No Longer a Third Rail

Barry Goldwater's 1964 landslide presidential defeat can, in part, be attributed to his warnings about the pending collapse of Social Security and the need for reform. Ronald Reagan touched that "third rail" of politics when he spoke of the need for Social Security reform. For decades, older Americans made it clear that political suicide was synonymous with warnings of Social Security disaster and talk of reform. The only "reform" they'd accept was higher FICA taxes levied on workers and bigger benefit checks to them.

From a self-interested point, this is rational. After all, why should Social Security recipients or politicians be concerned about the system's total collapse in 2030? Neither will be around to share the blame or feel the pain. Also, older Americans vote in much greater numbers than younger Americans. In the world of politics, you dump on people who can't dump back on you. Because of young people's low voting turnout, politicians have incentives to rip them off in favor of older people, or more politely said: engage in intergenerational wealth transfers.

The good news is that more politicians are now being candid about Social Security. Much of that is due to the fact that Social Security collapse is becoming apparent and undeniable and there are a greater number of Americans who'll be around for it. Indeed, more than one-half of today's population will be around for the beginning of the end that actually starts in 2010 and explodes around 2030.

Senator Patrick Moynihan (D. N.Y.) has offered a plan that features a payroll tax cut from 12.4 to 10.4 percent. Workers could take that two percent and invest it in a tax-deferred retirement account. With a modest inflation-adjusted return of 4 percent, such an account would yield $350,000 at retirement for the $30,000-a-year worker.

Senator Phil Gramm's (R. Texas) plan features a literal one-up on Moynihan's. Gramm proposes to cut the payroll tax from 12.4 to 9.4 percent. Workers would be allowed to put that three percent into private retirement accounts. When that worker retired, having put his money in a low-risk investment portfolio, he would have enough money to purchase an annuity that would pay him more than what he'd get from Social Security.

Both plans have other features but in each plan retirement accounts would become the property of the worker. That's not true about Social Security. In Nestor vs Fleming (1960), the U.S. Supreme court ruled that individuals have no right to Social Security benefits based upon the taxes they paid. Workers have rights to only what Congress chooses to give them.

Moynihan and Gramm are to be applauded for their political courage but we must send them a message: If our putting two or three percent of payroll taxes into a private investment portfolio equals or beats what we'd get from Social Security, why not scrap Social Security altogether and allow us to invest the whole 12.4 percent? If Moynihan and Gramm are honest, they'd say "We need us in the system for the transition period to pay off today's Social Security commitments, plus we prefer money coming to Washington rather than Wall Street."

There's actually a plan superior to Moynihan's or Gramm's. In Chile, they've completely and successfully privatized Social Security. Jose Pinera, of the Washington-based Cato Institute has made a persuasive argument for U.S. adoption of the Chilean plan. Let's hope that the timid steps taken by Moynihan and Gramm ultimately lead to privatization. Complete privatization would bring the greatest benefits to Americans but it would be a disaster to the Washington elite who want to control our lives.

Walter E. Williams
C22-98
April 30, 1998
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