Eliminating Corporate Welfare Could Free Up Funds for Social Security Reform
Doug Bandow, a nationally syndicated columnists, is a senior fellow at the Cato Institute and the author and editor of several books, including Tripwire: Korea and U.S. Foreign Policy in a Changed World.
The president and Congress have promised a balanced budget by 2002, but a recent poll found that just 17 percent of Americans believe the budget will then be balanced, the same percentage who think space aliens are now living on earth. And people’s skepticism is warranted. Congress actually added $220 billion in new outlays through 2002, spending virtually the entire financial windfall from a growing economy. There is no cushion if the economy turns downward. Moreover, balance will be achieved only if the budget cuts promised in 2001 and beyond—three-fourths of the supposed total savings—actually occur. In effect, present legislators voted to have future lawmakers make all of the tough decisions.
But the real budget crisis occurs when the unfunded Medicare and Social Security bills come due. Before the recent budget compromise, Medicare, which provides health care for the elderly, was expected to go broke in three years, by early 2001. The new legislation supposedly saves $115 billion through 2002, but much of that is fiscal sleight of hand. Even if the numbers were honest, however, the “reforms” would only put off the day of reckoning a few years, to 2008 at most. Then comes the financial tsunami.
Even worse, Social Security will run out of money by 2012, and possibly as early as 2006, if the economy worsens (the so-called trust fund is empty, filled with government IOUs, not cash). By 2015 the system will be spending $57 billion more than it is collecting; the revenue shortfall will be $232 billion by 2020. The deficits then quickly accumulate—an astounding $160 trillion through the year 2075.
At the same time, the system, due to years of rapid tax hikes, is providing a dismal return to beneficiaries. Some retirees are now collecting less than they and their employers put in. Their number will grow in coming years as Social Security’s return steadily worsens for younger workers.
The system is unsustainable because it is a public Ponzi scheme, under which current workers pay current retirees. Social Security seemed to work for years because 30 workers initially supported every retiree and more than 40 percent of potential beneficiaries died before collecting their first check. But when the Baby Boom generation begins to retire early in the next century there will be only two workers supporting every retiree, who will be living longer than ever. To maintain current benefit levels, warns the Social Security System’s Board of Trustees, would require payroll tax rates of 30 to 40 percent.
Half steps—some combination of tax hikes and benefit cuts—are no answer. Most would make the financial return even worse for current taxpayers. None would make the system sound. Several would generate almost as much political resistance as would privatization. All would merely postpone the crisis, cheating workers and retirees along the way.
In short, Social Security cannot be fixed. The only way out is to follow the Chilean model of switching to a private retirement system, where workers invest their own money for their own retirement, rather than turn it over to the government to pay current retirees. Such a system would not be difficult to implement in America: in essence, workers could invest their (and their employers’) FICA tax payments in IRAs. Social Security payments would diminish as fewer and fewer people (current retirees and those now close to retirement) relied on the system.
Most public officials privately admit the need for radical reform of Social Security and other entitlements, but publicly oppose any change that might risk their careers. Also of concern to even some advocates of privatization is the cost of the transition. For Washington to pay current benefits as workers were diverting their Social Security taxes into private retirement accounts would expand the deficit by an average of $86 billion annually (the number is sensitive to the underlying economic assumptions) over the next 16 years, after which privatization would generate net positive budget impacts, according to Peter Ferrara of Americans for Tax Reform. Thus, privatization would require significant tax hikes or additional borrowing, neither of which is desirable, or real budget cuts, which are desirable, but not attractive to a Congress that has been increasing outlays.
The answer is to find the right budget cuts: business subsidies. Congress could fund the transition to a private retirement system by killing one of the least justifiable and least popular expenditures of the federal government.
There is another reason to focus on corporate welfare. The greatest beneficiaries of Social Security privatization would be workers, who would enjoy a wealthier and more secure future. But business, too, would profit. Economist Martin Feldstein estimates the economic gain of privatization to be $10 to $20 trillion. (In contrast, the present value of the unfunded Social Security liability today stands at $9 trillion.) That means benefits not just for investment companies handling retirement portfolios. The higher rate of return on capital, growing capital stock, and larger national income that would result would benefit virtually every firm in America.
Many firms today live off the taxpayer. The 100 most egregious federal corporate welfare programs account for some $65 billion annually. Although Congress made modest cuts in business subsidies in 1995, it has upped outlays in succeeding years.
Ever wasteful are agriculture programs, which consume some $15 billion annually. Money goes to subsidize crop research, food production and exports, and land conservation. In 1995 Congress substantially hiked expenditures for the Market Access Program, which underwrites advertising for Campbell Soup foods, Dole bananas, Gallo wine, Mars candies, and Sunkist oranges overseas. Last year federal crop insurance was a big winner.
The Commerce Department also exists primarily to subsidize favored industries. Last year the House Appropriations Committee approved $361 million—more than requested by the Clinton administration—for the Economic Development Administration, long a fount of business pork. The Small Business Administration, which provides taxpayer largesse to smaller firms, received a significant budget boost for 1997. Independent agencies like the Export-Import Bank and Overseas Private Investment Corporation continue to enrich the largest corporations, like Anheuser-Busch, Boeing, McDonald’s, and Westinghouse.
Business also benefits from the Energy Department’s $6 billion worth of research and development activities and other subsidies, as well as big budget programs at the Interior and Transportation Departments. Another $15 billion worth of corporate subsidies, benefiting major computer makers, among others, are buried in the Defense Department. And there’s much more.
Killing these and other similar programs obviously won’t be easy. But despite the fearsome political reputation of some business groups, none of these programs has much popular support. Americans may be a generous people, but they aren’t clamoring for lawmakers to use their money to enrich the Fortune 500. After all, these subsidies, observe budget analysts Dean Stansel and Stephen Moore, “tend to have a Robin-Hood-in-reverse impact: redistributing income from generally middle-income taxpayers to the relatively higher-income owners and shareholders in the companies.”
Thus, axing corporate welfare should be a natural for Republicans who claim to support budget frugality and competitive markets, and Democrats who claim to favor the poor and equal opportunity. And if the proceeds were used to help finance the privatization of Social Security, which would spark a financial boom, even those businesses now subsisting on government hand-outs should be willing to yield up their benefits. This, rather than last year’s big budget “compromise,” would be a truly revolutionary package that could generate bipartisan support.
The only way to save Social Security is to privatize it. The best way to cut federal spending is to kick business off of the federal dole. When presented independently, the two arguments are intellectually powerful. If presented together, they would be a political winner.
