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Social Security

Justice Among Generations

By Robert J. Samuelson
Newsweek Inc.
Wednesday, January 15, 1997; Page A19

opinion
Stocks won't spare us from cuts in Social Security and Medicare

The best thing we could do with last week's report from the Advisory Council on Social Security is to forget it. The report brims with bad ideas from all along the political spectrum. None of the three proposals to invest vast amounts of Social Security funds (ultimately trillions of dollars) in the stock market is worth adopting. All would "nationalize" the stock market more than "privatizing" Social Security – with unpredictable and, possibly, damaging consequences. And all obscure the central issue posed by an aging America. It's generational justice: How much burden should the old place on the middle-aged and the young, whose taxes mainly pay for government retirement benefits?

Sooner or later, cuts in Social Security and Medicare are unavoidable, because the alternatives – huge tax increases or peacetime budget deficits – are worse and probably politically unacceptable. In general, we know what to do: raise retirement ages, tax Social Security benefits fully, shift Medicare toward "managed care" and correct Social Security benefits for an overstatement of inflation in the consumer price index. Changes need to be made gradually so that today's retirees are only modestly affected and larger shifts (such as higher retirement ages) occur with ample warning.

Siphoning huge amounts of Social Security funds into the stock market won't erase the budgetary pressures. In practice, the government can't pre-fund much of its future costs of the baby-boom generation's retirement, even though that's the vague promise of all three council proposals. The costs are simply too large. To see why, consider spending projections for Social Security, Medicare and that part of Medicaid that pays for nurs\ing-home care. All provide benefits for the elderly, and all are affected by the same aging trends. Common sense suggests they should be considered as a whole – and not as unrelated parts.

Together, these programs now account for nearly 40 percent of non-interest federal spending; they're already squeezing other important federal activities, from basic research to national parks. But the situation dramatically worsens in the next century, as baby boomers retire. In 1995 these programs cost about 7 percent of national income (gross domestic product). By 2025 they will cost – unless changes are made – about 13 percent, projects the Congressional Budget Office. Paying for them would require staggering tax increases (20 percent to 50 percent, depending on assumptions) or budget deficits. The projected increase for Social Security alone (1.3 percent of GDP by 2025) might easily be absorbed. The combined increases of all three programs, led by Medicare (up 3.5 percent), aren't.

The Advisory Council's failure to consider the combined costs – though defensible in terms of its legal charter – make its report a poor guide for the future. Even for Social Security, its proposals don't make sense. The idea is that if we save more now, we won't have to pay more later. Though true, this is misleading. To save more now, we have to consume less. Compulsory saving in stocks requires either tax increases or cuts in government spending. Two of the three plans – each mandating stock accounts for individuals – admit this. They would raise the existing 15.3 percent payroll tax on wages by 1.5 and 1.6 percentage points. These taxes would raise about $50 billion in 1998. (Despite this, one plan also involves $7.2 trillion of government borrowing over three decades. Whew!)

The last plan – proposing that Social Security invest 40 percent of its assets in stocks – would also raise taxes in a more roundabout way. Social Security is a pay-as-you-go system in which this year's benefits are paid mostly by this year's taxes. Since 1937, the system has collected $5 trillion in taxes and paid $4.5 trillion in benefits. But since the mid-1980s, payroll taxes have exceeded benefits, resulting in a rising "surplus" in the Social Security Trust Fund. This surplus has been invested in Treasury bonds that cover other government spending. In effect, today's Social Security taxes are slightly too high for today's benefits and could be cut.

Instead, the council's third plan would divert large parts of the surplus into stocks beginning in 2000. But what goes into stocks won't go into Treasury bonds. This means that some combination of three things must happen: (1) Federal borrowing from the public – the budget deficit – rises; (2) taxes increase; (3) some spending declines. In fact, this plan would raise taxes on Social Security income and slightly trim benefits. Still, the plan needs $309 billion in extra borrowing through 2015.

So the basic choices remain. Leaving programs for the elderly unchanged will raise taxes, cut other government programs or increase budget deficits. The longer decisions are delayed, the more abrupt and unfair they'll be. But the process can't begin until choices are presented clearly. Unfortunately, the council didn't do that. Although its members endorsed various benefit cuts, these were overshadowed by the three complex stock plans.

All these plans share the same fatal defect: They create large practical risks in return for small (and uncertain) gains. How would compulsory saving affect voluntary saving? Would government bias investment toward some industries and away from others? Would government protect investors against large losses? These and many other questions can't be answered, including the largest of all: How would Congress modify the plans when, inevitably, they didn't perform as promised?

What inspired these radical schemes is a mix of ideological fervor and intellectual arrogance. Liberals hope to insulate Social Security from benefit cuts. Conservatives think that individual stock accounts (even though mandated by government) reduce government power. Economists think they can raise economic growth by increasing saving. The result is deepening confusion and eroding public confidence. The various plans are so complicated they hardly can be explained, let alone defended. Social Security and Medicare are great successes. To stay that way, they must adapt to change. This report sets the process back.

© Copyright 1997 The Washington Post Company

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