When I worked in corporate America, my job was to clean up projects that had gone horribly awry. By the time I arrived, millions of dollars would have vanished, and my job was to salvage the program. In all of my projects, no matter the size or the cause of the breakdown, there was always a corporate patron who thought we could fix the effort by expanding its size.
My stroll through memory lane is in part in response to an article that I read on the internet about Social Security by David Barnes. He recognizes that Social Security is a raw deal, but suggests that it can be fixed with flexibility and fewer clicks.
It’s Not Working
For the love of everything, if you are going to end Social Security – just end it. Here is the problem: for every $1 that the system has ever collected, the greatest accomplishment of government has created nearly $2 of promises that it can’t keep. This isn’t a demographic issue. This is a system completely out of control.
Most Americans do not understand what the program does, or why it is broken.Yes, we are living longer. Most of that change in overall life expectancy has occurred before the age of 5. That force tends to make the system more solvent rather than less.
Yes, we have fewer workers per retiree. But each worker now pays as much as 20 times what workers did in 1952. So if we were to keep the worker-to-retiree mix constant on a 1950s basis, the program would have nearly 60 workers for every retiree. This isn’t a question of revenue.
People call it welfare. Characteristically, welfare is a government program which provides for the needy. Social Security takes money from those in poverty, and gives much of it to people not remotely close to qualifying as “in need.” Bernie Sanders and his wife, for example, collect nearly $50 thousand per year in benefits.
People call it a safety net. Andrew Biggs, AEI’s scholar on retirement issues, reports that 1/5th of the lowest-income seniors are not even eligible for benefits.
In short, most Americans do not understand what the program does, or why it is broken. We love the benefits, but hate the cost. It is all but human nature to believe that the solution is to make the program larger.
Bigger Doesn’t Always Mean Better
Typically, when people think about expanding Social Security, they tend to think of Hillary Clinton or Bernie Sanders. Yes, Bernie Sanders has a plan to increase the average level of benefits for retirees by $65 per month. Most of the increase would be spent on wealthy retirees.
The irony here is that no one puts forward an expansion the size that Mr. Barnes contemplates. The conversion of Social Security to a system of personal accounts might cost as much as $30 trillion.
The math of this change is very simple. Either we employ a massive alternative tax to pay the benefits of existing retirees, or we tell existing retirees to pound sand. If the system is going to continue to pay benefits, every dollar diverted from Social Security must be replaced by a tax of a different name.
What would the average American get for $30 trillion? He would get the privilege to save for his own retirement. Instead of 12.4 percent of wages going to Social Security that provides a compulsory pension, he would lose 12.4 percent of wages to Social Security that provides forced savings.
Savings may be a good thing, but is the government able to promote it? Home ownership was deemed a good thing, but in the process of encouraging this virtue, the government triggered a bubble in one of the most stable asset classes that nearly brought down the entire economy.
Today, it is true that Social Security is a broken pension. But why does anyone think that the government will do a better job with forced saving? The retirement services business which is run at the individual level is infinitely more complex than the pension business which is at the group level.
To those who think Social Security should be a safety net, an idea that even FDR completely rejected, I have to ask: why keep the program? Just end it, and transfer the resources to an actual welfare program. Today, Social Security reform isn’t about fixing the program. It is about creating something that we can call Social Security which will not bankrupt the nation.