Thursday, May 12, 2005

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

Do not hold against us the sins of the father. May your mercy come quickly to meet us, for we are in desperate need. (Psalms 79:8). Now that is a very relevant prayer to which all Americans should give thoughtful consideration. The first part, referring to “the sins of the father” will be covered later. The second part however, could reflect a “desperate need” to deal with and resolve a very real crisis situation facing the nation—but the crisis is not, as President Bush insists, Social Security. As described in an article in the Atlanta Journal and Constitution, Daniel Walker, the non-partisan head of the Government Accountability Office, summed up the real crisis by stating that America’s future is being built on a “burning platform,” essentially due to commitments for more benefits, services and tax cuts than it can deliver. At a recent conference sponsored by the Concord Coalition, a bi-partisan group specializing in budget issues, Walker emphasized, “We face large and growing structural [budget] deficits.” He then said, “We are clearly on an unsustainable path. There is absolutely no question that tough choices are going to be required. It’s going to involve entitlement programs, other mandatory spending, discretionary spending and tax policies.”

Even Alan Greenspan agrees in principle that, “Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability.” He also more recently concurred that we are on an unsustainable budget path. Lawrence Kotlikoff, an economist at Boston University, suggests that both the Bush administration and Congress are making a mistake by their failure to address the overall budget “nightmare.”

That nightmare could be exacerbated by the partial privatization of Social Security that has dominated President Bush’s attempts at reform despite his admission that private accounts will do nothing to help resolve Social Security’s long-term shortfall. His apparent failure to convince the American public of the benefits of that radical move, has forced a shift in his emphasis to the ultimate insolvency of the Social Security Trust Fund. However, his focus on Social Security ignores the most grievous and scandalous problem — the total federal debt burden. Indeed, Social Security is a relatively small portion of that considerably larger dilemma, especially when viewing it over a 75-year period.

To place the numbers in perspective, Concord Coalition’s estimate of the 75-year debt liability for Social Security is $5.5 trillion; for Medicare Hospital Insurance, $8.8 trillion; for Medicare Medical Insurance plus the recently legislated Drug Benefit bill, $29.5 trillion. This totals to an astounding $33.8 trillion and that would be the burden fostered upon our grandchildren and great-grandchildren. Thus, the Social Security problem termed a crisis by President Bush is in reality only some 16 percent of the total, and if that is a crisis then by comparison, the total debt burden of $33.8 trillion must be considered cataclysmic. It seems no one is paying any attention to this very real problem—not the President, not his administration, not the Congress.

For a most fascinating visual, consider the following:

National Debt

Illustrated here and on the referenced website is the National Debt Clock showing details of how the debt is distributed and how it is escalating, second-by-second. By the time you read this, the gross national debt will be close to $8 trillion, rising by $700 billion this year alone. Notice that our debt is accumulating at the mind-boggling rate of $1,000,000 per minute!

Now, back to the opening prayer’s reference to “the sins of the father.” A new book by retired economics professor Allen W. Smith describes in the sub-title, “How the Government Is Draining America’s Retirement Account.” The title of the book, “The Looting of Social Security” is equally damning. Professor Smith recounts that, “Prior to 1981, when there was rarely a Social Security surplus, at least some of any surplus was invested in regular issue marketable Treasury bonds…and the Trust Fund could have continued investing all of the surplus in such regular Treasury bonds. If it had, we would have no real Social Security problem until 2042. However, when large planned annual surpluses appeared on the horizon as a result of the sharp hike in payroll taxes in 1983 [the last time Social Security was reformed], the government quietly abandoned the practice of issuing regular marketable treasury bonds to Social Security. Almost nobody knew about it at the time, and few know about it even today, but the government established a policy of issuing only ‘special issues,’ a type of IOU designed exclusively for government trust funds. These special issues are worthless unless and until the government chooses to repay the looted money by raising taxes or borrowing massive additional funds from the public.”

The use of special issues is particularly attractive to the President, to Congress and to government budget makers since the surplus revenues from Social Security go into the general fund and can then be spent on projects other than for that originally intended. Smith describes this process as “looting.” And who do you think was one of the first, and certainly initially, the major “looter?” —The father, of course. That’s right! According to Smith, “George W. Bush’s father looted every penny of the Social Security surplus generated during his term…” Most unfortunately, this practice soon became embedded in the budgeting process, and Bill Clinton continued to treat the surplus as if it were general revenue.

However, during the 2000 Democratic convention, Professor Smith prevailed upon Al Gore to initiate his “lockbox” proposal, a commitment to credit the surplus exclusively to the Trust Fund. To counteract Gore’s proposal, “George W. Bush reiterated this same pledge over and over, and further cemented it with a statement in his first state of the union address, delivered on February 27, 2001. In no uncertain terms Bush said, ‘To make sure the retirement savings of America’s seniors are not diverted to any other program, my budget protects all $2.6 trillion of the Social Security surplus for Social Security, and for Social Security alone.”’

To put it bluntly, Bush lied, and Smith continues by pointing out that because of that broken promise, “This looted Social Security money became a major source of funding for Bush’s tax cuts for the rich. Social Security is $509 billion deeper in the red today because of Bush’s looting over the past four years, and he continues to loot the fund to the tune of approximately $438 million each and every day.” To paraphrase Ronald Reagan, George W. Bush is not the solution to the Social Security problem, he is the problem.” Apparently, the prayer, “Do not hold against us the sins of the father” is of no avail.

How can we best face up to the daunting problem of rebuilding fiscal viability into the Social Security system? Here is a menu, courtesy of The National Academy of Social Security, of possible solutions, along with the percentage of the 75-year shortfalls each will meet.

Raise the Tax Cap [from $90,000]
1. Make all earnings subject to Social Security taxes, but retain the cap for benefit calculations, beginning in 2005. (116%)
2. Make all earnings subject to social Security taxes and credit them for benefit purposes, beginning in 2005. (93%)
3. Make 90% of earnings subject to Social Security taxes and credit them for benefit purposes, phase in 2005-2014. (40%)

Extend Coverage
4. Cover newly hired state and local employees with a 5-year phase-in. (10%)

Raise the Age for New Beneficiaries
5. Speed up the increase to age 67 and index the age to 68 by raising it one month every two years. (28%)
6. Same as #5, but index the age to 70 by raising it one month every two years. (36%)

Cut Benefits for New Beneficiaries
7. Cut benefits by three percent for those starting to get benefits in 2005. (20%)
8. Cut benefits by 5 percent for those starting to get benefits in 2005. (32%)
9. Price index the benefit formula. (111%) [The wage index is currently used.]

Change Cost of Living Adjustment (COLA)
10. Lower the COLA by 1 percentage point each year. (79%)
11. Lower the COLA by ½ of 1 percentage point each year. (41%)
12. Shift to the new [July 2005] chained CPI. (18%) [A supposedly more representative measure of consumer cost of living.]

Raise Social Security Taxes
13. Raise tax rate for workers and employees each from 6.2% to 7.2% in 2005. (104%)
14. Schedule tax rate for workers and employers each, to 7.25% in 2020-2049 and beyond. (104%)

Use Other Taxes
15. Earmark for Social Security the remaining tax on estates over $3.5 million in 2010 and beyond. (27%)
16. Instead of making 2001 and 2003 tax cuts permanent, earmark part of federal income taxes or capital gains taxes for Social Security after 2009. (No percentage since this is not a specific proposal.)

Invest Trust Fund in Equities
17. Invest 40% of trust funds in equities, phased in 2005-2014, assuming a 6.5 % real return (over 3% inflation.) (48%)
18. Same as #17, assuming a 5.5% real return (over 3% inflation.) (35%)

It is obvious that while there is no shortage of ideas as to how to resolve the true Social Security problem, there is a shortage of focus and willingness to compromise on the parts of the two political parties. A more specific plan that has elicited kind words from President Bush was forwarded by a Democrat, Robert Pozen, on the op-ed page of The New York Times. He is the former president of Fidelity Investments and the current chairman of MFS Investments. He was also a member of the President’s committee that studied Social Security. As might be expected it has also attracted both Democrat and Republican critics.

Democrats deride it because it retains Bush’s plan for private accounts and does not adequately balance benefit cuts and tax increases. Conservative Republicans complain that the percentage allocated to the private accounts is half the size of the original Bush plan, and it is much too progressive. In fact, our old friend, Grover Norquist said, “Pozen’s plan is further to the left than we need to move.” The plan’s main contribution is that it would use the current wage index (see #6) for low salaried workers but the price index for the highest salaried. It would then use different percentages of each index, from low to high, as salaries increased for the in-between workers.

President Bush and his Republican backers deliberately choose to overlook the role that their economic and tax policies have played in exacerbating the Social Security problem. As described in a recent issue of The Economist, “The long term burden of Mr. Bush’s first term tax cuts and spending increases is three times bigger than the looming Social Security shortfall.”

The ultimate solution (that would require compromises by both parties) might entail increasing the retirement age, probably gradually over the years (see 5 & 6 above); raising the cap on the payroll tax beyond the current $90,000 level (1, 2, 3 above); reduce benefits slightly (7, 8, 9); and provide for add-on instead of carve-out private accounts.

President Bush however, must first set aside his obsession with private accounts. Most Americans have so far soundly and wisely rejected a “bet your life” philosophy that chooses to ignore the inherent and undeniable volatility of the stock market. It is a dreadful mistake to believe that ideological illusions and an untested experiment at privatization will triumph over one of the best governmental programs ever created. The existing system can and must be reformed (using several of the possibilities listed above) in an equitable and fiscally sound manner to avoid any threat of social insecurity.