End It; Don't Mend It

by Michael Tennant  

“Mend it, but don’t end it,” was the slogan the Clinton administration applied to the issue of federally mandated discrimination, a.k.a. affirmative action.  Liberals applauded, recognizing it as a typical piece of Clintonian blather, right up there with “The era of big government is over,” meant to assuage the less liberal parts of the electorate without actually altering the program in any significant fashion.  Conservatives, by contrast, recognized that the solution to an unconstitutional, immoral, and untenable policy was not to reform it but to put it out of its misery.  

Today President Bush offers the same “mend it, but don’t end it” approach to federally mandated intergenerational theft, a.k.a. Social Security; and, as might be expected, the party affiliation of the president uttering the slogan makes all the difference in the world.  Liberals today are the ones going ballistic over Bush’s “slash-and-burn” approach to this most sacred of all sacred cows from the New Deal.  Conservatives, on the other hand, are applauding, as if the solution to yet another unconstitutional, immoral, and untenable policy—as conservatives used to describe FDR’s Ponzi scheme—is not to put it out its misery but to reform it—to “save” Social Security, as it were.  

The actual operation and looming failure of Social Security are both well known by now.  Simply put, the system relies on transferring wealth from younger, productive citizens to older, retired citizens; and when the number of older citizens becomes too great for the younger citizens to support, as will happen sometime in the next few decades, the system is going to fail.  

The man proposing to “reform” Social Security is the same man who has increased government spending at rates unheard of since the Great Society years of the 1960s and who has created the largest new entitlement since then, namely, Medicare prescription drug coverage (a program sold under false pretenses, I might add).  He is also the man who said, in a recent press conference, “Franklin Roosevelt did a wonderful thing when he created Social Security.”  Is it reasonable to assume, then, that he would advocate a plan that would actually result in a loss of power from the federal government or a real reduction or elimination of Roosevelt ’s “wonderful” program?  If you think it is, then you and I have radically different definitions of reasonable.  

Nevertheless, let’s consider the basic Bush plan.  Essentially it retains the current pay-as-you-go system but allows (how generous!) individuals to invest a small percentage of their FICA taxes in certain approved funds, from which they can then withdraw the money upon retirement while continuing to receive their regular Social Security check, albeit one reduced in proportion to the amount of money diverted into their investment accounts, plus interest.  (Notice how the government never pays us interest when returning money it has stolen from us, but we’re always expected to pay interest to the government when paying that which we have withheld from it for a period of time.)  Supposedly each account can be transferred to heirs upon the death of the person who built up the account.  

At first glance, this sounds conservative indeed.  It provides a seemingly market-based solution to the problem of providing for one’s retirement instead of relying solely on wealth transfer from current workers.  Thus, government and people’s dependence on it are reduced.  

Upon further consideration, however, it becomes clear that this is not what the Bush plan is at all.  In fact, it is nothing more than an additional government program that further entangles the free market with the federal government and fails to address the fundamental flaw of the existing Social Security system, i.e., the ever-dwindling payer-to-payee ratio.  

Let’s consider that last point first because in many ways it is the crux of the matter.  After all, if the point of Bush’s plan is to save Social Security, and it fails to accomplish this fundamental goal, then the whole plan immediately becomes suspect.  

The problem, as noted earlier, is that the existing system is a pay-as-you-go system whereby the income of productive, younger citizens is transferred to retired, older ones, and the number of retired people is growing faster than the number of working people.  Bush proposes to permit no one to escape this system but merely to divert a very small percentage of his taxes into another system.  Thus, as the population ages, the underlying problem remains:  Most people will still be drawing large checks—checks which Bush says should increase or remain at current levels, with those who have paid less into the system actually getting more out of it—from the pay-as-you-go system, and there will not be enough people paying into the system to support them.  Worse yet, those who choose not to participate in the investment accounts will still be drawing their full payments from the existing system, while less money will, in theory, be entering the system as others choose to divert some of their taxes to investments.  

This latter problem will, as it happens, be most pronounced in the early years after Bush’s plan is enacted (assuming that it is) since far fewer people nearing retirement will likely have signed up for investment accounts, while those far from retirement will be more likely to open up accounts right away, immediately reducing the flow of cash into the system.  Thus, the plan not only fails to address the problem in the long term but also exacerbates it in the short term.  Vice President Dick Cheney himself, in an interview with FOX News Sunday, agreed that the program would initially require the government to go into about a quarter trillion dollars’ worth of debt over a decade and then “[t]rillions more after that.”  Even if the plan works as advertised to provide, as Cheney said, “a higher rate of return” for investors, the amount of taxes needed to pay off these trillions of dollars of debt will surely dwarf the savings.  

In addition to the problems of funding the current system that go unresolved in, or are even exacerbated by, Bush’s plan, there are other issues to be considered.  

First of all, is it constitutional?  If not, then no “strict constructionist” conservative ought to be able to support it.  Clearly the existing system is not constitutional, as many conservatives have argued for years, because the federal government is nowhere in the Constitution empowered to transfer wealth from one person to another, whether under the guise of a retirement system or under the rubric of plain old welfare.  Is, then, the government empowered anywhere to extract money from the citizenry in the form of taxes and then direct those citizens as to how that money may be invested?  You will search in vain for such an enumerated power.  

Second, is it really an improvement to have the government take your money by force and then, instead of pretending to save it and return it to you upon retirement, give you a choice to let the government invest your money in certain approved funds, then return some of the money generated by your investment to you upon retirement?  If a common thief held a gun to your held and demanded you give him part of your paycheck, which he would return to you at a later date, would you really care if he said he was saving it up for you directly or giving you a choice of a few investments, part of the proceeds of which he would return to you?  

Make no mistake about it:  These so-called “private” accounts are anything but private.  The government establishes them, tells you how much you may put into them and where you may invest the funds, and then sends you a check when you retire, supposedly drawing on the money generated by “your” investment.  Here’s how the folks at Casey Research explain it:  

Regular . . . readers will know where we come down on this. True privatization sounds like a laudable aim to us. But is that really what the White House is offering? As with all politicians and their promises, the devil is in the fine print. When we examine that, we find that the reality isn’t quite so straightforward. For example, under the Administration’s proposal, the individual wouldn’t control his or her account; the government would keep and administer the money, deciding how to allocate resources and when to distribute profits. Now, due to the financial ignorance of so many, one could argue that there should be some bar against high-risk investments (the Chilean system does), but this setup forces us to rely on the government to administer our personal monies in our best interest. Talk about risk.

Worse still, the Bush plan specifies that upon retirement, workers would be returned only the amount that exceeded inflation-adjusted gains over 3 percent. The SSA hopefully projects a return of 4.6% above inflation; the Congressional Budget Office, less sanguine, thinks a 3.3% return is more realistic. Either way, the government gets to hang onto the first several percentage points of your profit; brokerage fees included.

What does this mean in the real world? Assume that you invest $1,000 per annum for 40 years, starting today, and realize gains at 4%, midway between SSA and CBO estimates. At the end of that time, your “personal” account would grow to $99,800 in today’s dollars, but the government would then take back $78,700, a pretty hefty bite. But what if it only grew by an average annual 3%? Thanks to the government’s 3% fee, your net is zero. What they intend to do if there are some lean years and profits fall below that mark has not yet been decided, but it’s not inconceivable that you could wind up owing the government money.

This sounds like just another confiscatory government scheme to us. Or as Peter Orszag—head of the Pew Charitable Trusts’ bipartisan Retirement Security Project—puts it, what this amounts to is a loan from the government, to be paid back upon retirement at an inflation-adjusted 3% interest rate. Even conservative Stephen Moore, author of the book Bullish on Bush, admits that this plan undermines the notion of an “ownership society.” However, the question is why the government should have the right to take back any profits from a “private” account at all.  

Even if the system really were as straightforward as Bush and his boosters make it sound, there are still some potential caveats to consider.  

One is that a government program that starts out relatively simple seldom stays that way for long.  Recall that the original 1040 income tax form was only one side of one page long and was very easy to follow.  Recall, too, that a tiny fraction of the very wealthy were the only ones with any income tax liability in 1913 and that they had to pay in one lump sum annually.  By the end of World War II, practically every American was subject to income tax—and income tax withholding.  Today the IRS publishes over 500 forms with thousands of pages of instructions, and the tax code itself is more than 54,000 pages long, with exemptions for everything from electric automobiles to used underwear donated to charity, a deduction taken most famously by Bill Clinton.  Do we really expect Bush’s already complicated Social Security fix to become any less politicized over time?  

For example, since the government decides in what funds an account holder may invest his Social Security taxes, is it not likely that the approved funds will be determined on a political basis?  Will companies that contribute to politicians find themselves on the approved list, while those that do not contribute end up on the unapproved list?  What if a company fails to hire or promote enough minorities?  What if it—shudder—flies a Confederate flag on its property?  What if its owner has said some unkind things about a politically protected group such as blacks, Jews, or homosexuals?  What if—horror of horrors—it sells tobacco?  

What happens when it emerges that those individuals with the most investment savvy, who most likely are those who already had some means to begin with, are raking in the dough via their accounts, while less successful investors are wallowing in red ink?  Will politicians really let these poor unfortunates lose their investments while the rich get richer?  What if the market experiences a long downturn, negatively affecting almost everyone with a Social Security investment account?  Will the stock market become “too big to fail” and thus yet another ward of the state, subject to bailouts by taxpayers and ever more intrusive regulations?  

What if, in the future, politicians should find that they need more of the money in the accounts to fund other priorities, such as Medicare, which is in far worse shape and will collapse far sooner than Social Security?  Can we expect the amount returned to account holders to fluctuate depending on the profligacy of Congress?  If the accounts were truly private, there’d be nothing they could do about it.  As long as the government is administering them and sending out the checks, however, there is more than ample room for political chicanery.  

Now that it has become clear that the Bush plan is not an improvement over the current system and could, in fact, make things worse, the question becomes:  What is the solution to the looming Social Security crisis?  

The answer for anyone who cherishes freedom is, as always, quite simple:  End it; don’t mend it.  

This is not, however, politically feasible.  What then could be done from a realistic standpoint?  

The first thing is to establish a cutoff point after which Social Security will no longer exist.  Select an age, say, 40 or 45, and establish that anyone under that age simply won’t receive any Social Security benefits upon retirement.  Then cut the FICA tax for those people accordingly.  Tell those over the cutoff age that they will receive a certain percentage of what they have put into the system, but no more than 100 percent, adjusted for inflation.  Then start cutting spending elsewhere in order to live up to this guarantee.  

Of course, this plan is, in reality, about as politically feasible as ending the program; and even if it were to be adopted, it is subject to the same kinds of political maneuvering that Bush’s plan is.  There is little hope that any politicians (except Congressman Ron Paul of Texas ) are going to do the right thing because the right thing always means less money and power for them.  Essentially we just have to sit back and watch the Social Security system—and every other socialist program—die its long, slow, agonizing death, meanwhile planning our own finances in such a way as to minimize the impact the government’s collapse will have on us personally.  It’s unfortunate but a fact of life.  

Right now, though, let’s at least not kid ourselves into thinking that a president who spends taxpayers’ money faster than Imelda Marcos in a shoe store really intends to reduce the size and scope of government.