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ATLANTIC HIGHLANDS HERALD |
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THE REAL SOCIAL SECURITY PROBLEM Last week my daughter and I drove 200 miles to attend my granddaughter Ellen’s senior thesis presentation. A senior in a private high school in southern Virginia, Ellen worked for an entire year on her thesis that we can solve the Social Security Crisis by converting part of the system from pay-as-you-go to individually owned private accounts. Her carefully researched, twenty-five-page paper was an impressive piece of work for a high school senior. (Of course, there is no bias in this observation.) As we joined my son and his wife in the seats reserved for “honored guests”, I joked with Ellen that the New York Times Literary Critic was in the audience. Then I retreated as I saw that a reporter from a local newspaper was actually interviewing her. (OK, maybe it was a slow news day. But the reporter’s presence gave the occasion a more sober cast than we had expected.) Ellen’s presentation went very well. Tall, beautiful (no bias), well groomed and poised, she was confident about her material and handled questions from the reviewing panel, and later from the audience – which included the entire student body and faculty – like a pro. She made her parents, her aunt and her grandpa very proud. I think she performed a service for her audience, too. Ellen described how Social Security began and how it got where it is today. She spoke how FDR was elected, in part, on his promise to help the millions who lost their life savings in the bank crashes of the Great Depression. Social Security was his tool for ensuring that every American could retire with dignity. She related how political pressure quickly transformed the new system from a savings plan to a pay-as-you-go inter-generational transfer program. Ellen emphasized the fact that a Social Security pension was not legally guaranteed. She also explained that current workers’ Social Security “contributions” are immediately paid out to current beneficiaries, with any residue used to fund other government programs. (An accounting is made of the latter.) And she instructed her listeners – some obviously hearing it for the first time – that the difference between the benefits Social Security has promised and its projected ability to pay them is an unfunded liability of at least $12 trillion. (A sum equivalent to spending $120 million every day for 277 years.) Ellen then reviewed the three basic reform approaches currently in play: (1) Do nothing – i.e., “ignoring the problem and hoping it will go away”; (2) Raise taxes and cut benefits – both done several times over the system’s history; (3) Privatize. She explained how doing nothing increases the huge liability each year, while raising taxes and cutting future benefits – the approach overwhelmingly favored by lobbies for people already retired – would greatly diminish younger people’s prospects for a financially sound retirement. Ellen’s research led her to recommend that younger workers should be allowed to fund private accounts with part of their FICA taxes, in return for accepting reduced benefits from the current system. She showed how this would reduce Social Security’s unfunded liability and ultimately produce higher retirement incomes. She also emphasized the positive effect privatization would have on the country, as people re-embrace traditional principles of self-reliance and move away from the entitlement mentality of expecting payouts from the government. In the period following Ellen’s presentation, three reviewers asked their questions first. Then questions were taken from the audience. Who asked the questions and what they asked were as informative as the presentation itself. Every question from the general audience came from a faculty member. One might have expected a knowledgeable student to speak up, but none did. Why was that? The likely explanation is that high-school students simply cannot grasp the topic’s importance. Most students don’t pay FICA taxes because they are not yet working. The size (and security) of your retirement income seems irrelevant when you haven’t even started earning an income. This squares with my own experience of trying to discuss Social Security with twenty- and thirty-somethings. Typically, they shrug and say, “whatever.” Retirement means nothing to them now. It is far over the horizon. This indifference explains why advocates of Ellen’s option #1 (do nothing) or option #2 (higher taxes, lower future benefits) can safely ignore younger people’s views. They know most younger people don’t have a view. Politicians know they’ll be long-gone when today’s young people realize how they were snookered. The faculty’s questions, on the other hand, revealed discouraging ignorance of the current system’s features, the current political situation, and how privatization might work. I believe many were surprised to hear that benefits are not entitlements. Probably Ellen herself didn’t realize – although her faculty listeners should have – that the Supreme Court settled this issue years ago. In Fleming vs. Nestor (1960) the Court said Social Security is a “noncontractual social welfare program” (not an insurance contract, as has often been claimed by politicians). The political environment surrounding Social Security also seemed unclear to faculty questioners. Someone asked if the president was still trying to sell reform of the system across the USA. (Mr. Bush spoke to numerous town meetings early in 2005, but stopped by mid-year.) Another questioner asked if opposition to privatization was ideological or fiscal. (Ellen sagely answered that it seemed to be both.) Still another wondered what the final plan will look like – thus showing that he had followed the political debate from afar. Beyond the private retirement accounts he wants for younger workers, Mr. Bush expects Congress to work out the details. (This might prove to be a fatal error, as the Congress is too politically polarized to proceed.) The concept of privatization seemed mysterious to Ellen’s faculty. Will I own my account? asked one person who wondered if the government might still be able to tap into private accounts. (Anything is possible, of course, but Ellen correctly said Mr. Bush wants each person to own his account completely and even be able to bequeath it upon his death.) Isn’t the stock market risky, and what protections will there be against ill-advised investments? asked another. (Ellen answered that the stock market has averaged a gain of 13% per year since the 1920s – a period which included the Great Depression. An advisory board would prevent unacceptably risky investments.) A third questioner asked if 401K plans have been successful, and wondered if they would be the model for Social Security private accounts. (Financial experts agree that 401K plans have been enormously successful. Total 401K savings currently exceed $1 trillion.) In the aggregate, these questions show that ignorance is the real Social Security problem. It is not localized to Ellen’s faculty. Mr. Bush had trouble selling his reform concept because adults – not just high school students – are poorly informed about the current system and its problems. They don’t understand what private accounts can do both for them and for the country. Widespread ignorance allows opponents of reform to spread disinformation. Some of this is outright lies, but the public seldom knows the difference. If the president really wants meaningful Social Security reforms enacted during his term, he will have to launch a much larger educational effort. It can be done, but it needs to start soon. The system’s unfunded liability increases by several hundred billion dollars every year. And no one is getting any younger.
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