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AT LARGE by Woody Zimmerman zimmermane99@adelphia.net

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SOCIAL SECURITY AND THE MEANING OF "FIX"

Ever since Bill Clinton declared Social Security in “crisis”, Democrats have been conflicted over what they should think and do about their favorite social program. Mr. Clinton suggested personal accounts for younger workers who otherwise would see very poor benefits from the current system at retirement. Luckily for nervous Democrats, Mr. Clinton didn’t really do anything about the “crisis” except throw words at it.

George W. Bush has also noted Social Security’s looming crisis. Like Mr. Clinton, he proposed private accounts that would belong to individuals and their heirs. This would change the system from entirely backward-looking, pay-as-you-go to partially forward-looking, save-for-the-future.

But Mr. Bush’s jib has a different cut, as politicians of both parties have learned during his first term in office. Unlike Mr. Clinton, he looks like he might use his political capital to do more than talk about change. Democrats – who regard Social Security as the Holy Grail of FDR’s New Deal – are beginning to fear that “W” will use his much (mis)underestimated political skills to change their sacred 1930s relic forever.

Of course, this is intolerable. Mr. Bush is a Republican. Thus (to paraphrase Longfellow), hardly a Democrat is now alive who remembers that just seven or eight years ago he was among those who gravely seconded Mr. Clinton’s critique of the creaky New Deal holdover. Politicians who then agreed that the system needed “fixing” now say there is no crisis. Some deny there is a significant problem – nothing, at least, that would require radical surgery.

Nancy Pelosi – California Democrat and Minority Leader of the U. S. House of Representatives – has said the system needs only to be “tweaked” to set things right for the future. Others, including Senator Edward Kennedy of Massachusetts, denounce Mr. Bush’s individual account proposals as risky, irresponsible, and a violation of Social Security’s sacred “inter-generational compact”.

Democrat-leaning major media organs have hyped the story that individual retirement accounts – the centerpiece of Mr. Bush’s reform concept – are politically unpopular and doomed to fail. But polls show that a significant majority of the under-55 population favors them. Mr. Bush is now on a whistlestop tour to sell the concept. He also seeks to reassure over-55 voters that any reforms enacted would not affect the benefits they expect from the system.

I have been conducting my own informal information-gathering effort about the current system. Conversations with young people (anyone under 50 seems “young” to me) leave me amazed at how few understand the following salient facts:

• FICA Charade . The legislation that established Social Security was called the Federal Insurance Contributions Act (FICA). It created an environment of falsity around the program that persists to this day. Social Security is not “insurance” within the normal meaning of the word, and FICA taxes are no more “contributions” than the income tax. They are not optional. You must pay them or you will go to jail.
• Tax Rates . The FICA tax rate is actually 12.4%. Although half of those taxes (6.2%) are ostensibly paid by your employer, they are actually compensation that would go to you if not paid to the government. Effectively, you pay the whole tax.
• Guaranteed Benefits . Politicians trumpet this, but it is pure horseradish. There is no guarantee that you will receive any specific benefits at any particular age. Courts have ruled to that effect on several occasions. Congress can change taxes, benefits, and retirement ages at any time, and has done so frequently. For example, the original law made Social Security benefits tax-free, since FICA taxes were to be paid with dollars that were federal- and state-taxable. Your earnings are still triple-taxed (federal, state, FICA), but Congress welshed on the tax-free pension “agreement” (for as much as it was worth) years ago.
• Retirement Savings . Your FICA taxes are NOT being saved, at interest, in an account that belongs to you. In fact, they are not being saved in any way, shape, or form. The government spends them as soon as it collects them – either on benefits for present retirees or on other government programs. If the latter, the Feds leave bonds for later redemption when the funds will be needed to pay Social Security benefits. These IOUs are called the Social Security Trust Fund. It contains enough bonds to paper Washington, but not a farthing of cash money.
• The Great Pyramid . Social Security is a kind of Ponzi or “pyramid” scheme. Pyramids are scams where a “founder” gets each of 100 people to pay him, say, $10. Each of those 100 then finds another 100 people to pay him $10 each; etc. This works for a time, but by the third round a million new “donors” are needed. By the fifth round, 10 billion new donors are needed. This exceeds the population of the earth. Pyramids always collapse because the “base” grows beyond the available population. In 1945, there were 16 workers for every retiree; today, just 3 workers for each retiree. Within two decades there will be only two workers per retiree. As expected, the base cannot expand enough to support the pyramid.
• Crossover Point . By 2018, Social Security benefits being paid each year will exceed taxes received. At that point, some bonds left by the government in the “Trust Fund” will have to be redeemed to make up the negative difference. The bonds will last until about 2042. (The calculation is inexact because population 35 or 40 years hence is hard to predict.) The bonds will be redeemed either by new borrowing or by levying additional taxes.
• Bankrupture . When all the Trust Fund bonds have been redeemed, the negative difference between benefits being paid and taxes being received will have to be covered by higher FICA taxes, reduced benefits, or borrowing from the federal government. The latter – inverting the government’s current practice of borrowing from the Social Security Trust Fund – is not actually permitted under current law.
• The Social part . Future retirees who have consistently earned the maximum FICA-taxable income over their working lifetimes will receive a very low return on their “contributions”. Their benefits might amount to only a 1% or 2% return on what they paid into the system – perhaps less. For low-income workers, however, Social Security is still a very good deal. The system is tilted toward them. That is the “social” part of Social Security.

George W. Bush and many Republicans claim Social Security must be changed because they grasp these facts. They know the system’s deficiencies will mean greatly degraded benefits and much higher taxes for younger workers unless fundamental changes are made soon. They have a conscience for what will happen to those younger workers if nothing is done.

Democrats can say there is no crisis because they are (and always have been) politicians of the moment, not of the future. They believe that only the older worker now drawing benefits really matters in the political calculus. They think younger workers are too ignorant (or too stupid) to realize how the current system will gyp them, years from now, when they hit retirement age. Young workers will receive diddly on the FICA taxes they have paid, but that event is far out in the future. Ignoring it will cost current politicians nothing.

The wild card in the game is the word “fix”. As Bill Clinton famously said (in another context), it all depends on how you define it. “Fix” can mean “repair”, as in fixing your car. It can also mean a dishonest arrangement, as in rigging a game – i.e., “the fix is in”.

With respect to Social Security, Republicans use the first meaning of “fix”. They want the system to treat both young workers and current (or soon-to-be) retirees fairly. Democrats mostly use the second meaning. When Democrats speak of “fixing” the system, they mean increasing taxes and reducing benefits for younger workers. They seem to believe that young people actually want to pay higher taxes in return for lower benefits.

Thomas Sowell writes that a huge debt is not a problem if you can simply elect to pay what you think you can afford when the obligation comes due. He asks, “Would you sign a contract that enabled the other party to change the terms of that contract at will, while you could neither stop him nor make any changes of your own? Probably not. Yet that is exactly what happens when you pay money into Social Security.”

So far, Mr. Bush has offered a concept, not a plan. Individual retirement accounts financed with part of workers’ FICA taxes will not “fix” all of Social Security’s solvency problems. But they will remedy the poor return awaiting millions of younger workers under the current system.

In the late 1970s we were told that dramatically higher FICA taxes would absolutely “fix” Social Security for 75 years. In the 1980s, retirement ages were raised to “fix” the system once and for all. Yet just a few years later we have unfunded liabilities, in the trillions of dollars, marching out into the future.

Was it all lies? Or is the system so fundamentally flawed that it cannot be fixed? The Big Lie, it turns out, was the word “Insurance” – another of the deceptions of FICA. Social Security never had (or intended to have) the financial reserves required of a real insurance company. It has been broke since Day 1. For seventy years it has just been going more broke.

Will a new generation of workers fall for the same story and buy yet another round of benefit-reductions and tax-increases without any prospect for fundamental change? Will current retirees be so venal and self-interested as to deny their children and grandchildren a sound financial future? In both cases, I pray that it will not be so.