Rampant Bull

In 1981, a young aide to Ronald Reagan named Peter Ferrara proposed a scheme to privatize Social Security. At the time, a serious shortfall was projected in the system's long-term financing. Even at his zenith, however, Reagan knew better than to tamper with America's best-loved (if most redistributive and costly) public program. Ferrara, the author of a Cato Institute book titled Social Security: The Inherent Contradiction, proposed to scrap the whole system in favor of private individual retirement accounts (IRAs). This was surely dear to the hearts of Reaganites-but Ferrara was kept far from the administration's Social Security policy, and even farther from the press.

Social Security's financial crisis is exaggerated, but its political vulnerability and the allure of wealth creation are real. Herewith, a rebuttal and a proposal.

A year later, a bipartisan commission headed by Alan Greenspan, with Democrats Daniel Patrick Moynihan and former Social Security Commissioner Robert Ball playing key political-broker roles, came up with a fix: a slight cut in the inflation-adjustment formula; an increase in the taxable income base; a gradual raising of the normal retirement age by two years; and the taxation of Social Security benefits received by well-to-do retirees. Ferrara stayed muzzled. Privatization stayed off the agenda. In 1983, Congress overwhelmingly approved the Greenspan plan. And Social Security stayed intact.

Republicans of that era understood that messing with Social Security was political death. Barry Goldwater had opined that Social Security might be made voluntary, and suffered mightily for it. And Democrats, however shell-shocked by the Reagan Revolution, grasped intuitively that nothing quite so usefully differentiated them from Republicans as their unwavering defense of Social Security. It was the best they had.

Social Security serves, and reinforces, a kind of collective solidarity rarely articulated explicitly in the ordinary idiom of American politics. But it has precisely expressed the modern liberal view of social entitlement-the collectivity taking responsibility for unearned misfortune, not by singling out (and thus stigmatizing) the certifiably needy, but within a universal system. This approach offers a logic that is both moral and political, both redistributive and inclusive. It cultivates a politics of social empathy and, in turn, an astonishing level of political support for a surprisingly social concept in a fiercely capitalist society.

Social Security provides not only a floor for retirement income; it also provides "survivorship"-life insurance-benefits in cases of the death of a breadwinner and disability payments when a wage earner is unable to work. So it has intergenerational elements, though they are too little appreciated. Even middle-aged families that get no direct governmental assistance still benefit from having their elderly parents provided for. Its payout formula is progressively tilted, so that relatively low-income wage earners get a retirement return on their Social Security taxes at more than triple the rate of high-income wage earners. As a result, Social Security provides more income redistribution and antipoverty benefit than all other government programs combined. Yet it retains the fierce loyalty of the middle class.

All of this beautifully expresses the concept of social insurance-the idea that life is full of unforeseen turns, for which only society as a whole can provide protection. Who knows which of us will be widowed, disabled, dealt cruel blows by random economic reverses, or left to outlive personal resources? Social Security provides a universal defense against all of these. Since the explicit benefits go mostly to retirees, Social Security has suffered little of the political vulnerability that has plagued welfare-state benefits for people in the prime of life, based on the concern that such benefits create a "moral hazard" of inducing indolence or dependence. Like children, retirees are expected to be dependent (and even a little indolent). Since everyone contributes payroll taxes during working life, the program feels like an earned entitlement, not like a government handout. And unlike welfare, Social Security is not means tested. Nobody comes around snooping into your bank account or requires you to "spend down" your personal assets or sell your house to qualify for benefits. And as defenders constantly point out, Social Security compares favorably with any private rival. It has far lower administrative costs, is totally portable, and is fully indexed for inflation. What could be better defended politically?

Fast forward to 1998. Several Democrats, led by Senators Robert Kerrey and Pat Moynihan, have now endorsed plans for partial privatization. There is a near universal sense that the program is in grave financial crisis. And the Clinton administration, having bought a little time by proposing that the budget surplus be earmarked for Social Security, is close to concluding that some form of privatization is inevitable. What happened in the intervening 15 years? How did privatization of Social Security go from an extremist embarrassment to conventional wisdom? And should Social Security's defenders shore up the status quo, keeping the program's redistributive and solidaristic aspects tacit-or build on the broad support the program enjoys to push its logic to a bolder level?


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Four factors have brought about this epic shift in Social Security's political vulnerability. Earlier issues of The American Prospect have treated several aspects of this story, so I will summarize briskly.

Demographics and flat wages. Social Security is, of course, financed by payroll taxes. But the past two decades have seen unprecedented stagnation in wage growth, producing a depression of Social Security's anticipated income stream. If the bottom two-thirds of the income distribution had the same share of national income in 1998 that they had in 1978, the Social Security shortfall would nearly vanish, even without higher overall economic growth.

Social Security's often exaggerated financial problems are usually attributed to the aging of the population and the "maturation" of the system. Workers started contributing in 1935, and the first pensioner collected the first Social Security check only in 1940. So for more than 40 years, the system had an abnormally high ratio of payers to recipients, as an entire generation went from early working age to retirement. During this period, the ratio of workers to pensioners gradually dropped from twelve to one in the 1940s, to five to one in 1960, to three to one today. This will decline further to about two to one by 2035, thanks to the birth dearth and the expanding normal life span. But thanks to the same declining birth rates, the ratio of workers to all dependents (young and old) is nearly constant for the next half century.

Much of this was anticipated. The system's original designers, President Franklin D. Roosevelt's 1935 Committee on Economic Security headed by Labor Secretary Frances Perkins, recommended that up to half of the system's cost eventually be financed by general revenues (to supplement the employer- and employee-financed payroll taxes that gave the system its "contributory" character). The additional funds were needed because its designers knew the dependency ratio would grow. But this was never done. Frances Perkins wrote in her 1946 memoirs, "Perhaps in 1980 it would be necessary for Congress to appropriate money to make up a deficit." She was off by three years.

The Greenspan plan of 1982-83, taking into account demographic changes, was supposed to stabilize the program for 75 years. What was not anticipated, however, was the wage stagnation. So despite demographic shifts, higher rates of economic growth or better income distribution would solve much of the problem. Dean Baker of the Economic Policy Institute calculates that the slight improvement in the unemployment rate now anticipated by the Congressional Budget Office (5.6 percent versus 6.0 percent forecasted in the 1997 Social Security Trustees' report) will increase Social Security revenues by $333 billion over the next decade. A return in the rate of real economic growth to levels normal for most of this century would eliminate the shortfall entirely.

Ideological assault. Since the early 1980s, a steady tattoo of ideological opposition has challenged the system's solvency and its fiscal and political logic. By extension, opponents suggested that since younger recipients would never get their anticipated benefits, they would be wiser to put their money in the stock market. Fortuitously for them, the stock market cooperated.

For nearly two decades, investment banker and ideological impresario Peter G. Peterson has been predicting the collapse of Social Security and the ruinous impact of entitlements on the economy, in a series of partly ghostwritten books and articles, beginning with a tract titled "Social Security: The Coming Crash," published in the liberal New York Review of Books in 1982. These and similar works have made outlandish fiscal claims. Peterson foresaw payroll taxes at 50 percent of wages by 2040. Boston University economist Lawrence Kotlikoff, the inventor of "generational accounting," calls Social Security an ongoing Ponzi scheme.

In addition, neoliberal critics like Charles Peters and Mickey Kaus saw a system in which the future prospects of the young were greedily consumed by today's elderly, some of whom were not even needy. Peters regularly invoked his rich aunt who spent her Social Security check on Florida vacations. Such critics denigrated the logic of universal entitlement as nothing more than "bribing the middle class"-as if targeted outlays for the poor somehow offered an easier politics or a more attractive program.

Instead of viewing universal social entitlement as something that worked well for the young and old and needed to be extended to working families (for example, child care, medical care, lifetime learning), these neoliberals called for retrenchment and means testing. This, of course, would turn Social Security into another form of "welfare," with all the stigma and political isolation that entails.

So Social Security was already softened up both by ideological foes and by some nominally liberal allies. And since the mid-1990s, the campaign for full or partial privatization has been abetted by a sophisticated media and lobbying drive by bankers and Wall Street investment houses that stand to make fortunes as account managers, and by conservative groups ideologically opposed to social insurance. The State Street Bank has spent millions of dollars promoting privatization. The J. M. Kaplan Fund of New York has financed several right-wing groups advocating privatization, including the National Center for Policy Analysis, the Institute for Research on the Economics of Taxation, "Third Millennium," a letterhead organization posing as a mass-membership group of Generation Xers, and the National Development Council, headed by Sam Beard, a self-described liberal (allied almost entirely with conservatives) who thinks privatization, properly done, could broaden the distribution of wealth. In addition, the libertarian Cato Institute has poured millions into a privatization project under José Piñera, the former Chilean labor minister responsible for privatization of Chile's pension system. Cato was astute enough to capture the Web site address socialsecurity.org. Go there on the Internet, and you will find endless libertarian propaganda for full privatization.

This relentless campaign, in turn, has reinforced the conviction in the political center that Social Security needs major overhaul rather than minor surgery. A good case in point is the Pew Charitable Trust. Pew has put $12.5 million into a project called Americans Discuss Social Security. The ostensible text is that citizens need to become better informed about the issue, but the unmistakable subtext is that something is seriously amiss. Pew's materials use a rhetoric of "crisis." While the project's letterhead advisory board includes several Social Security defenders, they have no practical influence. In Pew's ubiquitous op-ed ads, critics and privatizers seem to get more prominent billing than the system's defenders. One recent spread in the Washington Post featured Pat Moynihan, a supporter of partial privatization, juxtaposed against the American Enterprise Institute's Carolyn Weaver, a supporter of . . . partial privatization. One of Pew's radio ads, which has since been pulled, had a latter-day Franklin Roosevelt imitator speaking an idiom of generational warfare, with an announcer adding: ". . . polls show that most young people believe the Social Security system will never be there for them."

Weak defense. The most surprising, and potentially fatal, aspect of the political shift has been the relative quiescence of the system's usual defenders. While individual groups, such as the Twentieth Century Fund and the Campaign for America's Future, are doing heroic work, there is simply no liberal counterpart to the right's multipronged campaign. As this issue of the Prospect was going to press, there was no organization or coalition coordinating the defense of the Social Security system. (One, belatedly, is due to be unveiled in late May.)

Why the feeble defense? For one thing, the most logical defenders were otherwise engaged. The AFL-CIO, reeling from the Teamsters scandal and gearing up to fight the right's state-by-state ballot initiatives to illegalize most of labor's political spending, has not made Social Security a priority. Labor's own polls have discerned that the disinformation campaign on the system's "crisis" has had an effect, and labor is reluctant to challenge frontally the public's preconceptions. Labor also had concerns that one fiscal device favored by many of the system's defenders-bringing new public employees into Social Security-would come at the expense of pension plans that now generously serve (heavily unionized) government workers.

The AARP, supposedly the behemoth of liberal Washington lobbies, has turned out to be a paper tiger if not a Trojan horse. The AARP has always been essentially an insurance marketing conglomerate that sometimes finds it expedient to pose as an advocacy group for the elderly. As such, it does incalculable damage to liberal causes, because it takes up a place that might be occupied by a genuine mass-membership organization. The AARP is now at best neutral in the privatization battle. Some of its wealthier members are attracted to a system of individual investment accounts. The AARP itself is already in the mutual fund business and could turn a nice profit from the sale and management of individual accounts. AARP Executive Director Horace Deets, appearing on Face the Nation in mid-April, declined to flatly oppose partial privatization.

One group that should have been a lobby for a strong Social Security system is the National Academy of Social Insurance, a group founded in 1986 by resolute advocates of social entitlement. But the National Academy (despite its name, it is not sponsored by the government) has gradually been infiltrated by conservative think tank activists, corporate employee-benefit managers, and even representatives of proprietary investment plans. As a result, the one high-profile coalition that might have stepped into the breech has been neutralized by its own high-minded inclusiveness. How like liberals!

Liberal economists and policy analysts have played mainly a defensive game, supporting a series of policy adjustments that many commentators have derided as "nip and tuck." Here, the debate is numbingly technical, and the liberal side lacks the drama and excitement of what appears to be a big new idea consonant with the pro-market sentiment of the age. Traditional Social Security defenders are uneasy about playing serious offense, for fear of giving legitimacy to any form of individual accounts.

Barring a shift in strategy, resources, and passion, the fight over whether to retain Social Security as social insurance could be a textbook case of how American liberals squandered their most precious programmatic and ideological legacy. Given this extreme asymmetry-those attacking America's most popular program having vastly more resources, visibility, and strategic purpose than its defenders-public debate has been tilted accordingly. For example, when the Clinton administration decided to launch a series of public forums on Social Security, it turned to two organizations to play point-counterpoint roles-the explicitly pro-privatization Concord Coalition and the AARP, the latter (mis-)cast in the liberal role but, in fact, soft on some form of privatization, too. The system's real defenders were left out in the cold. In the meantime, one press account after another has concluded that at least partial privatization is both desirable and inevitable.

Financial imbalance. Lending credence to this entire campaign is Social Security's real, if wildly exaggerated, financial imbalance. By the mid-1990s, the official projections (based on "mid-range" economic forecasts) showed the system ceasing to meet its full commitments by 2029 (recently recalculated to 2032). This projected shortfall, in turn, emboldened the critics. Several centrist Democrats embraced partial privatization, either because they felt some form of privatization was inevitable (Moynihan) or because they were part of the current of thinking that identified markets as modern and dynamic and state transfers as static and out of date (Kerrey).

Over a 75-year period, Social Security's anticipated revenues were deemed sufficient to meet 85 percent of its anticipated payouts. According to the official Social Security Trustees' report, the total 75-year shortfall equaled about 2.2 percentage points of taxable payroll. If there was little appetite for raising the payroll tax 2.2 points, other possible remedies included disguised cuts in benefits, finding new sources of revenue, or increasing the rate of return on Social Security's assets.

Last year a plurality of the Social Security Advisory Council (6 out of 13) proposed a blend of all three approaches. The group, led by former Social Security Commissioner Robert Ball, now the grand old man of Social Security, called for bringing in new public employees (this would generate more revenue than payout); making a small reduction in the inflation adjustment (a disguised benefit cut); imposing both additional taxation of benefits for the well-to-do and another small payroll tax hike in 2050; and other tinkerings. They also threw privatizers a curve. If the stock market is such a great deal, they proposed, why not leave the system collectivized but invest up to 40 percent of Social Security reserves in equities. (This curve, however, may boomerang, since it deprives the system's defenders of the argument that investment in the stock market is too risky for Social Security.)

Seven of the commissioners proposed either a moderate (five members) or a radical (two members) privatization scheme. Under the more radical scheme, about 40 percent of the current payroll tax would be diverted to a new system of mandatory personal accounts, leaving the basic Social Security benefit a flat $400 a month-well below the poverty rate for an elderly individual. The more moderate privatization scheme would cut Social Security benefits less drastically and add a new layer of private accounts financed by a 1.6-point hike in the payroll tax. Both the Kerrey and Moynihan plans are variations on the same theme-though to make matters worse, Moynihan's cuts payroll taxes substantially, adding to the system's shortfall and requiring an eventual 30 percent cut in benefits.



There are four basic criticisms of the privatization plans. First, they are not a solution to the real financial shortfall, but merely an opportunistic run at changing the system, taking advantage of concerns for its long-term solvency. By definition, any plan that diverts revenues currently dedicated to Social Security payouts only increases the shortfall. All of the privatization advocates who have faced this problem honestly have called either for tax increases, increased borrowings, or benefit cuts. But if such new taxes or borrowings were simply allocated to the present Social Security system, its shortfall would be solved. Indeed, as I will suggest, there are far better uses of new taxes to finance social insurance.

Second, any comparison of stock market returns with Social Security returns compares apples with oranges. As noted, Social Security is far more than just a pension system, and its payouts are government guaranteed. It is also deliberately redistributive. More than three-fifths of retired Americans derive at least half their income from Social Security; without it, half would live in poverty. Dedicating some of the payroll tax to a private account system would divert that much revenue into a system that is neither redistributive nor government guaranteed.

Third, the promise of higher yields through investment in equities is overstated and in any case does not require individual accounts, with all of the risk and overhead expense that change would entail. Administration of such accounts and broker profit would consume 10 to 20 percent of the benefits. If we as a society think Social Security reserves should be partly invested in the stock market, the system can do that-collectively-at lower cost and at lesser risk than if private stock fund managers are given the job.

Fourth-and the right surely understands this all too well-breaking Social Security into individual accounts would explicitly segregate the system's antipoverty component from its contributory aspect and thus erode the political coalition that now supports its solidaristic and universal character. Writing in 1985, in a Cato book edited by Peter Ferrara titled Social Security: Prospects for Real Reform, Stuart Butler laid out what became the right's privatization strategy. In creating individual retirement accounts, Butler wrote:


The final element of the strategy must be to propose moving to a private social security system in such a way as to detach, or at least neutralize, segments of the coalition that supports the existing system. A necessary step towards this objective is to honor all outstanding claims on the existing system. [Otherwise] the retired (or nearly retired) will strongly oppose any package that threatens to significantly reduce their benefits.

This strategy, of course, is exactly what the right has pursued. Butler couldn't have imagined he'd have Pat Moynihan as his paladin. Privatization, by design, would lead inexorably to more privatization, leaving a means-tested, underfunded welfare system as a rump.

In part, this is a debate about how many tiers of a retirement system we need and how to structure and finance them. Social Security was never intended to be the whole system. "Above" it are personal savings, IRAs, Keoghs, 401 (k)s, and private pension plans, all of which explicitly reflect earnings during working life. "Below" it are means-tested forms of aid for the very poor, such as supplemental security income (SSI). The system is unraveling both above Social Security and below it. Fewer Americans have employer-provided pensions; according to Brookings Institution economist Henry Aaron, only 3 percent of moderate-income Americans have IRAs; and means-tested social aid is declining in real, inflation-adjusted value. Social Security is the only part of the system that is universal and guaranteed.

Defenders of social insurance face an epic decision that is both philosophical and tactical. Do they stick to the "nip-and-tuck" script, run a public education campaign, and hope that the system's residual popularity carries the day? With every defection of a leading Democrat and with the escalating mismatch of lobbying resources, this course becomes ever less credible. Or do they try to outflank the right with something bold and new?

Here, liberals need to fight on two fronts. For the short run, we need a plan that challenges the crisis rhetoric, resists even partial privatization, reminds Americans just why Social Security is so legimately valued, and shores up its finances. The Ball plan, or something very like it, does the job. At the same time, the right has touched a popular chord with its proposals to allow the young to accumulate wealth. And the right's disinformation campaign has done serious damage to public confidence in Social Security. We do need something that builds real wealth, starting when people are young, and that expands the tacit intergenerational aspect of Social Security into something more tangible. The right, having opened the door to tax increases to finance their pet individual accounts, invites liberals to respond in kind with something bolder and more effective. This initiative should not substitute for a vigorous defense of the present system, which must remain as a centerpiece, but serve as a complement-to revive first principles, stimulate debate, and engage the young.



One big idea that might steal the right's clothes is a new system of what I have termed endowment accounts. Different versions of this have been proposed by Yale Law Professor Bruce Ackerman on the left, and pamphleteer Sam Beard and House Budget Committee Chairman John Kasich and Senate Finance Committee Chairman William Roth on the right.

In Ackerman's version, every American child would get $80,000 at birth, financed by a tax on wealth. In the Kasich and Roth versions, the budget surplus would finance a new system of individual retirement accounts. What differentiates the Kasich and Roth plans from other conservative proposals is that they would not divert any of Social Security's current revenue stream. Their plans, however, are unattractive on three grounds. The sums are puny; the finances are entirely dependent on the budget surplus; and there is no intergenerational dimension-only more retirement accounts. Still, it is noteworthy that two influential conservative Republicans have proposed a (modest) form of wealth redistribution-since everyone would get the same annual benefit, financed from general tax revenues. So a door has been opened.

In my version of the proposal, every American child would get $5,000 at birth. The money would be administered by the Social Security system and invested collectively in bonds and stock index funds but accounted individually. In other words, each American child would have a nest egg, of real wealth. For low-income children, the government would add $1,000 every year of childhood. Middle-income families would get a tax deduction for annual contributions of up to $1,000 per child. If a child's account received $1,000 for each additional year of childhood, with normal investment returns and compounding, about $50,000 would accumulate by the time the child turned 18.

Under my proposal, half of this accumulated money could be spent on college tuition, at age 17 or afterward. At age 30 or beyond, two-thirds of the residue could be spent on home ownership and/or lifetime education and job training. A tax deduction would continue to be available for modest annual contributions into the fund. Beginning at age 60, the residue could be withdrawn to supplement other savings for retirement. What remained could be passed along to heirs. This program, of course, is explicitly redistributive where Social Security is tacitly redistributive. But it builds on the tradition of universal free public education, the Homestead Acts, the GI Bill, and subsidized home loans-all programs through which society as a whole helps young people into the middle class.

This program of endowment accounts, which would cost on the order of $50-75 billion a year, could be financed by the projected budget surplus, supplemented by a lifting of the cap on income subject to Social Security tax and a surtax on very large incomes and estates. Unlike most proposals on the table, it would supplement rather than supplant Social Security. The proposal outflanks the right in several attractive respects.

First, it addresses the liberal goal of helping people of modest means to accumulate real wealth rather than just accounting claims against the Treasury. This is an idea the right appropriates-State Street Bank CEO Marshall Carter speaks loftily of helping working people accumulate wealth-but because there is little redistribution in most conservative versions, the real transfers to people of modest means turn out to be paltry. With the exception of Kasich and Roth (which are puny) and Beard (which diverts money from Social Security), all of the leading conservative plans base contributions to the proposed individual accounts on the pattern of an individual's earnings. This feature, of course, sacrifices the redistributive aspect of Social Security. And the more that individual accounts replace Social Security, the more redistribution and antipoverty effects are sacrificed. Endowment accounts, by contrast, would be highly redistributive. They would likely increase the national savings rate-but progressively.

More importantly, the endowment account approach accomplishes two other things of great strategic importance. First, it restores a politics of generational alliance. Young people are skeptical about Social Security in part because most have to wait decades to get tangible benefits. A system of endowment accounts would provide benefits throughout the life course. Further, it would entrust management of this new system precisely to the Social Security program rather than to thousands of private Wall Street middlemen-thus reinforcing the public system and its political support and ideology. Social Security would remain the centerpiece of a multitiered system. Compared with other nations, our Social Security program is already too meager. The ratio of U.S. Social Security benefits to pre-retirement income ranks tenth out of eleven advanced nations. It makes no sense to cut the program back further.

But it does make sense to supplement Social Security, both as a matter of equity and of politics. Far better than just playing defense, we need a grand debate about how to complement Social Security, based on first principles and ultimate ends. A new, wealth-broadening, intergenerational compact should be the high ground of that debate. To effectively defend Social Security, we need a bolder intergenerational compact-worthy of the liberal imagination that gave us social insurance more than 60 years ago.


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