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My Opinion of the Moment

Privatizing Social Security: A Solution Without a Problem

When you tear a small hole in your pants, one that will get larger as they're worn, do you patch them or throw them away? Those who patch will likely approve what I have to say. Those who throw might like privatization.

I use that analogy because we need to be straight about what privatizing Social Security means. It isn't reforming the system, or fixing it, it means making a whole new system. That might be fine if the system was crumbling, but it isn't. In fact, the perils of Social Security have been drastically oversold. It's been made into a tenet of young adults that Social Security will be long gone by the time they get to retirement. This alleged doom gets far more play in the mainstream media than far worse problems in Medicare. The other promoters of the falling sky are privatization proponents who dislike Social Security because it's a big government program. Privatization is preferable even if it's more costly, less efficient, and even if Social Security were running perfectly. They can't be blamed for using the real problems to make their case, but besides the perils of privatizing, the assumption is wrong. Social Security isn't in as much trouble as we think, and it can be fixed with much simpler solutions than a whole new system.

Just so we're clear: this is a pay as you go system. The money comes in, it goes out. Revenues have been running ahead of benefits, and that extra revenue is the trust fund. The coming trouble is that around 2010, benefits will be more than revenues, and around 2030 the trust fund will be gone. Here's what's less commonly known: those projections are nearly a worst case scenario. They assume almost flat economic growth. Only an outright depression would be worse. Those projections are possible, but we've never had so awful a 30 years, even including the Great Depression. Meanwhile, if we have another 30 years like the 1990's, equally unlikely but possible, there will be no shortfall, and no depletion of the trust fund.

Lesson Number One: Let's be pragmatic instead of ideologically pure. Social Security has worked very well at its task of alleviating poverty among the elderly. It shouldn't be dumped unless it's going completely in the tank, which it isn't close to doing.

Even if pessimistic projections of economic growth and revenue shortfalls prove true, there are much simpler solutions, and the two that follow fall in the "kill two birds with one stone" category.

What's not as commonly known as it should be is that there is an salary cap on the FICA (Social Security) tax. Nothing above $68,000 a year gets taxed (someone please correct me if I'm wrong about the precise figure). Since it's a flat tax, that means the higher your salary, the lower the tax rate. How much more revenue would there be if all salary income were taxed? I'd certainly like to know before scrapping the whole system. Removing the cap would at least buy a lot of time, and I suspect it would cause an indefinite surplus which would make it possible to lower the tax rate. Meanwhile, some regressivity is taken out of the system, making for a fairer tax.

Alternatively, we could raise the retirement age to 70, meaning we pay in longer and withdraw less. The downside is we have to put off our retirements. There will also be those who are physically unable to work that long. They will have to live on disability and workers comp programs which carry the welfare stigma that Social Security is free from. However, the difference might be enough to keep the system solvent indefinitely. The reason for the danger of insolvency in the first place is our aging population and increasing lifespans mean fewer workers per retiree. Presumably then, more people are capable of working to 70. Meanwhile, if we have labor shortages, we need older people working anyway if they're able. And let's not forget that some retirements are involuntary. Fewer of those seems like a good thing, especially if the result isn't unemployment for younger workers.

The salary cap has always grated on me, so removing it is my preferred solution. Besides, I might like to retire at 67 (someone correct me if I'm wrong on the year--I think that age was set for everyone born since 1961). Other possible reforms include raising the tax (I bet I can fit the supporters of that in the seat of my truck and still have space for my backpack). A possibility often talked about is means testing benefits, which risks turning Social Security from an insurance program into welfare, and we all know how popular welfare is. The harsh reform would be to cut benefits, which asks our poorest to make the sacrifices (Reaganomics lives!).

Lesson Number Two: The simplest solution is usually best. There are several solutions that are simple, at least by comparison to replacing the whole system. Sometimes, the government does work.

If anyone out there has heard the arguments for privatization and thinks it sounds so wonderful that it should be done despite all I've said above, consider this: the old system will remain. What, two systems? Why? Simple. Some people will find their investments failed. There will remain a need for disability payments and survivors benefits, unless we're going to tell all these people, "Your private account is too small. Too bad." Forget theory. When it gets down to it, we're disinclined to throw people out in the cold, even if their own decisions were to blame. That means the current system will exist, even if fewer checks are going out. We'll still be taxed, still pay administrative costs. What's the point of two systems?

Lesson Number Three: Privatization is a marvelous way of adding huge administrative costs and bureaucratic inefficiency.

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