Franklin Roosevelt was one of the 20th century’s political geniuses. By saying this I don’t mean that I think FDR’s policies and achievements were uniformly effective or good for the country. In fact, most economists now recognize that his policies not only did not end the Great Depression, but actually prolonged and worsened it. Nevertheless, the “genius” label fits because he knew how to create government institutions that would resist undoing by political opponents. Several of his creations have withstood the test of time – in fact, have grown and expanded, despite repeated attempts to shrink them.
Chief among the survivors is the wonderfully named Federal Insurance Contributions Act (a.k.a. Social Security), which manages to tell two lies at the same time, just in its name. The Social Security is not “insurance,” nor do we “contribute” to it. Contributions would be voluntary, but we all know FICA is no such thing. Citizens who decline to “contribute” can be subject to big fines, or even go to jail.
FICA benefits are also not insurance – in the conventional sense of the term. They are government-bestowed benefits that can be revised or revoked at any time. The Supreme Court has ruled that citizens have no legal grounds for expecting that benefits will actually be delivered as promised. Congress controls FICA benefits, and it has changed them numerous times since the program’s inception in 1935.
For instance, the original agreement had taxpayers paying FICA “contributions” with taxed dollars, while benefits would be entirely untaxed. (This meant that you earned your pay and paid taxes on it. Out of what was left, you paid your FICA “contributions. But your “pension” would be tax-free.) That deal is long-gone. You still pay the FICA taxes with taxed dollars, but many recipients are also taxed on 85% of their FICA benefits. In the 1970s, the “full-benefit” age was raised for future retirees. People born after 1937 saw the age raised in steps, by year of birth, until it reached age 67 for birth-year 1960. Other changes will undoubtedly be made as the system becomes untenable.
Notwithstanding the program’s unpredictability, Americans are stuck to it like Br’er Rabbit to the Tar Baby. Various political attempts to eliminate or modify Social Security significantly have ignominiously failed. In 1964, Barry Goldwater campaigned for president on a conservative platform that advocated ending this New Deal vestige. For this and other reasons his candidacy went down to defeat by the most lopsided popular-vote margin since 1820 – 61.1% to 38.9%. Mr. Goldwater carried only 6 states. I clearly recall the media pronouncing the Republican Party dead – perhaps permanently – just after the election.
George W. Bush tried to ride his 2004 re-election mandate to a major revision of Social Security. He wanted young people to be able to invest some of their FICA taxes in market instruments, in return for reduction of their future Social Security benefits. The effort met fierce resistance from seniors and the Democratic Party. It went absolutely nowhere – even in a Republican Congress. Arguably, it led to loss of the GOP Congressional majority in 2006 and the loss of the presidency itself in 2008.
These and other disastrous attempts to modify the popular program have caused it to be called “The Third Rail of American Politics” – a reference to an electric train’s high-voltage rail, which will instantly electrocute anyone who touches it. Politicians are extremely wary of getting anywhere near “the Rail.” Most go to extraordinary lengths to say nothing about FICA except to voice unqualified support for keeping it sound and stable. Changes that have been made – e.g. retirement age – tend to affect young people, years in the future. (Younger people often pay little attention to matters that far ahead.)
Of course, FICA is anything but sound and stable. In 1950, 16 workers were paying FICA taxes for every retiree drawing benefits. We now have 3.3 workers for every retiree. As 76 million Baby Boomers retire, the ratio of workers to retirees will approach 2:1, by about 2040. An excellent summary of the FICA “problem” was written by Jagadeesh Gokhale and Kevin Lansing of the Cleveland Fed:
“Consider the following investment scenario. You turn over 10 percent of your salary each year to an investment manager who pools your contributions with those of others to form something that looks like a mutual fund. The manager assembles a portfolio that ends up earning a meager rate of return—less than 1 percent after adjusting for inflation.
“Next, you learn that before you ever joined the fund, the manager made some unwise promises to the early investors. In particular, he guaranteed that they would receive very high rates of return – far exceeding the fund’s ability to pay, given its less-than-spectacular investment performance. Moreover, he handed out all sorts of cash bonuses along the way to keep the early investors happy. To maintain investor confidence, the manager used incoming cash from the new investors to make direct payments to the early investors.
“This precarious setup actually worked for awhile. Now, however, like all pyramid schemes, the fund is on the brink of collapse because the supply of new investors has begun to dry up. Indeed, the manager informs you that you will have to increase your annual contribution to keep the fund solvent, and that you should reduce your expectations about future payoffs from this investment.”
Although current FICA “contributions” still exceed benefits paid out each year, experts say the program will reach the “crossover” point – i.e., when benefits start exceeding “contributions” – around 2017 or 2018. After that, the program will draw upon its $2.5 trillion Trust Fund to cover the annual shortfall between benefits and revenues. The Trust Fund holds only IOUs from the federal government, however, which borrowed all of the accumulated funds to finance annual budget expenditures. Economists estimate that the Trust Fund will be empty by 2040. Thereafter, FICA won’t be able to meet its benefit obligations without an infusion of new cash. This eventuality seems distant enough to let us do nothing now, but the system is eventually going to be in big trouble. Every politician knows this, but…well, it’s the Third Rail.
Why is the program so popular, if it is slowly collapsing? The simple answer is “volume.” Upwards of 52 million people get Social Security checks every month, and the number keeps increasing. Most recipients are elderly people. By nature, seniors who no longer can work are disinclined to let politicians touch the system they depend on for their retirement. Besides, they figure they paid into the system, so they have a right to their promised benefits. FDR’s instinct was right. Social Security cannot be dislodged. It is a fixture in American Life. Medicare – enacted in 1965 – is the same. Millions of people dependent on it will not let politicians touch it, although it will run out of money sooner than FICA.
Our experience with these programs applies to the national battle over the Democrats’ proposed Health Care/Insurance Reform – a.k.a. “Obamacare.” It would become the same kind of “tar baby” to which we shall get stuck so firmly that we’ll never get loose. It will go on and on – resisting all attempts to repeal or curtail it, and bankrupting the country. Such programs only expand. They never shrink. As Ronald Reagan once said, they are the closest thing to eternal life we’ll find on earth.
This is why loose talk about simply repealing Obamacare after the November elections alarms me. There is very little chance of this, once the bill is passed. Even if Republicans are wildly successful in the 2010 elections, how likely are they to have veto-proof majorities in the House and Senate? Zero chance, I should say. Until Mr. Obama can be defeated – earliest 2012 – there is scant likelihood that Democrats’ landmark bill could be rolled back or repealed. Even then it might be too late.
President Obama, House Speaker Pelosi and Senate Majority Leader Reid know this, of course. It’s why they’re throwing in the kitchen sink to get the bill passed now – before the public learns more about it and increased opposition firms up. If they can do it, even by a single vote, they will have created another Third Rail of American Politics. The ratchet turns only one way on these programs. The time to stop this immortal Tar Baby is before it’s born. So raise cain while you can. History shows that once it’s in, we’ll never get rid of it.