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Jon N. Hall's Views on Social Security and the Deficit
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Privatization and the deficit… by Jon N. Hall…September 7, 2005
“Private property” is so cool. It motivates like nothing else. Naturally, I’m a big believer in President Bush’s vision of an “ownership society”. Which is not at all radical, nor un-American. Indeed, it is entirely consistent with the age-old American Dream. But if any Social Security privatization plan were to incur a run-up in the deficit, I couldn’t support it.
Social Security reform may well be tabled for this year, and next year there’s an election. We’re getting ever closer to D-day, that day in 2017 when revenue from the payroll tax is insufficient to pay the benefits of retirees. And the payroll tax surplus is set to start shrinking before the end of this decade. The longer privatization is put off, the more unattractive it becomes in terms of the deficit. We should have privatized back in the 1980s, when we started running these huge payroll tax surpluses. (You can read my privatization plan here).
The US Congress wrote and passed budgets that produced real surpluses in each fiscal year from 1920 through 1930. But from 1930 until the late 1990s, Congress ran budget deficits more than 90% of the time. And since 1930 the US has become more and more a welfare state where social programs, or entitlements, have grown and grown. Social programs now account for way over half of the federal budget, and retirement benefits (Social Security, Medicare, etc) are the biggest item in the budget—bigger than Defense, bigger than Homeland Security, bigger than interest on the national debt. With baby boomers soon to start dipping into Social Security and Medicare the question becomes: As a percentage of the budget, just how large are we going to let these entitlements become? Is there some outer limit even liberals won’t go beyond? When entitlements are 80% of the budget? 90%? When?
Such questions receive far too little attention in the current debate over reforming Social Security. Federal retirement benefits, especially healthcare, have a virtually unlimited appetite and could well eat up every tax dollar if we don’t do something, and soon.
In order to salvage something out of this Congressional impasse on Social Security reform, I propose that Congress pass an ironclad, no-way-around law that requires all redemptions of treasuries held by the Social Security Administration—the so-called “trust fund”—to come only out of general fund surpluses. That’s the long and short of my law, and it should be enacted regardless of whether we privatize Social Security or not. There would be no cashing-out unless the budget were balanced and running a surplus. Such a mechanism would put a check on runaway spending, taking spending off of automatic, as it were, and would prevent the country from being held hostage to the injudicious promises Congress made to get the elder vote. We wouldn’t have to print money, float new debt, or sell Yellowstone to China or Ted Turner to make good on the IOUs in this phony “trust fund”. Congress didn’t get its hands on any Social Security funds except for surplus; and likewise, Social Security shouldn’t either. Besides, if Congress had really meant for us to have a trust fund, it wouldn’t have spent it.
Although this idea helps the deficit, it doesn’t address the problem of Social Security solvency. However, it doesn’t put any other restrictions on how Congress could deal with that problem. Congress could still hike retirement ages, or raise tax-rates or whatever, but it couldn’t get some automatic infusion from the general fund. And Congress would have to take the political heat for whatever means it used to deal with the problem.
An under-appreciated feature of the current system is what happens when the “trust fund” runs out, currently projected for 2041. And what happens is benefits will be cut to match revenue. We should move that up to the present through the introduction of means testing. Those in the upper-middleclass should not only accept benefit cuts, they should enthusiastically embrace them. Because if we keep paying benefits at the current clip, you know who’s gonna pay for them? It’s you, my middleclass friend. So would you rather pay lower taxes now, or trust the government to give you a slightly higher benefit when you retire?
The introduction of means testing would act as a backdoor to privatization. Because if high-earners understand that they’re in for some cuts in their Social Security checks, they’ll be motivated to save and invest more to make up the difference. And means testing would help to freeze Social Security as a percentage of the budget.
Here’s the situation: We have, and will continue to have, hundreds of billions of dollars pouring in from the payroll tax, and it’s more than enough to insure that retirees won’t freeze or starve. If they don’t quite have enough for a second cruise each year, they’ll just have to tough it out.
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Privatization: the real “nuclear option” for Social Security. Jon N. Hall … Dec 5, 2004
In the aftermath of the bursting of the stock market bubble, baby-boomers will need to adjust their retirement plans, as $7 Trillion—that’s with a “T”—of market cap had vanished, decimating the boomers’ private retirement portfolios. From its all-time high in March 2000 to its subsequent low 2 and a half years later, the NASDAQ lost 77.9% of its value. Such meltdowns have given Democrats their ammunition to criticize plans to privatize Social Security, and they are justified in doing so, because the bubble is not the only time in recent years when the stock market has misbehaved. For instance, the DJIA moved sideways from 1967 to ’82. You would have been just as well-off to have stuffed your money under the mattress, and far better-off to have put it in an interest-bearing checking account, than to have invested in an index fund that tracked the Dow during those 15 years. It seems unlikely that we will see anytime soon another stock market as irrationally exuberant and as fraught with froth and fear as the market of 1998 to 2002, and that’s a good thing.
The problem with the privatization plans is that they don’t go far enough. Let me float a plan that addresses the problem of safety in social security privatization and is, in my humble opinion, more truly conservative.
What is right about the plans presented so far is that they’d limit you to investing in only the safest stock market instruments. This part of the plans is unassailable. And in my plan you would not be allowed to invest in derivatives, hedge funds, dot-coms, soybean futures, or the like. Nor would you be allowed to invest in single stocks either, even blue chips; do that with your non-Social-Security monies. Instead, you’d have an array of baskets of stocks to choose from; mutual funds, index funds and, my favorite, Exchange Traded Funds (ETF). Such instruments spread the risk, and are the exception to the rule of not putting all your eggs in one basket. (In the interest of full disclosure, I own shares in an ETF, the NASDAQ 100 Trust, sticker symbol QQQ if you want some.)
But what about bonds, you ask. Well, this is a privatization plan after all, so we wouldn’t allow investment in government bonds. No federal treasuries, municipal bonds, or any investment sold by any government would be allowed. Only corporate bonds in the most rock solid companies would be allowed.
But investing in stocks and bonds is not the centerpiece of my plan, nor is it even required. What my plan does require is that a substantial portion of the diverted monies be saved in FDIC-insured bank deposits. Yes, you read right: stodgy old bank accounts, mostly certificates of deposit. And what’s more, if you wanted to save all of your diverted monies, you would have the option of doing so. There is no investment on this planet that is as safe and as sound as bank deposits insured by the FDIC, and which are further backed-up by the houses, businesses and other properties that serve as collateral for the loans commercial banks make with those very deposits. The portion of the diverted monies that would be required to go into savings would be set at your choice of either a percentage (I’d recommend 50%) or a dollar amount (which would vary with inflation). Once the savings target has been hit, the remaining diverted monies could be invested in stocks and bonds. Low-wage workers who couldn’t meet the dollar-amount target would have to save at the percentage target, but would still be able to invest in the market. Now how radical is that? We’ve heard for years how abysmal we Americans are at saving. Doesn’t this plan fix that? I can’t see how this savings requirement would be anything but great for the banking industry, and the CDs would earn the best interest rates, as they would be locked-in until retirement. On the issue of safety, this savings requirement utterly refutes the Democrats’ criticism of social security privatization: Who in their right mind could possibly be against putting money in the bank?
So far, I don’t see how any rational being could quibble with my privatization plan too much. But get ready to rumble, because now we’re heading off into uncharted waters, to mix a metaphor. We’re gonna be talkin’ about what Al Gore would most assuredly call a “risky scheme” that traduces his idea of the “lock box”. The New Dealers amongst you may well quiver with indignation. So fasten your seat belt and batten down the hatches.
First of all, this plan of mine is NOT for everyone, only the privileged few. And if that’s not enough to get your egalitarian panties in a bunch, unlike the other privatization plans, my plan is mandatory, not voluntary. And before your bleeding liberal heart has a myocardial infarction, I aim to privatize ALL of this select cohort’s payroll taxes, not just a part of it as has been proposed in other plans. I know, I know; I’ve been referring to “diverted monies”, but that was just to get you to read this far, because what I’m really proposing is to privatize the entire payroll taxes of every last teenybopper who has their 18th birthday in the year of the plan’s enactment, or thereafter.
I’m talking about having two systems running simultaneously, a totally private system for the kids, and the current system for the rest of us. The current system would fade away in 100 years or so. No changes would be made for current and near retirees; the Greatest Generation will have their social security just as they have been promised. But starting with my generation, the boomers, and maybe some of the younger folks in the Silent Generation, there would be changes. But we boomers should accept these changes so that our grandchildren will have a better, more secure system.
A worker making $40,000 a year will have $3,000 each year skimmed right off the top of his paychecks and sent to the Social Security Administration. Over the course of a 40-year career, $120,000 will have been taken out of his wages for the so-called payroll tax, or FICA. If he were to get raises, then we’re talking even more money for the SSA. In my plan, half of that money, or $60,000, would have been saved. It would be sitting in a bank account waiting for him to retire. And with even modest interest rates, that $60,000 would have grown substantially. The other half could also have been saved, or invested in the market. The point is: Your social security will be there, waiting for you—unlike the current system. The current social security system operates entirely on a cash-flow pay-as-you-go basis; what comes in, goes immediately out to retirees. Not a single penny of the social security surplus has ever been saved or invested. Instead, these surpluses have been spent on items that having nothing to do with social security. The columnist Donald Kahl once quipped that, “The first thing you need to know about the Social Security Trust Fund, is that there is no such thing as the Social Security Trust Fund”.
And another thing: You do not “own” your social security. Social security did not come down from Sinai etched on a stone tablet, nor is it found in the Constitution. Rather, it is strictly statutory, i.e. a law, and as such can be taken off the books. I can only speak for myself, but I don’t want to be dependent on the kindness of strangers when I become decrepit and senile. I’d rather “own” my retirement, thank you very much.
But wait; there’s more; we haven’t even gotten to the other half of my plan. So far we’ve only been looking at the employee side of Social Security. Now we need to look at the employer side of the system. New Dealers will be relieved to know that my plan leaves that the way it is; employers would continue to send the same percentages in to the federal government, just as they have been for lo these many years. The employer side of the system would continue to operate on a cash-flow basis, and would be used to pay for the transition out of the old system. When the vanguard in the new system begins retiring, the employer contributions would pay for Medicare. After those on the old system have died, the funds available for Medicare would be much larger than today. Also, the employer side could be used to help the indigent elderly. In short, the employer side would be the “public” part of the new system. So, we’ve preserved exactly one half of the old system and expanded Medicare.
Social Security was born of a noble impulse: the desire to help the elderly. But over the last 60 years our Social Security system has gotten larded up with programs, like Supplemental Security Income, which have little to do with retirement. Those programs would need to be folded into regular welfare, where they should have been in the first place. And the Social Security System has certain inequities. One glaring inequity is the way the system treats single folks. Don’t single folks have loved ones too? Why shouldn’t they be allowed to leave their social security to their significant other, as the married are allowed to do? A private system, where retirees “own” their retirement, fixes that by rendering it moot.
To be fair, there is a perfectly good reason why our current Social Security System is structured the way it is, and it has nothing whatsoever to do with ideology, social justice, or any of the other things that liberals are so concerned with. Rather, it is entirely technological: We didn’t have computers in the 1930s, when the system was conceived and implemented. But now we do—have computers, that is—and every moment of every day they’re keeping track of countless transactions all around the world, and if there is a hiccup it’s usually due to some careless human. Make no mistake, without computers the modern world, as we know it, would come crashing down about us forthwith and we’d be in one sticky wicket, mark my word. But back in the 1930s today’s world was all science fiction, so they had just one account, and that, with the federal government. The system I’m proposing is to be sure far more complicated in terms of the myriads of accounts, but hey, the computers can handle it. The contemporary financial world is far more complicated than that of the ‘30s, but latter-day New Dealers seem to be committed to their ancient programs.
So to recap, this system I’ve proposed does the following: 1. Rescues privatization from legitimate concerns about safety. 2. Creates an “ownership society” by demanding that workers save, and, if they wish, invest. For the first time in its history, the Social Security system will actually be putting money aside, not merely spending it. 3. Provides for a more gradual transition than other plans. 4. Preserves the existing system exactly as it is for current retirees. 5. Saves one half of the current system, the employer side, for Medicare and welfare for the elderly. 6. Robs Congress of its special incumbent-protection slush fund (the social security surplus) that Congress has been robbing since the 1980s for its own purposes.
I am not a policy wonk, nor a fellow at some think tank, but I think my ideas have some merit and ought to be considered. My plan seems cleaner and purer than partial privatization, and would help create a new society of a now-vanishing breed—adults. Adults: Folks who can defer gratification, and save and invest for tomorrow.
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