March 14, 2005

March 14, 2005 | Commentary on Social Security

Nothing personal about Social Security

Before we begin talking about ways to reform Social Security, consider: If the system had never existed and was proposed as new legislation in its current form, would it pass?

No way. Liberals would oppose the program as patently unjust - and they would be right. The fact is that many current workers will pay more in Social Security taxes than they'll ever collect in benefits, as my Heritage Foundation colleague William Beach showed in a pioneering study published seven years ago.

As President Bush noted recently, "African-American males die sooner than other males do, which means the system is inherently unfair to a certain group of people." Yet New York Times columnist Paul Krugman attacked Beach's work as a pillar in the Bush philosophy, calling it "bigotry."

In his State of the Union address, the president ruled out any of the hysteria used to scare seniors: "[F]or every American who is 55 or older: Do not let anyone mislead you. For you the Social Security system will not change in any way." Minutes after the speech, the official Democratic response said the reform was more like "roulette" in Las Vegas.

You are witnessing knee-jerk liberalism.

Mindless partisanship has gotten in the way of the liberal traditional instinct to fight injustice. But the injustice of Social Security in its present form is plain. Problem number one: Social Security can be made solvent only if newborns are force-fed higher taxes than any retirees ever faced. Problem number two: the program is unfair to poor Americans who die young - Social Security takes a tithe from their labor and gives nothing in return.

Defenders deny that, of course. They say Social Security has a massive trust fund that is still growing, which implies solvency.

But Americans need to know that the trust fund is a fiction. It's simply a no-interest funnel to big government spending. The money collected through "Social Security" taxes is spent immediately by politicians on government salaries, welfare, debt service and foreign aid, not to mention pork that has nothing to do with retirement. That's why personal accounts matter so much. Ten dollars in hand are worth so much more than ten dollars in theory.

The right way to think about the promises made by Social Security is to think of a pie. Five people have been promised a slice, but there are only four pieces. The oldest three generations get their slices first, meaning that today's 20-and 30-somethings and their children will have to split one piece into two slivers. Is that justice?

Here's the alternative you hear from many on the left: raise taxes to pay for another slice of pie. But let's remember that Social Security taxes have been raised 14 times in 35 years. This "alternative" might make sense if it were a tax on consumption that all Americans pay. But no. This is a tax on wage labor, set squarely on the shoulders of the young.

But economists are starting to appreciate that labor supply responds to taxation. If you increase taxes on gasoline or cigarettes, supply and demand for them contracts. This rule of elasticity applies to labor as well, which is a small revolution for economists who long treated labor as inelastic. That's what the micro evidence indicated, but aggregate labor is more than a sum of parts, which is good news. As Nobel Laureate Ed Prescott explains in a 2004 paper, promises of future Social Security benefits can only be met with lower, not higher, payroll taxes. With personal retirement accounts, Prescott projects a level shift in national hours of work, production, and even wages.

Let's remember that when Social Security was created, it was an insurance system. It was supposed to ensure that nobody would have to suffer destitution in old-age. It acted as a kind of "death" insurance: If you lived "too long," it would protect you from your inability to earn money.

As the generosity of benefits grew ever larger and American longevity rose over the decades, the mindset changed, but not the math. Now Social Security is thought of as a retirement program. Big difference.

What has evolved is a system of retirement payments that is generous for the healthy by punishing the unhealthy, and unlucky. What if you die from cancer at age 53? Your family gets far less than if your retirement fund was a personal account, and possibly nothing. The fact that blacks die younger on average than whites means the current system is unabashedly biased against them. And the family of any person of any ethnicity who dies at 63 is likely to get stiffed by the trustees. Nothing personal. No, really: nothing personal.

Most people who set aside 12.4 percent of their entire lifetime income would not plan to donate that nest egg to Uncle Sam in case of an untimely early death. Sadly, that's what's happening now. But change is within reach, a change that converts labor taxes to personal savings, and offers every American real retirement choices and control. The growth surge Prescott predicts is just icing on the cake. Or perhaps, icing on the pie. 

Tim Kane is a research fellow in the Center for Data Analysis at The Heritage Foundation. He is a veteran Air Force intelligence officer, and former San Diego software entrepreneur.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)

First appeared in the San Diego Union Tribune