Avoiding Social Security insolvency? Nah.

As everyone reasonably proficient with numbers knows, most Americans are virtually clueless about them. The scary part is that these "math-challenged" folks include more than a few senators and congress-critters.

To win re-election, many of these innumerate congressfolk either draft bills that are financially unsound, or support similar bills introduced by their peers. These bills typically give "freebies" to voters--that is to say, poorly educated voters believe they're getting something for nothing.

Not surprisingly, once such a bill is introduced it usually winds up becoming law, since no congress-critter wants to be seen by voters as the Grinch who denied them their "free" government handout.

The result is a system that's fatally biased toward spending with no accountability, because any consequences will happen after the politicians who set up these programs are safely out of office.

Two such timebombs are, of course, Social Security and Medicare. Two years ago "Jane Galt"--economist Megan McArdle blogging at Asymmetric Information--wrote a great analysis of the approching insolvency of these huge programs. Megan seemed more interested in the financial angle, while I'm fascinated by how reasonably intelligent people could have allowed these two systems to be created in the first place.

What strange dynamic renders 535 people--most of whom seem to be of above-average intelligence--unable to recognize and avoid obvious disasters?

We'll come back to that later. Right now I'd like to take up the main points of Megan's analysis ["Social Security Insolvency", 10/15/2003]:

From the time Social Security started, it took in more money each year than was paid out in benefits. The reason was simply that there were always more workers paying in than retirees getting monthly checks. For many years these annual surpluses were in the billions of dollars.

Congress, of course, never saw a dollar it didn't scheme to confiscate, and now--in a truly world-class demonstration of willing mass-delusion -- Congress decreed that all SS surpluses would be treated like any other tax revenue to the government. This decree enabled Congress to borrow each year's SS "surplus", which instantly gave them billions more to spend on...whatever.

The benefit of this scheme to Congress was that their deficit spending wouldn't look as bad as it really was because after all, the government was actually taking in those extra billions. The fact that this revenue actually constituted a future obligation was conveniently ignored.

The bottom line is that today the Social Security trust fund consists entirely of IOUs from the government.

Democrats--whose greatest iconic president pushed through the initial legislation for Social Security--claim this is not a problem because after all, US Treasury bonds (the actual form of the IOU) are the safest investment there is. Most philosophy students would recognize this as a syllogism:
1. Bonds of the U.S. government are the safest possible investment;
2. The SS trust fund contains 100% US gov't bonds;
3. Therefore the SS trust fund is completely safe.

The problem is that in just 11 to 12 years, when the baby boomers begin to retire in huge numbers, the total amount of their benefits will be more than the amount workers are paying into the system. (Hopefully you've already heard all this before, right?)

This shortfall can only be covered in four ways:

1. cut benefits, so that the amount paid out in benefits matches the amount paid in in contributions; or
2. cut other federal spending to compensate for the SS shortage; or
3. raise taxes to cover the extra spending; or
4. borrow the money to cover the shortage.

Option 1 isn't likely. Cutting SS benefits is considered the "third rail" of politics, and any politician who even mentions it usually loses his job at the next election.

Option 2? Yeah, right. Been on this planet long, sailor?

Option 3--raising the SS tax on workers--gets a lot of consideration from Leftists and Democrats, whose solution to most government problems is to raise taxes. After all, the collection mechanism already exists, so all the pols need to do is to pass a law raising that tax rate to...whatever they need to have it be. Voila--problem solved! And it's *so simple!*

Unfortunately for Dems, the Social Security tax kicks in from the first dollar of wages, so it hits the Dems' core voters (as well as everyone else, of course). So Dems need a decent cover story before they're likely to support this option, or else Joe Sixpack is likely to figure out that if he'd supported Bush's plan, he wouldn't be seeing his SS withholding go way up.

But the possibility of losing one's seat in the next election is only part of the problem with this option--because hiking tax rates also raises the incentive for people to flee the "legitimate," (tax-paying) economy for the untaxed underground one. At some point, raising the tax rates won't raise revenue at all, as the number of people fleeing from the higher taxes will offset the higher remittances per remaining, taxpaying worker.

How far the government can tighten the screws before we reach this point is unknown--and the legislators who are pushing a tax hike are equally clueless. What we *do* know is that higher taxes raise anti-government sentiment and cause more people to drop out of the legitimate economy.

That leaves Option 4: cover the shortfall by simply having the government borrow more money. After all, the government already borrows billions each month to cover other deficits, so what difference does it make if it adds a few billion more per month? Of course this option is equivalent to paying by credit card--we'll end up paying far more than if we'd raised taxes or cut benefits up front--but it's certainly politically safe.


According to the Social Security trustees, Medicare's expenses will start to exceed what it collects in 2013--just seven years from now. The Social Security fund will reach the same point just four years later.

So what are our elected officials doing about this approaching crisis? Prodded by left-leaning groups like the AARP, they're actively looking for ways to make it worse, as when Congress passed the recent prescription drug benefit for seniors, which will likely cost an extra $4 billion per month.

With this background, consider the idea floated by the Bush administration to offer Americans the option of investing part of their SS contributions in private, interest-bearing accounts. One small Texas city tried this with its employees and was soon able to pay benefits two to three times more than SS provided. Of course this city's results may be an aberration, or there may be some reason that investing retirement funds in the stock market won't work on a national scale. On the other hand, it might have been a solution for the otherwise-certain insolvency of the SS trust fund.

But to the Democrat congressional leaders, none of this mattered: They decided this couldn't be allowed to happen--not even a small-scale test of the idea. They declared SS reform "dead on arrival," then joined with their media allies in creating such a huge wave of scare stories that the GOP gave up the fight.

Interestingly, not a single reporter asked the complaining Dems what changes *they* would make to solve the rapidly-approaching insolvency. In other words, the media were happy to help the Dems kill Bush's proposal without even allowing an official study, even though they *knew* insolvency was inevitable if no changes were made, *and* had no proposed solution of their own.

This is partisan obstructionism at its worst.

In effect, the Democrat congressional leaders have chosen to ignore the problem. They can't possibly believe ignoring the problem will make it go away. Perhaps they think that the government is so powerful (as they feel *they* are) that it can simply borrow the money it needs to cover the insolvency with no consequences. But if that's their reason for blocking Bush's test of a solution, why aren't reporters getting them to go on the record about their plan to save Social Security?

But of course, the question answers itself: The MSM and the Dems are allies in their hatred of Bush and conservative principles.

What kind of person sees a coming wreck and still refuses to change course? Would Democratic leaders rather defeat a plan from Bush than try something that just might save Social Security? Amazingly, the answer seems to be yes.