender its claims on the system in the future. Any costs today
associated with borrowing to pay benefits to current retirees would
be offset by savings in the future from not having to pay
today’s workers — because their retirement benefits would
come from their own personal accounts. He also overlooks the
increased taxes and/or debt needed to support the current system
that we will avoid having to pay in the future under a reformed
system. When those are factored in, the accounts do earn a rate of
return.
The President’s proposal describes a “benefit offset” that would
perfectly assure this, by offsetting the future benefits of anyone
opting for a personal account by an amount equal to their lifetime
contribution to those accounts plus a financing charge that would
make the Treasury whole for any borrowing it had been required to
do. Personal account holders would have to earn a rate of return
greater than that financing charge — currently set at 3% — in
order to come out ahead. Based on historical market returns, that
should be easy.
Chait also falls back on the Social-Security-as-social-insurance
argument:
Privatizers portray Social Security as a kind of
low-performing 401(k) plan. But the program was never intended as a
personal retirement plan. It’s a form of social insurance, designed
to spread risks throughout the population. One such risk is that
you get sick or hurt and can’t work anymore; 11.5 percent of Social
Security benefits go to disabled workers (which is another reason
why retirees get a lower rate of return).
Another risk is that your income will decline, perhaps because
economic changes make your skills less valuable. (Today, for
example, steelworkers could be made redundant by productivity
increases. Perhaps in 30 years it will be accountants or software
engineers whose work was outsourced overseas.) That’s why Social
Security gives low earning retirees a greater return on their taxes
than high-income retirees. Still another risk is that you’ll live a
very long time and exhaust your savings, which is why old-age
benefits are indexed to inflation and last for a lifetime.
It’s hard to take this argument seriously for two reasons.
First, liberals have spent the last decade defending every last red
cent of government spending as an “investment,” something that is
spent today to yield a greater return tomorrow. Indeed, Chait not
long ago zinged congressional Republicans for “cutting support for
scientific research [as] an incredibly mindless way to solve the
federal deficit.” The reason, according to Chait, is that
“scientific research is an investment in future
prosperity. Cutting the NSF budget is like a family in debt pulling
its children out of college but keeping its country club
membership.” [Italics added.] Now, suddenly, Chait wants us to
believe that Social Security is not an investment but social
insurance.
Second, if Chait is serious about Social Security being social
insurance, why doesn’t he go all the way? In other words, he should
argue that Social Security ought to cover only those cases —
sickness, less valuable skills, longevity — that he lists. Turning
Social Security into only social insurance would probably solve the
long-term solvency crisis. Chait might respond that there are a lot
of people who rely on Social Security for retirement income, and
since they have paid into the system it would be unfair to cut them
off. True enough, but then one has to concede that regardless of
what Social Security was intended to be, the
outcome is that it now functions as a retirement program.
Indeed, the left is not united in this view that Social Security is
social insurance. For example, Dean Baker of the Center for
Economic and Policy Research, a reform opponent, claimed at a
recent America’s Future Foundation debate that he saw Social
Security as “a public retirement plan.”
Since Social Security functions as a retirement plan, we need to
acknowledge that it faces the same problems as defined-benefit
plans in the private sector. Basically, it is an unsustainable
Ponzi scheme because it relies on each generation being large
enough to fund the preceding generation’s retirement benefits. It
is for this reason that much of the private sector is turning to
defined-contribution plans.
If Social Security is to survive deeper into the 21st Century,
it must likewise change.
