06 Feb 2004 What Conservatives Think #020604: Social Security: Is New York Times Right to Call the President’s Plan “Terrifying”
The Left Says:
“[President Bush’s] decision [in his State of the union address] to re-endorse the Social Security overhaul plan from his last campaign was terrifying.
Mr. Bush has long advocated that younger workers be allowed to set aside part of their Social Security tax payments for private investments in stocks or bonds. He has never explained how he would pay for such a plan. The Social Security taxes that come in are used to pay for the benefits of those already retired. If part of the current workers’ money is redirected without corresponding tax increases, the difference would have to be made up through budget cuts or – far more likely – a disastrous addition to the amount of debt the government continues to roll up every day.”
Source: New York Times Editorial, January 21, 2004
What Conservatives Think:
Social Security pays benefits from incoming Social Security payroll tax revenues. At present, more taxes are paid than are spent. By 2017 or thereabouts, fewer taxes will be paid than will be needed to pay benefits. At that time, benefits will need to be cut, taxes will need to be raised, or Social Security will need to be subsidized by general tax revenues unless changes are made to the structure of the Social Security system.
Conservatives, including President Bush, are intrigued by the last option.
In coming years, the number of retirees dependent upon Social Security will increase relative to the number of persons paying Social Security taxes. By the 2040s, less than two workers will be paying each retiree’s Social Security benefits. (Today the ratio is 3.3-1. 1)
A less than 2-1 ratio is considered unsustainable, especially as workers also will be expected to pay for retirees’ Medicare benefits while still meeting all their other federal, state and local tax obligations.
Alternatives include one or more of the following, all but the last of which is either unpopular or difficult for the government to impose:
Dramatically cutting monthly benefits;
Increasing the retirement age by a substantial number of years;
Means testing so middle class and wealthy seniors don’t qualify for Social Security;
Increasing immigration of young workers to increase payroll tax receipts;
Increasing the birthrate significantly and permanently to increase future payroll tax receipts;
Changing the system so some of workers’ tax contributions are not immediately spent, but instead are invested, so they can grow before they are needed.
The last option is referred to as partial privatization.
In such a system, a portion of each worker’s 12.4 percent payroll tax for Social Security would be diverted to a savings plan where it would earn interest. Later, when that worker retired, he would draw on the sum, reducing his need to be dependent upon those then in the work force. If he died before depleting the account, he could leave remaining funds to heirs. If the money ran out, he could draw on public resources, as retirees now do.
The New York Times complains that President Bush did not explain how he would pay for partial privatization. Perhaps not for the first time, it is thinking backwards. Partial privatization is designed to reduce the draw on the federal treasury, not to expand it.
Workers today are contributing more money than Social Security needs. The excess tax funds are spent on other things, such as National Public Radio, U.N. dues, the National Endowment for the Arts and other federal expenses that the New York Times supports, but conservatives often do not.
Enacting partial privatization now would reduce the amount of dollars available for discretionary programs the New York Times likes, but workers could pay less Social Security taxes now without current retirees losing a penny in benefits.
What if today’s workers continued to be taxed the same 12.4 percent, but the excess amount, or some similar sum (such as 3 percent of payroll), was conservatively invested for the worker’s own use after retirement? The answer: Even without benefit cuts, workers wouldn’t need so much money from Social Security.
Maybe Social Security, which many people now believe is destined for bankruptcy, needn’t be insolvent after all.
Source: (1) Megan McArdle, “Demography, Disaster and Destiny,” Tech Central Station, October 21, 2003, available online at www.techcentralstation.com/102103B.html