GRAPPLING WITH the technical and political problem of Social Security is hard and unrewarding work. Perhaps it was inevitable that the peddlers of miracle cures would begin working this area as well. One such elixir has attracted particular attention because it is the brainchild of Peter J. Ferrara, now a senior policy adviser at the White House.
The Ferrara proposal -- which has won praise from many conservative think tanks and economists, including Milton Friedman -- would replace the current pay-as-you-go Social Security system by welfare, individual private investment accounts and private disability and health insurance. Friday, on the opposite page, columnist James J. Kilpatrick described one version of the plan being promoted by the National Taxpayers Legal Fund. The authors, says Kilpatrick, "cut boldly through the fogs of sham and illusion." Well, not exactly, although they are certainly wandering around in some heavy mist.
Under the plan, a worker of, say, age 35 would stop paying payroll taxes and he and his employer would start paying into a private investment account instead. By the time he retires at age 65, say the authors, his account would hold $380,000, adjusted for inflation, which would give him interest of over $30,000 a year plus an estate to leave his children. What's the catch?
Well, first you have to assume that annual interest will exceed inflation by 8 percent. Assume an 8 percent real rate of return? You might as well assume that by the year 2012 money will be growing on trees and pie will fill the sky. If secure investments -- the sort one would put in a retirement portfolio -- had to yield an 8 percent real rate of return over the long term, the economy would collapse.
At more realistic rates of return, such as those used in a recent New York Federal Reserve Board study, you will find that even in the next century, Social Security benefits will outpace any private investment -- which is actually its basic problem.
Ah, but the plan is supposed to stimulate economic growth because of the private capital it would release from the Social Security trust funds. In fact, as a detailed analysis by economist Henry Aaron recently concluded, there is no evidence that Social Security depresses private savings, it simply shifts them from one age group to another.
Then there is the matter of people already retired or close to retirement. The Ferrara plan says that all their benefits would be kept intact. How's that again? If the payroll tax were abolished for all but near-retirees, who would pay the current $210 billion bill for Social Security and Medicare? Why, they would be shifted to the regular budget. You mean more than doubling the current deficit? Gee, what a terrific idea.
There are other worrisome details -- such as how people could buy comparable disability and old-age medical insurance on the private market and what happens to the fellow whose investments go sour. But you get the idea. Like most simple solutions to complicated problems, this one is just wrong.