Common Sense on Social Security

A Centrist Perspective on the Social Security Reform Dilemma


Social Security Reform: Breaking the Stalemate

Section 8. The Liberal Morality Play

Liberals have also authored a morality play on Social Security. As the liberal story line has it, the Social Security program is one of the twentieth century's finest achievements, a common sense retirement solution that rightfully enjoys broad support among Americans of all ages. Social Security benefits are earned benefits, not welfare, and they provide elderly Americans with an all-important safety net. Thanks to Social Security, the poverty rate among elderly Americans has dropped by nearly two-thirds in the past four decades, from thirty percent plus to ten percent plus. In providing elderly retirees with greater independence, Social Security also reinforces the independence of their grown sons and daughters. Liberals are confident that the Trust Fund's current assets will be there when they're needed, because, after all, the debt owed to the Trust Fund by the U.S. Treasury is backed by the full faith and credit of the United States.

In the liberals' morality play, privatization advocates are cast in the villain's role. Their campaign on behalf of Personal Retirement Accounts is merely the opening wedge in a battle to end Social Security as we know it. Liberals, of course, play the hero's role in their own melodrama, valiantly defending the fair damsel Social Security against the Trojan Horse of privatization.

Social Security wasn't designed to promote individual investment, the liberal morality play reminds us, it was designed as a social insurance vehicle. Some folks die early, others live a long time, and the whole point of social insurance is to protect all citizens against the risk of poverty in their old age. Any shift to PRA's would undermine the program's ability to meet its social insurance objectives. Furthermore, say the liberals, such a shift would be costly for current taxpayers, who'd have to pay twice, once to finance benefits already owed to current retirees, and a second time to finance their own PRA's. (This argument is disingenuous. Any shift from an unfunded retirement system to a funded retirement system carries with it a "pay twice" problem, regardless of whether the funding is accumulated in PRA's or in the Trust Fund.)

Liberals also highlight the fact that Social Security has always been moderately redistributive. Lower income workers get proportionately higher retirement benefits than higher income workers. In a PRA-based system, though, lower income workers receive no extra push, an ominous reversal of Social Security's basic spirit. Nor should anyone forget the stock market's inherent cyclicality. It isn't fair to expose retirees to such a high level of risk. Social Security is supposed to make our retirement years less risky, not more risky.

Better, in the view of the liberal camp, to use the Trust Fund as an investment vehicle. Allow it to invest more broadly so that it can earn higher rates of return. Create a stronger and more independent supervisory structure for the Trust Fund, and contract out the actual management of Trust Fund assets to independent professional firms. Since the cost of managing Trust Fund investments will be much lower than the fees charged to individuals for their PRA investments, argue Henry Aaron and Robert Reischauer of the Brookings Institute, Congress shouldn't hesitate to use the Trust Fund as Social Security's preferred savings vehicle.

President Clinton has taken an initial cut at translating some of these sentiments into actual legislation. He would use a combination of budget surpluses and Social Security surpluses to pay down much of the national debt, a step which is meant to reduce annual interest payments on the debt. Assisted by those interest savings, he would give the Social Security Trust Fund a $2.8 trillion cash infusion from the Treasury's expected surpluses, stretched out over 15 years.

To some extent, the President's proposal merely borrows from Peter to pay Paul. Of the national debt's $5.4 trillion total, $0.8 trillion is owed to the Social Security Trust Fund, $3.8 trillion is owed to the public, and another $0.8 trillion is owed to a number of other government trust funds. From Treasury's perspective, borrowing another $100 billion from Social Security in order to pay off $100 billion owed to the public would have zero net impact on the total size of the debt. On the other hand, the president's willingness to use federal budget surpluses to pay down the national debt is an entirely different matter, and genuinely beneficial. And his desire to capitalize the Trust Fund with a large infusion of federal cash could be quite positive.

Congressman Gerrold Nadler (D-NY) has also taken on the task of converting the liberal morality play into legislation. Following Senator Moynihan's lead, the Nadler plan raises the earned income cap substantially, so that 90% of all covered earnings will once again be taxable. The Nadler plan also adopts President Clinton's proposed subsidy for Social Security, and liberates the Trust Fund from its current government-bond-only investment restrictions, authorizing 30% of Trust Fund assets to be invested in the stock market. With visions of the Trust Fund earning an endless stream of 7% returns on Wall Street, Congressman Nadler argues that his plan can easily achieve lasting solvency for Social Security without any need for benefit cuts.

Unless the Dow falls to 4000 and dividend yields rebound thereby into the 4.5% range, Nadler's forecast is somewhat fanciful. Even so, let us imagine that the market cooperates, with the Dow losing almost two-thirds of its present value, stock market capitalization dropping to 65% of GDP, and long-run real returns leveling out at 7%. With the Nadler plan in force, the Trust Fund grows vigorously and attains an ultimate value equal to 76% of GDP. The stock portion of its portfolio, therefore, is worth 23% of GDP. In other words, Trust Fund stockholdings under the Nadler plan might well represent more than a third of the total value of a shrunken but higher yield stock market.


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Common Sense on Social Security
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Revision Date April 13, 2006