Casper,
You think that one was bad, consider this from the Nobel prizewinner in
yesterday's NYTimes. The subtext could be, is it a three headed monster
or a puff of smoke? I wonder what he thinks about the future of work and
the availability of work in that future? What do you think Arthur, Ed,
Mike or any other out there more expert than this poor opera director. Oh
yes I am definitely one of the lower class types that he writes about in
the last few paragraphs. I put all my money into performance art. REH
January 11, 1999
Social Security Chimeras
By MILTON FRIEDMAN
he journalist Michael Barone recently summed up the
conventional
wisdom about reforming Social Security. "The content of
the reform is
fairly clear -- individual investment accounts to replace
part of the
government benefits financed by the payroll tax, later
retirement ages,
adjusted cost of living increases," he wrote in The American
Enterprise. And,
he added, "suddenly the money to pay for the costs of
transition is at hand,
in the form of a budget surplus."
I have italicized "part" and "costs of transition" because they
epitomize key
defects in conventional wisdom.
Social Security has become less and less attractive as the
number of
current recipients has grown relative to the number of workers
paying taxes,
an imbalance that will only get bigger. That explains the
widespread support
for individual investment accounts. Younger workers, in
particular, are
skeptical that they will get anything like their money's worth
for the Social
Security taxes that they and their employers pay. They believe
they would
do much better if they could invest the money in their own
401(k)'s or the
equivalent.
But if that is so, why replace only part and not all of
Government benefits?
The standard explanation is that this is not feasible because
payroll taxes --
or part of them -- are needed to pay benefits already committed
to present
and future retirees. That is how they are now being used, but
there is nothing
in the nature of things that requires a particular tax to be
linked to a
particular expenditure.
The link between the payroll tax and benefit payments is part
of a confidence
game to convince the public that what the Social Security
Administration
calls a social insurance program is equivalent to private
insurance; that, in
the Administration's words, "the workers themselves contribute
to their own
future retirement benefit by making regular payments into a
joint fund."
Balderdash. Taxes paid by today's workers are used to pay
today's retirees.
If money is left over, it finances other Government spending --
though, to
maintain the insurance fiction, paper entries are created in a
"trust fund" that
is simultaneously an asset and a liability of the Government.
When the
benefits that are due exceed the proceeds from payroll taxes,
as they will in
the not very distant future, the difference will have to be
financed by raising
taxes, borrowing, creating money or reducing other Government
spending.
And that is true no matter how large the "trust fund."
The assurance that workers will receive benefits when they
retire does not
depend on the particular tax used to finance the benefits or on
any "trust
fund." It depends solely on the expectation that future
Congresses will honor
promises made by earlier Congresses -- what supporters call "a
compact
between the generations" and opponents call a Ponzi scheme.
The present discounted value of the promises embedded in the
Social
Security law greatly exceeds the present discounted value of
the expected
proceeds from the payroll tax. The difference is an unfunded
liability variously
estimated at from $4 trillion to $11 trillion -- or from
slightly larger than the
funded federal debt that is in the hands of the public to three
times as large.
For perspective, the market value of all domestic corporations
in the United
States at the end of 1997 was roughly $13 trillion.
To see the phoniness of "transition costs" (the supposed net
cost of
privatizing the current Social Security system), consider the
following
thought experiment: As of Jan. 1, 2000, the current Social
Security system
is repealed. To meet current commitments, every participant in
the system
will receive a Government obligation equal to his or her
actuarial share of the
unfunded liability.
For those already retired, that would be an obligation -- a
Treasury bill or
bond -- with a market value equal to the present actuarial
value of expected
future benefits minus expected future payroll taxes, if any.
For everyone else,
it would be an obligation due when the individual would have
been eligible to
receive benefits under the current system. And the maturity
value would
equal the present value of the benefits the person would have
been entitled
to, less the present value of the person's future tax
liability, both adjusted for
mortality.
The result would be a complete transition to a strictly private
system, with
every participant receiving what current law promises. Yet,
aside from the
cost of distributing the new obligations, the total funded and
unfunded debt of
the United States would not change by a dollar. There are no
"costs of
transition." The unfunded liability would simply have become
funded. The
compact between the generations would have left as a legacy the
newly
funded debt.
How would that funded debt be paid when it comes due? By
taxing,
borrowing, creating money or reducing other Government
spending. There are
no other ways. There is no more reason to finance the repayment
of this part
of the funded debt by a payroll tax than any other part. Yet
that is the implicit
assumption of those who argue that the "costs of transition"
mean there can
be only partial privatization.
The payroll tax is a bad tax: a regressive tax on productive
activity. It should
long since have been repealed. Privatizing Social Security
would be a good
occasion to do so.
Should a privatized system be mandatory? The present system is;
it is
therefore generally taken for granted that a privatized system
must or should
be as well.
The economist Martin Feldstein, in a 1995 article in The Public
Interest,
argued that contributions must be mandatory for two reasons.
"First, some
individuals are too shortsighted to provide for their own
retirement," he wrote.
"Second, the alternative of a means-tested program for the aged
might
encourage some lower-income individuals to make no provision
for their old
age deliberately, knowing that they would receive the
means-tested amount."
The paternalism of the first reason and the reliance on extreme
cases of the
second are equally unattractive. More important, Professor
Feldstein does
not even refer to the clear injustice of a mandatory plan.
The most obvious example is a person with AIDS who has a short
life
expectancy and limited financial means, yet would be required
to use a
significant fraction of his or her earnings to accumulate what
is almost
certain to prove a worthless asset.
More generally, the fraction of a person's income that it is
reasonable for him
or her to set aside for retirement depends on that person's
circumstances
and values. It makes no more sense to specify a minimum
fraction for all
people than to mandate a minimum fraction of income that must
be spent on
housing or transportation. Our general presumption is that
individuals can
best judge for themselves how to use their resources. Mr.
Feldstein simply
asserts that in this particular case the Government knows
better.
In 1964, Barry Goldwater was much reviled for suggesting that
participation
in Social Security be voluntary. I thought that was a good idea
then; I still
think it is.
I find it hard to justify requiring 100 percent of the people
to adopt a
Government-prescribed straitjacket to avoid encouraging a few
"lower-income
individuals to make no provision for their old age
deliberately, knowing that
they would receive the means-tested amount." I suspect that, in
a voluntary
system, many fewer elderly people would qualify for the
means-tested
amount from imprudence or deliberation than from misfortune.
I have no illusions about the political feasibility of moving
to a strictly
voluntary system. The tyranny of the status quo, and the vested
interests
that have been created, are too strong. However, I believe that
the ongoing
discussion about privatizing Social Security would benefit from
paying more
attention to fundamentals, rather than dwelling simply on nuts
and bolts of
privatization.
Milton Friedman, 1976 recipient of the Nobel Memorial Prize in
economics,
is a senior research fellow at the Hoover Institution.
