Saturday, April 02, 2005

Social Insecurity, Or, You Bet Your Life, Part II

Although Social Security legislation was initially enacted in 1935, some eight years earlier an event occurred that, as far-fetched as it may seem, could be utilized to illustrate the current controversy surrounding that issue. In 1927, a 26 year-old German physicist named Werner Heisenberg (who during World-War II would be appointed as the leader of Germany’s attempt to create an atomic weapon), published what many believe to be the most quoted paper in the history of physics—his “uncertainty principle.”

For purposes of this article, the specifics of his discovery relating to the then new science of Quantum Mechanics (that I couldn’t explain if I wanted to) is irrelevant. However, this comment in Slate magazine is pertinent: “Today, even the greatest physicists admit to bafflement at Heisenberg’s mathematical non-sequiturs and leaps of logic.” Now, the simplest definition of a non sequitur I could find is: an inference or conclusion that does not follow from the premises.

Like these great physicists, the great American public must also be baffled by the ideological leaps of logic and mathematical non-sequiturs, as expounded by both Republicans and Democrats in their efforts to explain their conflicting positions on Social Security. Realistically, despite evidence to the contrary, neither party is willing to admit what should be obvious to all—the numbers used by both parties, as well as predictions relating to future demographic, economic and other financial conditions unquestionably must be subject to something similar to Heisenberg’s uncertainty principle. These misguided positions are illustrated by the following:

Despite their condemnations of the numerous trial balloons that President Bush and his staff continuously float in countless speeches and appearances, Democrats have yet to forward a specific plan of their own. Unfortunately for them, negativism for its own sake can backfire. In fact, a number of Democrats also deny that Social Security is in a state of (to use President Bush’s term) crisis. Although they are correct when viewing the short-term prospects, from a long-term perspective (50-75 years), a do-nothing approach has the potential to create serious problems.

On the other hand, much of what Republicans allude to as certifiably accurate numbers that bolster their arguments are anything but. The party line as expounded by President Bush (or is it the other way around?) has focused its primary effort on the establishment of private accounts as opposed to reestablishing the financial health of the Social Security system. This has lead to leaps of logic, mathematical non sequiturs, as well as uncertainty. Here are a few examples:

In an effort to predict its future viability, the Social Security Administration has the unenviable, and almost impossible task of producing long-term forecasts that consider factors such as gross domestic product growth, labor productivity, inflation, immigration trends, etc. Several scenarios are developed, and the one usually cited is termed the “intermediate 1.8% growth scenario.” This predicts that the trust funds will be exhausted in the year 2041. The President has repeatedly stated that is the year when Social Security will go “flat bust.” To paraphrase President Clinton, “That depends on what your definition of ‘flat bust’ is.” Considering the fact that even after 2042, the system will still have the capability of paying out 73 percent of promised benefits, doesn’t the use of the phrase “flat bust” fit your definition of a non sequitur?

To confuse matters even more, using figures developed by the non-partisan Congressional Budget Office, the system will not become insolvent until 2052, and at that point will still generate enough revenue to pay out, not 73 percent, but 80 percent of promised benefits. But there’s more. Totally ignored, especially by the Bush administration, is a more optimistic “low cost” scenario advanced by the Social Security Administration. Assuming an economic growth rate of 2.6 percent, (faster than that referred to in the “intermediate” scenario), if attained, it would completely eliminate the imbalance in the system and reestablish a sizable surplus in the trust fund over the next 75 years. Perhaps those seemingly overly optimistic Democrats who claim there is no crisis will be proven correct after all. Considering all of the above, uncertainty certainly reigns. Hello Herr Heisenberg!

Here is another mathematical paradox to consider. Based on the program starting in 2009 and being fully implemented in 2011, President Bush suggests that the creation of private accounts would require adding (only) $754 billion to the federal budget over the next ten years. However, Senate Minority Leader Harry M. Reid (D-Nev) estimates that starting in 2011 a cost of $4.9 trillion would apply over a 20 year period. In
last month’s article, Mortimer Zuckerman (and now others) was quoted as saying the costs would mushroom to $15 trillion over a 30-year period. Even Vice President Cheney has admitted that private accounts would cost “trillions of dollars.” The one thing that can be certain here is—uncertainty. There are several other, let’s say unclear, or incomplete statements that are worthy of attention. Mr. Bush refers glowingly to the Federal Thrift Savings Plan (covered by me in a column in July 2004) as a suitable comparison of what private accounts can accomplish. Recent statistics do show that while the plan has worked out well for most, retiring during the lows of the stock market can be devastating. In addition, he does not mention that members of this plan also enjoy a very generous guaranteed pension plan, and the Thrift Savings Plan is an add-on that does not detract from the base pension plan as would private accounts. Mr. Bush’s use of this federal plan as being relevant to Social Security members is disingenuous at best.

Another questionable statement frequently used by the President is that with private accounts, at death, people could will the remaining balances to their heirs. However, he also insists that in order to make certain these balances are not frittered away on retirement, each person would be required to purchase an annuity at the point of retirement and annuitize it in order to receive monthly payments. Did he merely forget, or did he deliberately conceal the fact that an annuity ceases to exist at the point of death, and therefore cannot be left to anyone?

During this entire debate, the fundamental rationale for the existence of Social Security has been forgotten. This, despite the very obvious reminder signified by the name of the payroll tax—FICA—imposed on every person in the country who contributes or has contributed to Social Security. That acronym refers to a 1939 amendment to the original Social Security legislation that is titled, the Federal Insurance Contribution Act. Critical to its understanding is the fact that it is not titled with the words Federal Pension, Investment, Retirement, or Savings Act. And contrary to some of the recommended fixes being floated, it was conceived as, intended to be, and has always functioned as an insurance plan—and a very successful one at that.

Perhaps this concept was best described by then Labor Secretary Frances Perkins in a 1935 radio address (the equivalent of today’s television speeches). She said, the program’s mission would be “protection against the loss of income,” “providing against need and dependency in old age to the many workers who could not, unaided, provide for themselves.”

By and large there are two conflicting ideologies at play: Democrats wish to maintain the 70 –year old tradition that perceives Social Security as an insurance contract, whereas the Republican goal is to completely overturn the concept whereby the federal government provides social benefits, or as some term it, social welfare, to its citizens. As New Republic magazine points out, “Conservatives always saw the [Social Security] program as an indefensible infringement upon freedom. Alf Landon, the 1936 presidential nominee called Social Security a ‘cruel hoax.’ More than 40 years ago Milton Friedman wanted to let workers opt out of it, and Barry Goldwater said, ‘Perhaps Social Security should be abolished.’”

Confirming the Republican stance is this memo from Peter H. Wehner, White House director of strategic initiatives, sent to selected conservatives, making a case to transform Social Security: “We consider our Social Security reform not simply an economic challenge, but a moral goal and a moral good. If we succeed in reforming Social Security, it will rank as one of the most significant conservative governing achievements ever.”

Referring to the above memo, an article in The Washington Post in January, titled “What’s Behind It?—A Bit of Social Engineering in Disguise,” commented, “The emphasis was revealing. The memo said little about long-term growth and other economic effects. It stressed moving away from depending on government and giving greater power and responsibility to individuals.”

The Post article continued, “At the Libertarian Cato Institute, Michael Tenner, the director of a Project on Social Security Choice and a long-time proponent of privatization, makes the same case. “We’re changing fundamentally the relationship of people to their government,” he says. It would be the biggest shift since the New Deal.” Here, according to the Post, is the key: “Once you cancel the zeros on both sides of the equation, neither creating private Social Security accounts nor ratcheting down the growth of future benefits would constitute an economic watershed. Republicans frame Social Security reform as a dollar-and-cents issue, but what they really hope to change is not the American economy but the American psyche.” Therein is the best explanation I have seen or heard for President Bush’s obsession with the subject of private Social Security accounts.

It may well be that some readers of this article will agree there is a need to transform the concept of Social Security in accordance with this conservative Republican view. However, others will find it ironic that while over the years Republicans have condemned Franklin D. Roosevelt’s “New Deal” and Lyndon Johnson’s “Great Society” as social engineering, the privatization of Social Security is, as the above article’s headline states, “social engineering in disguise.” Unfortunately, at this point in the argument, the issue of “privatization” is unquestionably the major stumbling block to any real and serious effort to resolve the problem of future shortfalls in the system. Indeed, this issue alone threatens to destroy any attempt to bring both political parties together in order to provide the fiscal solution necessary to insure Social Security’s long-term viability and fiscal solvency.

Since there is no immediate crisis, the operative words here are long-term. There are any number of individual measures that when combined could provide a solution to the potentially critical long-term problem. It is now admitted, not only by the Bush administration, but also by Alan Greenspan, that privatization is not one of them. If that issue is taken off the table, even temporarily, other more constructive actions can be considered in an objective, realistic, collegial and non-partisan environment—sans the non sequiturs and leaps of logic.

Because this issue is so complex, and since the debate has become so intense and passionate, this article has been extended to three parts, and in next month’s posting various possible reforms to the system will be discussed.


At 5:15 PM, Anonymous Anonymous said...

keep up the info. it is no cleare now than before. however, the way i read this is that you can justify your point of view either way as long as you use Goebbels approach to justify your position.ralph weissman


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