The Myth of Social Security's Imminent Collapse

Thirty years ago, when Barry Goldwater proposed making Social Security voluntary, he was dismissed as a lunatic. Now, however, the radical transformation of Social Security--essentially its privatization--is the consensus among the political class and the pundits who serve them.

The strategy of the privatizers is proving quite successful. Sow doubts about the future solvency of the system. Chip away its near-universal political support by taxing benefits of "affluent" retirees, periodically lowering the definition of affluence. Encourage the "affluent" retirees of the future to provide for themselves, because of the system's wobbliness. And eventually turn the public pension system into welfare for the elderly poor--an easy target for cuts--while leaving the middle class and rich to fend for themselves. This isn't only happening in the U.S.; it's happening around the globe.

This might be dismissed as conspiracy theorizing--if you haven't been reading publications of international organizations like the World Bank, IMF and the Organization for Economic Cooperation and Development. (See,for example, the OECD's 1988 report, Reforming Public Pensions, which is full of advice on incremental reforms to "what was only a couple of decades ago considered as a central achievement of the welfare state [but which] is now being evaluated differently.") There, they've been quite explicit about what they're up to, because they're writing for an elite audience. But when journalists write for the masses, they have to be more careful.

Take, for example, a Time magazine cover story from March 20, 1995, headlined "The Case for Killing Social Security." The article opened by citing the cretinous Sen. Alan Simpson (R.-Wyoming), who "confronted" the Social Security Commissioner with "a poll showing that more people under the age of 35 believe in UFOs than in the prospect that Social Security will pay them benefits upon retirement." The article went on to recite the usual statistics about the system's imminent bankruptcy, as the boomers and then the Xers enter their golden years. The article concluded with a menu of options--privatize the whole system, cut benefits, or means-test them. A sidebar touted the virtues of Chile's system, the privatizers' favorite model, which was inaugerated by military dictator Augusto Pinochet.

Almost no one bothers to investigate the claim of Social Security's coming insolvency, which is based on projections in the annual report of the system's trustees. I did (Left Business Observer, 12/22/95), and discovered that the projections assume the economy will grow an average of 1.5 percent a year (after inflation) for the next 75 years--half the rate of the previous 75, and matched in only one decade this century, from 1910-20. Even the 1930s, the decade of the Great Depression, saw a faster growth rate.

What would happen if the economy grew at a peppier 2.2 percent rate? The trustees provide alternative projections based on that as well, and, gosh, the system remains solvent indefinitely. At 2.5 percent--still slower than the 75-year average--it runs a surplus. About the only other journalist to question the dire predictions for Social Security's future was Robert Kuttner, in his Business Week column (2/20/95).

And what about Chile, everyone's favorite model? Time pointed out that Chile's program was recently endorsed by the World Bank, an entity that has overseen the impoverishment of scores of countries in the name of free-market reform. Its endorsement should excite fear rather than respect, but that's another story.

The Bank's report, Averting the Old Age Crisis, recommended a three-pillared system: (1) a mandatory system, financed out of taxes, to provide a minimal base pension; (2) a mandatory savings scheme, in which every worker is required to contribute a portion of his or her earnings to a kind of IRA, to be invested in the financial markets; and (3), a supplementary system of private savings, also to be invested in the financial markets. This is essentially the Chilean model that Time--and Wall Street, hungry for the boodle--adores so much.

What's wrong with this? First, the present system is mildly redistributive, with the rich slightly subsidizing the poor in retirement. A private system would end that transfer. And second, a private system would be no better equipped to handle the bulge of boomer retirees beginning around 2010 than the present system. Right now Social Security is financed by a wage base that grows roughly in line with the overall economy; why should the stock market do significantly better?

Most people think that money invested in the stock market finds its way in to real investment in buildings and machines. In fact, almost none of it does; most firms finance real investment through their own profits. (Between 1901 and 1994, U.S. non-financial corporations financed less that 5 percent of their capital expenditures through the stock market.) The stock market is mainly an arena for the buying and selling of pre-existing shares and, through takeovers and spinoffs, of entire corporations. Investing in the stock market will no more create the wealth necessary to take care of elderly Boomers that Social security taxes do.

In Chile, according to Joseph Collins and John Lear's excellent new book, Chile's Free-Market Miracle (Food First Books), the public system's minimum benefit was $1.25 a day in 1988. Less than a quarter of all workers make enough money to qualify them for more than this risible minimum public benefit. Tellingly, the army and national police kept their own generous public systems; while the new plan may have been good enough for the masses, it wasn't good enough for the forces in charge. Of course, Time was silent on all this.

It's near impossible to find a dissenting view on Social Security anywhere in the press. Even the normally sensible Tom Tomorrow promoted the Imminent Collapse scenario, in a cartoon adorning a bipartisan New York Times op-ed piece by Sen. Simpson and Sen. Bob Kerrey, the pension-slashing Nebraska Democrat (5/23/95). Tomorrow's last panel claimed that the Social Security system is "on the verge of bankruptcy...and many workers starting out today suspect they are just as likely to win the lottery as ever receive Social Security benefits." The senators' article, wittily titled "How to Save Social Security," proposed allowing individuals to divert part of their Social Security taxes to an IRA-like account, and would permit the trust fund itself to invest in that magic money machine, the stock market.

The best commentary on the Slashers' piece was in, of all places, Barron's(5/29/95), the weekly magazine for investors. Columnist Alan Abelson sharply characterized the strategy of the privatizers: "The soft spot in any entitlement is that the recipients feel entitled. If, instead, they're made to feel slavishly grateful, then it's no great sweat to persuade them to accept a pittance instead of a plum. And to put them in the proper frame of mind, nothing is more efective than a whiff of destitution. Paupers...can't be choosers."

And as for the stock market proposal, Abelson, who's been covering Wall Street for decades, commented: "If Congress and the President put aside their partisan differences--and any residual vestiges of prudence--and swiftly turn [the proposal] into law, there may be time enough for the Trust Fund to load up on stocks before the next secular bear market. In terms of expediting the pauperization of geezers and completing the marvelous scheme to shrink benefits and save Social Security, the sheer brilliance of the concept cannot be gainsaid. (Did we neglect to mention that the saviors are all covered by retirement plans that are separate from Social Security?)" Shades of the Chilean police.

To say that on the op-ed page of the newspaper of record would, of course, be irresponsible.