Grabbing the third rail

Republicans have their work cut out for them on Social Security

Last year, the Social Security Trust Fund paid out more than it received in tax revenue. By 2039, the Congressional Budget Office projects that the trust fund will be exhausted, at which point either benefits will have to be cut by 20 percent or taxes increased by 25 percent.

We’re likely to encounter problems well before 2039. In a few more years, the reserves of the fund will begin being drawn down as payouts increase beyond the combination of tax revenues and interest income. Between then and 2039, $2.5 trillion in government securities will have to be sold on a global bond market whose ability to absorb U.S. debt is already straining credulity.

Deficit doves, like the Brookings Institute, tell us there is no reason to worry and that there is plenty of time to tackle the problem. These assurances are no more credible than those of the teachers unions, who tell us our schools are doing great. Social Security is like the Titanic — it will not stop and turn on a dime. If we are to avoid crashing into the icebergs before us, we must begin turning the rudder now.

Social Security is primarily old age insurance. And as insurance, it gets the most bang for its buck when it insures against very old age, focuses on the first dollars of retirement income, and is sufficiently solvent to guarantee, beyond a doubt, that it will be there for future retirees.

A good reform proposal, therefore, might be the following: Make up half of Social Security’s shortfall by raising the retirement age to 70, and push the program into surplus by reducing benefits for the top 70 percent of earners. A bad reform proposal would involve pegging the rate of increase in benefits to a lower-than-inflation rate — changes like this would fall harder on the very old than the merely old. There are many ways to do the math — the conservative preference should be toward raising the retirement age and cutting benefits for the non-poor.

Beyond the immediate steps that are necessary to bring Social Security back into solvency, Republicans should also seek to improve the rate of return on the Social Security Trust Fund. A dollar invested in the Trust Fund in 1940 would have grown to roughly $225 today. That same dollar, invested in the S&P 500, would have grown to $1500. The problem is not just one of having less money to hand out to our elderly — by turning the Trust Fund into a captive customer for Treasury bonds, the interest on our debt has been kept artificially low and fueled the discretionary spending binges that have gotten us into our current mess.

One solution is to convert Social Security into individual accounts. Sadly, this policy will not be a viable option this time around. In 2005, on the heels of George W. Bush’s re-election, the GOP made a push to mend our broken Social Security system. At the heart of their proposal were individual savings accounts. Individual savings accounts held two significant advantages over the existing system. Firstly, they removed much of Social Security’s bias against shorter-lived demographics. Secondly, they allowed for the investment of Social Security funds in higher-yield assets than government bonds.

The fixes were torpedoed by Democrats, who managed to scare the elderly into thinking their overly generous goodies were being touched, convinced the demographics that stood the most to gain from the reform — blacks and Hispanics — that Republicans were out to get them, and riled up their reflexively anti-free-market base with the word “privatization.”

The battle for individual accounts has been lost. Republicans, as they craft their reforms, are going to have to avoid making individual accounts a component of the new system.

If private accounts are taken off the table, we are left with one option for improving yield and avoiding the temptation to spend the Trust Fund’s bond-buying fuels: The Social Security Trust Fund should be transitioned from a creature of the Treasury Department to something more closely approximating a sovereign wealth fund, free to invest wherever the gains are deemed the highest.

The challenge inherent in giving the Trust Fund the freedom to invest in the highest-returning assets is that their decisions could be politicized. Michigan representatives will argue that the fund should focus on spurring job creation (read: propping up automobile companies). Green types will demand that the fund invest in renewable energy. Health groups will fight against the purchase of cigarette company stocks, foreign policy types will push for divestment from the latest foreign enemy, populists will battle to exclude financial stocks from the fund, and so on.

Fund management should be set up like the Federal Reserve Board — appointed but independent. And its mission should be clearly stated: to maximize the pool of money available to our retirees, with few statutory restrictions on the options that it can pursue.

Done correctly, modernization of the Social Security Trust Fund will not only improve the solvency of Social Security, but it will remove one of the greatest forces that has propelled us toward big government. As deficit hawks, elected by a public eager for belt-tightening, Republicans have few areas better to advance their agenda than Social Security.

james gallagher over 10 years ago

The government cannot go bankrupt as our currency is sovereign. The Treasury pays for things like SS by simply marking up checking accounts. There is no operational constraint.

Anonymous over 10 years ago

Ah, the typical deficit hawk, using any excuse possible to starve the beast. SS may be headed for trouble eventually, but if Republicans were really serious about cost control, they would embrace Obama's health care plan, as you've mentioned previously. If they were even more serious, they'd eliminate the Bush tax cuts. Fellow MIT'er Paul Krugman goes into more detail here: http:www.nytimes.com20110218opinion18krugman.html

As for private accounts, the GOP's magic answer to any government program it doesn't like, how's that going for 401k's?


Finally, when Democrats fail to adequately garner support for a plan you like, such as health care reform it's their fault, not the Republicans for inventing things like "death panels". But when Republicans can't gain support, as they couldn't for gutting social security, you blame Democrats for rightfully labeling it "privatization". Where I'm from, we call that a double-standard.

Anonymous over 10 years ago

It's funny to see Mr. Yost being labeled as biased towards Republicans. There was even a letter from an alumnus recently challenging current students to take on Mr. Yost for being in league with "Tea Party" types. It's an indication of how far off to the left current MIT students and their generational peers are. Mr. Yost, after all, supports Obamacare and now apparently wants Republicans to set up another council of central planners (no doubt a recommendation that flatters the economist profession) to determine how best to invest social security "funds". This despite all past experience which shows that those who think they could do better than their predecessors at central planning --- don't. Not unlike those who continue to believe that communism failed because it was simply "implemented incorrectly" and that they could succeed where those before them failed. And politically speaking, if Mr. Yost reads his history, simply claiming to be more efficient at big government than Democrats are has always been a losing strategy for Republicans.

Anonymous over 10 years ago

Rather, I think it's an indication of how far to the right the modern GOP has become. After all, "Obamacare" is actually based off of many Republican ideas, including "Romneycare". That Mr. Yost isn't willing to adhere to the recently-adopted GOP doctrine that all government is bad speaks well of him; that this causes him to be labeled a Communist speaks very poorly of the modern GOP and their increasing dogmatism.

Anonymous over 10 years ago

Voters favor repeal of Obamacare 57 to 38. If the GOP supports repeal, this makes them mainstream, not "far to the right".

Looks like some people still haven't got the message of the November 2010 election. Fringe movements do not win massive, crushing electoral victories. However, it is understandably soothing to tell yourself otherwise.

Anonymous over 10 years ago

I'm not sure anyone's going to read this comment so long afterwards, but I feel compelled to respond to point 5:

The GOP is better at messaging on the Health Care bill. When individual components are polled, they poll reasonably well. Hell, a large portion of the public thinks the bill was already repealed.

Keep telling yourself that 2010 was about anything other than frustration at the state of the economy. Republicans certainly seem empowered by the 2010 elections, leading them to things like the fiasco in Wisconsin. How's that working out for the Wisconsin GOP? Assuming the Republican overreach doesn't destroy the country, it'll be fun to see them swept out almost as quickly as they were swept in.