How to Salvage Bush's Plan for Social Security
by Ari Armstrong, January 7, 2005
I have made two main arguments about Social Security. First, Social Security is a fundamentally bad and unnecessary system that harms especially the working poor and middle class and violates the rights of people to use their money the way they want. Second, replacing Social Security (in whole or in part) with mandatory, regulated accounts is useless for reforming Social Security, a violation of rights, and an invitation to significant national control over investment.
However, I've also pointed out, while a phase-out plan is superior to an opt-out one, an opt-out plan absent the mandatory, regulated accounts would be tolerable. Here, I want to further explain President Bush's plan in its essentials -- the details remain undecided -- and how it could be salvaged and turned into a workable reform compatible with economic liberty.
First a bit of review. A phase-out plan cuts benefits outright, either by raising the age at which benefits are paid or by incrementally reducing benefits for future or even current retirees, and cuts the Social Security tax commensurably. For example, a simple phase-out plan would leave current recipients unaffected but raise the pay-out age for future recipients by three or four months every year.
Bush seems keen on adopting a partial phase-out measure, as Fred Barnes has suggested. The idea is to cut promised benefits by setting them to grow only with inflation. Right now benefits grow faster than inflation as determined by increases in wages. (Note that this is not a cut in actual benefits, only in promised increases of benefits.) A January 6 article in the New York Times ("GOP Divided as Bush Views Social Security," by Richard W. Stevenson) notes one debate is "whether Mr. Bush should back a proposal to reduce substantially the guaranteed government retirement benefit through a change in the way the benefit is calculated..." Any sort of phase-out measure is a good idea, and thus I hope Bush follows through with reducing the growth of benefits.
An opt-out plan, no matter what the details, involves cutting promised benefits in exchange for reduced payments to Social Security. Mandatory, regulated accounts are not an essential part of an opt-out plan. They are instead the imposition of a new program of forced savings controlled by the national government.
One possible opt-out plan under consideration is to let workers stop paying half the Social Security tax -- 6.2% of all income up to $90,000 per year -- into Social Security, and in exchange they agree to give up all benefits. So people would still pay half the tax but get no benefits. Of course, the reason some tax is still required is that the pay-out burden will not be affected until those who have opted out start to retire. In the meantime, current recipients and those close to retirement will still draw benefits.
For quite a few years, an opt-out plan is expected to generate a shortfall, which will require more deficit spending. Thus, the opt-out plan (using the same example) isn't even as good as letting workers cut all their benefits but their tax only by half. Deficit spending is merely a promise of future tax hikes. Thus, workers will pay half the Social Security tax, plus pay more general taxes to cover the deficits, and in exchange receive zero Social Security benefits.
The essential flaw with Bush's plan is that there's no need to force that 6.2% of income (or whatever the percent turns out to be) into mandatory, regulated accounts. People could simply be allowed to keep that money to spend or invest as they see fit.
So here's how Bush's plan could be salvaged. It would be best if the accounts were totally dropped from the plan. However, if people were allowed to decline the accounts and simply keep that money, without any restrictions or conditions, that would be a tolerable improvement. Perhaps the default could be for the money to go into accounts, so long as the plan allowed people to easily file to keep that money.
H. Michael Hayes suggests this option in a December 26 column in The Denver Post. Hayes writes, "[I]f privatization is an option, why not consider the option of opting out of that amount of the payroll tax eligible for a private account? Surely many people would be happy to take full responsibility for investing that portion if payroll taxes were to be reduced by whatever amount is planned for privatization."
I take issue with applying the term "privatization" to mandatory, regulated accounts, but Hayes may be on to something. If Bush and the Republicans in Congress adopted the idea, their opt-out plan for Social Security would be significantly better. Such a proposal would still give the national government too much control over investment and threaten to grow into a more onerous program. Nevertheless, the change would be an improvement
The simple, unvarnished truth is that any opt-out plan is a plan to cut future benefits. Under the possible plan mentioned, the Social Security tax would be cut in half, general taxes would be raised, and future benefits would be cut completely. Eventually, this would completely eliminate the Social Security program, once only those who opted out were in retirement.
But many Republicans try to hide the fact that the opt-out plan is a benefits cut. They argue that, if a portion of the Social Security tax is forced into mandatory, regulated accounts, the interest earned on the money will exceed the lost benefits. They may be right about this. But Social Security benefits are not the equivalent of interest earned on investments of one's own money. Thus, Republicans are wrong to speak of the offsetting funds as if that amounted to keeping benefits constant. We're talking about two fundamentally different things. The forced transfer of wealth is in no way comparable to interest earned on investment. Thus, Republicans should claim that the money earned by the accounts offsets the money lost in benefits, rather than argue that benefits are not cut. Under the opt-out plan, future benefits are cut, they're cut dramatically, and that's a good thing.
It is because they're trying to obfuscate the issue and fool the public that many Republicans are wedded to mandatory, regulated accounts. Without those accounts, Republicans would not be able to estimate how much interest any given worker would earn. That's because workers would be free to use their money however they choose. Some people would invest all of it. Others would spend all of it. The point is, people have a fundamental human right to use their earnings as they see fit. National politicians should have nothing to say about how much money people invest or how they invest it. That's supposed to be a conservative principle, yet today's alleged conservatives endorse a program of forced savings controlled by Congress.
For example, in his January 3 column for The Denver Post, David Harsanyi equates mandatory, regulated accounts with "privatization" and the "free market." He suggests that the binary choice between Social Security and mandatory, regulated accounts is somehow indicative of a "free market." But a system of two options dictated by the national government is not the same thing as liberty -- it is the precise opposite of liberty.
Notably, Harsanyi neglects to discuss the so-called "transition costs," which require more deficit spending to cover short-term losses under the opt-out plan. Under Bush's opt-out plan, the national government will actually control a greater portion of our income: the full 12.4% that now goes to Social Security, which will be split between Social Security and mandatory accounts, and whatever new taxes are required by deficit spending. Harsanyi describes the opt-out plan with mandatory accounts as a "first step," but if so it is a first step only toward a more interventionist national government.
Harsanyi praises Bush's plan because, he writes, "You can't gamble your entire retirement fund away on gummy bears and martial arts DVDs." Well, if it's my money, why the hell can't I spend it on gummy bears or martial arts DVDs, if I want to? According to Harsanyi, it's not my money at all, it belongs to national politicians, and it can only be invested at their discretion. Well, such a system may be called many things, but a "free market" is not among them.
The Republicans are already considering ways to cut promised benefits, and that's good and a step in the direction of phasing-out the program. Republicans should drop this nasty business of mandatory, regulated accounts, which are contrary to free markets and utterly worthless for reforming Social Security. The best option would be to drop the opt-out plan and adopt instead a phase-out plan. That would eliminate any need for short-term deficit spending. The second-best option would be to push the opt-out plan, but without the mandatory, regulated accounts. People should simply be allowed to keep a greater portion of their income. The third-best option is to include a provision for accounts but not make them mandatory: allow people to easily decline the accounts and simply keep the money (as Hayes suggests). I would still grumble over such a proposal, but I could swallow it.
Any opt-out plan that gives workers only the binary choice between Social Security and mandatory, regulated accounts is a harmful reform that undermines free markets and economic liberty. Republicans need to suck it up and explain that, yes, Social Security benefits need to be cut, but in exchange people can be allowed to keep more of their money, to spend or invest as they see fit. This game of mandatory, regulated accounts is a dangerous one that risks the further nationalization of the economy. Republicans who actually support the free market will adopt one of the three options I describe. It's time for liberty, not lip service.
For additional analysis, please see Social Security: Collected links.