When President Bush stated earlier this year “I don’t think
[Social Security reform] is going to happen” it was a matter of
political reality trumping policy necessity. The urgency has not
diminished, only the political resources.
“Fixed” before, the system that issued its first payments 70
years ago labors under fundamental demographic and economic
contradictions. Certainly the impending baby boomer deluge
highlights its demographic dilemma, but Social Security’s problems
go even deeper. By accentuating financial markets’ volatility and
fictionalizing Social Security’s stability, anti-reformists have
fostered the myth that the system not only ameliorates the economy
but transcends it. In truth, financial markets are neither as
volatile, nor Social Security as stable, as popularly perceived. If
Social Security is to meet its requirement for fundamental reform,
it must be reestablished so that it reinforces the economy, not
seeks to replace it.
According to this year’s Trustees’ report, Social Security
serves 49 million beneficiaries and is funded by 162 million
contributors. Today’s ratio of 3.3 workers for each beneficiary was
49 to 1 when the baby boomers first began being born in 1946. When
those boomers begin entering their octogenarian years, that ratio
will have fallen to 2.2 to 1 and America’s number of retired
workers will have doubled.
The real reason these demographic trends matter is economic.
Social Security operates on a pay-as-you-go system. Today’s
contributors pay today’s benefits — rather than pre-funding their
own, they produce only an entitlement for future benefits. Even
surplus revenues do nothing to offset future benefit requirements
because they are not invested.
Together the demographic and the economic gaps mean that Social
Security will demand a rapidly growing proportion of America’s
economy. Social Security’s share of GDP will increase 50 percent —
from 4.3 percent today to 6.2 percent in 2030; however as the
Trustees’ report points out, dedicated “tax income is projected to
be about 4.9 percent of GDP in both 2007 and 2030, and then to
decrease to 4.5 percent in 2081.” The Trustees currently project
this gap to begin in 2017, when payroll taxes are no longer able to
pay current benefits. The widening gulf between contributions and
commitments will have to be made up from general revenues — either
cutting spending elsewhere or raising taxes and increasing
borrowing.
As inevitable as the system’s failures are and as dire as the
consequences would be, Social Security’s anti-reformists amazingly
have been able to paint the economy as risky. A baby boomer born in
1946 would have realized an annual average rate of growth of 7.4
percent from a DJIA- and 7.9 percent from an S&P 500-indexed
investment. As the Congressional Budget Office points out the same
would have happened “from 1926 through 2000 [when]…the real rate
of return on large-company stocks averaged about 7 percentage
points more than the real rate of return on three-month Treasury
bills.” Neither time frame avoids volatility — both encompass six
recessions, and in the case of the 1926-2000 time, period, the
Great Depression.
And Social Security? While its trust fund has grown dramatically
on paper since 1946, it has never invested a dime nor returned a
penny. It remains completely dependent on what the economy can
later produce and the government tax or borrow from it. Even
ignoring its trust fund façade, it has hardly been a
paragon of prosperity. The Congressional Research Service points
out that it ran deficits in 21 of 27 years from 1957 to 1983.
In 1982, Social Security reached such a crisis that insolvency
was imminent and prevented only by a multi-billion dollar
government bailout (via a shift of from other entitlement trust
funds that, like Social Security, held no financial assets) and
enormous increases in beneficiary numbers and contributions were
legislated in 1983. The 1983 changes would bring essentially the
entire American workforce into the system, increase payroll tax
percentages, and tax benefits. While they forestalled disaster,
they did not fix Social Security. In fact, they represented the
last levers left to pull. There are now no large untapped
populations to be taxed to pay for current benefits. Even if more
money could be taxed in, it could not come with the promise of
future benefits because these would simply generate future
commitments — when current commitments already are
unsustainable.
The demographics and economics that have hounded it and
transformed it now threaten to sink it because Social Security is
not what it seems. In contrast to the economy, which has not only
survived but thrived in spite of numerous temporary downturns,
Social Security cannot survive itself. It cannot because it is
essentially a pyramid scheme. A pyramid scheme appears to generate
revenue by taking in ever more participants and their
contributions. The early contributors at the pyramid’s apex do
quite well, but as the pyramid’s base grows, it is unable to
continue attracting enough new participants to deliver on its
promises.
While the most focal flaw of both Social Security and a pyramid
scheme is their inability to maintain sufficient contributors to
fulfill their commitments, their real flaw is economic: because
neither invests, neither produces the means to meet its
obligations.
Social Security’s grand illusion is far bigger than the charge
of stock market volatility. It is that the government can supplant
the private sector in producing assets — that government is
somehow separate and above its economy’s ability to produce.
Government is only the recipient of wealth — obtained by taxing
and borrowing — not its creator. It therefore cannot deliver
resources beyond what the private sector creates. And the more
government takes, the less productive the private sector is, as
resources are diverted from their most productive uses. Far from
being insulated from its private sector, government is susceptible
not only to its vicissitudes but to the failings of its own system
— as the impending debacle and 1983’s near one demonstrate.
Belying those who seek to maintain Social Security’s status quo
by impugning the stability of private financial markets, Social
Security now poses a greater risk than the private sector ever has.
It poses this risk not only to its beneficiaries but to the
nation’s economy as a whole. In order to meet the commitments for
which it has produced no resources, it will have to take more and
more resources from the private sector, thus depleting its ability
to produce. This vicious cycle needs to be replaced with a positive
one. One that relies on the real returns of real investments by
private individuals. It would offer workers a chance to replace
their currently required investment in government with one that
would yield real returns. This would not only guarantee their
future benefits but would reinforce the economy’s ability to
produce them. While today’s politics may not allow such a move now,
tomorrow’s policy reality will continue to demand it.
