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Contributors
Gary M. Galles - Contributor
Mr.
Galles is a professor of economics at Pepperdine University.
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 More
Sorry Than Safe
The debate on privatizing Social Security…
[Gary M. Galles] 12/20/04
With President
Bush making it clear he intends to push letting workers shift
some of their Social Security taxes to the private
sector, opponents are once again deriding the idea as playing
roulette with people's retirements. For instance, Princeton
professor Alan Blinder said it would be "neither social
nor provide security. This would...expose people to more and
more risk."
This idea that any privatization would unacceptably sacrifice
the safety Social Security provides is reiterated whenever enlisting
greater private sector investment returns to reduce the multi-trillion
dollar gap between Social Security's benefit promises and its
ability to fund them is proposed. But what is ignored in those
attacks is that Social Security is far riskier than advertised.
Demographic trends guarantee Social Security's long term insolvency
in its present form. Its 14-digit unfunded obligation demonstrates
that it cannot be secure, because no one can be sure they will
actually get the benefits it promises now. That means the status
quo is not only far from safe, it is not really even an option,
and the issue is not Social Security's safety versus market investment
risk, but which is, in fact, riskier.
Social Security does avoid the market volatility private retirement
funds bear, though diversification and prudence can substantially
reduce that risk. However, it has its own risks.
Social Security's safety is nothing but the belief that, unlike
private investments, its benefits are guaranteed. But not only
does its under-funding reject that premise, so do both law and
history.
Despite rhetoric to
the contrary, the Supreme Court has ruled that Social Security "contributions" do
not entitle workers to the promised benefits they supposedly
finance. I.e.,
the government is not legally obligated to pay workers their
Social Security benefits, and any commitments made today can
simply be unmade tomorrow. So retirement benefits depend on future
political decisions about whether to live up to past promises
to beneficiaries, making them subject to substantial change at
any time. Relying on Social Security's unenforceable political
promises of retirement benefits, which cannot all be delivered,
seems far riskier than relying on the legally enforceable contracts
that back private investments.
Social Security's "defenders" argue
that this political risk is small, because Congress would never
renege on its commitments.
But its history destroys any such belief.
The House Finance
Subcommittee's 1935 report on Social Security stated that "We can=t ask support for a plan not at least
as good as any American could buy from a private insurance company...The
very least a citizen should expect is to get his money back upon
retirement." To back this up, Social Security originally
guaranteed that taxpayers who reached 65 without qualifying for
benefits or who died before 65 would be refunded everything they
paid into the system.
When refund applications started arriving, rather than live
up to the promises made only 4 years earlier, the law was amended
to end the first of those promises (instead, applicants received
a letter explaining how the change would strengthen the system).
Similarly, heirs now receive a nominal burial fee, rather than
a tax refund to their estates, for those who die before retirement.
Social Security's
commitments have continued to be revised since 1939. The tax
rate and the income to which it applies have hugely
expanded the original $60 annual combined maximum, dramatically
raising required "contributions" beyond that originally
promised to taxpayers. The fraction of income Social Security
replaces has been frequently "reformed." Benefits have
been made largely taxable for those who have successfully provided
for their own retirement. And this was before the baby-boom retirement
crunch puts far greater pressure on the system.
Social Security's
promised benefits are not a sure thing decades from now. Therefore,
we have to consider whether it is really
riskier to face market volatility, minimized by prudent planning
and diversification, in exchange for its far higher investment
returns, or to bet our "golden years" on future politicians
honoring commitments made now, when that will require sharply
raised taxes. With both major parties constantly reminding us
of how unreliable their opponents are, perhaps we should believe
them, and recognize just how great that risk is. tOR
copyright
2004 Gary M. Galles
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