Social Security: An Evolution in Analysis
by Ari Armstrong, December 2, 2004
In 1995 (has it been so long ago?), I spent a summer working for the Center for Market Processes, an organization largely funded by Charles Koch that's now affiliated with the Institute for Humane Studies. I was farmed out to Families Against Mandatory Minimums for the summer, which was a great experience. Julie Stewart, who once worked for the Cato Institute, continues to run FAMM exceptionally well. All the participants in the program were also divided into groups and given a research topic. My group studied Social Security.
It soon became apparent to me that, while mandatory personal accounts were touted as a way to convert Social Security to something friendlier to free markets, in fact mandated accounts were harmful and unnecessary in reforming Social Security. Well, now these so-called "privatized" accounts -- which in reality are accounts mandated and controlled by the national government -- are at the top of President Bush's agenda.
The rise in popularity of mandatory accounts is a great example of the dangers of intellectual appeasement. A decade ago (and even before that), free-marketeers had a choice. They could proudly and confidently stand up and declare Social Security is morally bankrupt and should be abandoned in favor of free markets. Or they could brush the intellectual case for the free market aside and adopt a paternalistic shell-game of a proposal that seeks to replace Social Security with another centrally planned program. Unfortunately, too many leaders of the supposed free-market movement chose the later course. And so now the national government threatens to control a huge portion of U.S. investments.
This is a travesty. Mandatory, regulated accounts are an abomination. And a main culprit in this crime against markets is the Cato Institute. I hate saying it, because the Cato Institute has done great work in many other areas, and I've been influenced by a number of scholars affiliated with Cato. And I've heard that the matter of Social Security has been debated within the Cato Institute. Nevertheless, Cato has given its support to mandatory, regulated accounts, and thus, in this area, it is the enemy of liberty, individual rights, and free markets.
Here's a recent example. On December 1, the New York Times published an article by José Piñera, "co-chairman of the Cato Institute Project on Social Security Choice." Piñera couches his proposal in the language of markets: "For 24 years, I have championed the Chilean retirement system, which is based on ownership, choice and personal responsibility." Yet, as his discussion makes clear, the Cato-backed proposal has nothing to do with real choice or free markets. Much of Piñera's discussion explains how the government controls the accounts. Piñera explains, "Chile's Social Security Reform Act of 1980 allowed current workers to opt out of the government-run pension system financed by a payroll tax and instead contribute to a personal retirement account." Those are the options. Either you can pay into the old system, or you can "contribute" to the account. And what if you do not wish to "contribute" to the account, and instead you choose to use the money the way you want? Then you will be hounded by enforcement agencies and, if you fail to comply, you will sent to prison. If you resist, you will be killed. The essence of the plan advocated by Piñera and the Cato Institute is coercion.
In a February 17, 2004, document, Michael Tanner, "director of the Cato Institute's Project on Social Security Choice," also pretends that mandated accounts are somehow consistent with the free market.
Yet one choice passage demonstrates Tanner's fundamental deceit: "[A]lthough the individual account option [of 6.2% of income] is completely voluntary for current workers, it will eventually become mandatory for those workers who have not yet entered the labor force. As a result, the PAYGO ["pay as you go"] Social Security system will eventually be replaced entirely by a market-based one."
A "completely voluntary," "market-based" program that's MANDATORY is a contradiction in terms. The accounts are not "completely voluntary for current workers" -- workers cannot choose to keep the money and spend it how they want. Tanner's report suggests he has no concept of what the terms "voluntary" or "market" even mean. Either that, or he is deliberately twisting the meaning of those terms. Thus, the Cato proposal is a grand Orwellian lie.
Anyway, the July, 1996, edition of Reason magazine published a letter of mine critical of mandatory accounts. I wrote, "According to rhetoric, several plans now exist on the Hill and among libertarian think tanks which would 'privatize' Social Security. This is false. Even the plans promoted by the Cato Institute call for replacing the current Social Insecurity scam with another statist plan under which savings levels would be mandated by the government and savings programs would be regulated by the government."
In the August, 2001, edition of Liberty magazine, I criticized Tanner's plan for Social Security. He's still promoting a similar reform, and I'm still criticizing it.
When writing about the phase-out plan, I was tempted to call for a half-way measure of converting Social Security to a means-tested welfare program. I even titled the draft, "Scale Back Social Security." That seems to imply the program should be slightly modified, rather than completely eliminated. Thankfully, a reviewer pointed out the folly of that approach and I took a harder free-market line. It's important to discuss why welfare statists should logically support replacing Social Security with a strictly means-tested program, but this point can be made without advocating some element of welfare statism. Sticking to principles is important, and for a short time I struggled to do that regarding this issue.
I also made a second mistake in early drafts of the phase-out plan. I finally nailed down the fact that Bush's plan (basically Cato's plan) is a sort of opt-out plan. I realized long ago that an opt-out plan could be implemented without the mandatory, regulated accounts. But for a while recently I was tempted by the account-free opt-out plan. I finally figured out that the phase-out plan is far superior. Interestingly, my December 2 column for Boulder Weekly endorses the opt-out plan in its best possible form, though between the time I wrote it and the time it was published I began to favor the phase-out plan.
A Google search of this page for Social Security turns up a number of related links. I re-read a piece of mine from 1999 that holds up well. I supported the phase-out plan back then, and now I've returned to it after considering some other options.
Now, because the supporters of free markets failed to provide adequate leadership over the last decade, Bush and the Republicans in Congress are poised to install a horrible statist program consisting of mandatory, regulated accounts. The short-term deficit is likely to be funded by raising the national debt. But it's not too late! Many Republicans are sympathetic to arguments about free markets, and many Democrats are openly hostile to mandated investments (though usually for the wrong reasons). Thus, free-market advocates have an opportunity to make the case for real market reform through phasing out Social Security.
For additional analysis, please see Social Security: Collected links.