Is Social Security Bankrupt?

Is Social Security Bankrupt?

E-mail debates of newsworthy topics.
Jan. 28 1997 3:30 AM

Is Social Security Bankrupt?

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       It's sort of fun to get into a debate with a pure ideologue, because one can talk Big Thoughts. You basically say that markets are good and government is bad. I think the choice between them depends on what you're trying to do.
       The question is not just the realities of government, but the realities of the market. None of us exactly trust the market, for example, to provide healthy television entertainment for our kids. When it comes to secure retirement incomes, let's consider some relevant realities:
       1) Market returns vary with the time and how the money is invested. They go down as well as up. If you invested in housing up to 1982 and stocks thereafter, great; if the reverse, not so great. If you're in the right part of the cycle, you win big; if in the wrong part, you don't do so well.
       2) People earn different incomes, and some do not earn much. Social Security therefore includes some redistribution, in order to make a not-so-miserable retirement guaranteed to all.
       3) Our incomes are at risk. We might be "downsized," or suffer some illness or injury that impairs our earning potential, or just happen to be in the wrong business at the wrong time. In your examples, people who work for a state government or a fire department continuously do not have that problem. If you want to guarantee decent jobs, private savings will be at less risk, but I doubt that's your idea of good "free-market" policy.
       4) Markets work through trades in which both sides benefit. But that means sometimes there will be no seller for a buyer. We know from health insurance that there can be a lot of people who cannot find a seller at a price they can afford. The same would be true of retirement annuities. It's called "rationing by price": what markets are supposed to do.
       5) The market does not care about need. Indeed, in standard economics there is no such thing as "need," only "wants." So investment returns do not distinguish between people who live alone or in families, for example, even though the latter would find a given income less adequate.
       Naturally, people in 1997 are less worried about the market's risks than people were in the 1930s. But the real economy is a matter of what we produce, not the prices of financial assets; and our retirements overall depend on that real economy.
       We should not expect the financial markets to continue to outperform that real economy by large margins. It's pleasant to assume that returns of 6.5 percent per year can continue forever (as you assume in your Galveston example). But presently, investment returns far exceed underlying growth in productivity. How long can that last?
       People who worry about the effects of demographics on Social Security often forget that the baby boom should affect market returns, too. If we all saved privately, we would look to sell off assets to pay for our retirements. But to whom would we sell them? When they buy assets, the baby boomers compete against each other to purchase from a relatively small cohort of elderly, and so drive up prices. When they sell, the boomers will be competing to sell to the "birth-dearth" generation: With fewer buyers relative to sellers, prices should come down.
       It's hogwash to accuse Social Security supporters of not wanting anybody to do better than anyone else. People with more money can and do invest more, and benefit from those earnings. But we do want to provide a totally secure base, and the realities of the market mean that is done best through social insurance.
       Actually, people who earn more also get more from Social Security. Rather than being a purely "statist" program, Social Security is a carefully balanced package, meant to ameliorate market risks without threatening economic efficiency or the values behind what is basically a market culture. That was very clear when the program was created.
       In the real world of the free market, there are likely to be people who do not have adequate retirement incomes. Even conservative communities tend to have some measures to address that--the traditional "means-tested" programs. One trouble with such "welfare" is, it's too easy to believe the beneficiaries are leeches on society, who are taking even though they did not contribute. As economist Rudolph G. Penner, a Republican former head of the Congressional Budget Office puts it, "The system that preceded (Social Security) bred conflict, because it was difficult for participants to protect themselves against those who did not do their duty while working but who nevertheless wanted support when they retired." The most popular alternative at the time was the "Townsend Plan" of noncontributory pensions. The 1938 Advisory Council on Social Security, which designed the major reforms of 1939, explained about Social Security's contributions that "[t]he council believes that such a method of self-help and self-reliance in securing protection in old age is essentially in harmony with individual incentive within a democratic society. It is highly desirable in preserving American institutions to remove from as many individuals as possible, in the years to come, the necessity for dependency relief and to substitute instead protection afforded as a matter of right, related to past participation in the productive processes of the country. It is only through the encouragement of individual incentive, through the principle of paying benefits in relation to past wages and employment, that a sound and lasting basis for security can be afforded."
       Unfortunately, some people will earn so little, even though they work hard, that their contributions cannot provide for a decent retirement. And the earliest generations cannot contribute for long enough to pay for their own benefits. So the program was always designed as a compromise between the principles of guaranteeing adequate benefits, and relating returns to contributions. But it's moral basis is "participation in the productive processes of the country"; people who, in current political language, "work hard and play by the rules" should have some measure of security.
       The alternative now, supposedly, is compulsory savings. Make no mistake, that's "government": the power of the state forcing us to do something. So what are the real differences between this approach and current Social Security?
       Three things. Social Security is more redistributive. This, of course, is something the private sector isn't set up to do. Social Security provides various explicit and implicit forms of insurance that would be eliminated by the fact that everybody's savings would be separate in your system. The private sector could sell the insurance components, but at a premium and in ways that penalize the people who are most likely to need benefits (that is, "poor risks"). Finally, private investments base benefits on financial earnings rather than wages. If the trend of financial earnings can continue to far outstrip wage earnings, then this difference in returns can make a big difference. But supply and demand suggest the trend cannot survive the boomers' retirement. Moreover, individual accounts are not needed in order to capture any extra earnings. In your own examples, investment is done for the whole group, an approach which has the advantage of involving far lower sales and administrative expenses.
       And, of course, any arguments about return from private investment, such as the examples in the most recent message, continue to ignore the question of how to pay for current benefits.
       By grouping all government programs into one "statist" box, you refuse to acknowledge that both markets and government have their points, and that government programs differ from each other. Social Security balances market and governmental virtues; balances moral virtues, such as paying people according to contributions and paying according to need; and balances the needs of the present and the needs of the future. It has worked pretty darn well. Market investment will work better for some people, sometimes. But it can never provide the same security.
       In practice, both individuals and the government should follow the same logic. We need Social Security. And we also need private investments and savings! None of us should rely on Social Security alone for our retirements. Unlike yourself, most of the rest of us could not be really secure without it. So we should support the program and invest for ourselves separately as well. The choice between Social Security and private savings is simply false.