This discourse began as a simple reaction to the Social Security debate of 1990 — the one launched by Senator Moynihan’s charge that the Social Security surplus was being "embezzled", and its proceeds exploited to make the national deficit look smaller. It seemed to me that everyone was barking up the wrong tree, worrying about symbolic payments and symbolic credits, when they ought to be looking into the character of government expenditures. Which government expenditures would enhance the future economy, and how did they measure up against the promises that were being made? This tied in with a prior concern of mine: that public debate was obsessed with the immediate proceeds of government spending — who got what, right now, regardless whether they rendered any quid pro quo, and regardless of opportunities gained or lost for the future.

That is still the punchline, it is the moral of the story. Frame it and put it on the wall:

I’m a hard person, though, to convince, even of my own arguments, and anyhow, "the devil is in the details". As I examined and re-examined my arguments, and dug into the details of the existing system, a number of subordinate issues emerged. What seemed creative thoughts popped into my head. Moreover, the evolution of public debate prompted still others. The discussion wandered and wandered —

It is time to boil it all down, though it touches many topics. So here is my considered formula for saving Social Security, and a great deal more.

1. A Change of Outlook.

A "paradigm shift" in our thinking about Social Security is part of the cure. Not only will it guide us to more appropriate actions, but this is the part about "goodwill between generations". Some really nasty generational conflict has been shaping up. Maybe it’s to be expected in our "adversarial" way of conducting public business, but it’s an unnecessary tragedy.

Two changes are required.

First, stop thinking of Social Security as an obligation passed from generation to generation of workers, to support their predecessors in old age. Start thinking of it as provision which each generation can make for its own retirement, by doing things during its working years to empower the economy of the future.

Second, stop thinking of government as an army of occupation, which quarters its horde of employees upon the productive part of the community. Start assessing its productive contributions, and their role as investments for the future. Demand that they be such.

The perception that an oversized generation of baby boomers is going to burden the next generation of workers, because the latter will have to support the former in retirement, is based unconsciously upon the labor theory of value. It ignores what capital can do to make work easier. Ironically, conservatives and libertarians, though offering the right solution (base Social Security upon investments) have tacitly endorsed this fuzzy-Marxian view of economics by playing up the "gray glut" crisis. They would do better to stress the lesson which it teaches: well-disposed people who want to do anything meaningful for the elderly of the future must accept the productive role of capital. After all, it’s liberals who need to learn the lesson.

On the other hand, enthusiasts of the private sector have nothing to teach about economics, as long as they deny the "investment" character of many government expenditures. It is necessary to analyze purported "investments" critically, but wholesale denial is — well, "in denial". There’s paradigm shift enough for everyone.

2. Base Social Security upon investment, whether public or private.

The existing design of Social Security treats it as an entitlement to be supported by contributions out of wage and salary income alone. Retirement benefits, moreover, are calculated in relation to average employee earnings at the time of the worker’s retirement. This has multiple bad effects.

First, it freezes in place exactly the perception which needs to be changed: that retirees are living off a chunk of current workers’ income. On that basis, geezers are seen as burdens, who should maybe be encouraged to die sooner.

Second, it distracts attention from what workers should monitor carefully all their working lives: what is being done with the money they save, that will make the economy buoyant when the time comes to live off it.

Third, it ties retiree benefits to economy-wide, average employee earnings at the moment of retirement, rather than to the performance of capital during the time it was invested. This means that each contingent of retirees takes a fixed share of the total wage bill, proportioned to the size of the contingent. On that basis, the burden upon remaining workers must indeed grow onerous when retirees outnumber their descendants. Indeed, as a practical political matter, it is doubtful that a payroll tax can be raised high enough to be the apparent source of Social Security pensions. This aspect of the system will have to be reformed.

Total privatization would automatically satisfy this part of the prescription. That, however, would distort the economy, some vital portion of which needs to be undertaken by government. The entire working class would become a cheering section for a government shutdown. Therefore —

3. Make it somebody’s job to evaluate government expenditures as investments.

Congress, of course, has the last word upon government expenditures. Information and proposals come at it from a flood of sources — the Administration, testimony from government agencies, lobbying by scores of interest groups. Some interests are institutionalized: a Department of Labor to speak for wage workers, a Department of Education to speak for public schools, and so forth. Nowhere, though, is there a formal voice for the interests of the future, as they bear upon current government expenditures.

The closest thing in existing agencies is the Social Security Trust Fund. Its Board of Trustees [38] makes an annual report on the state of the fund. For this, it can call upon a body of experts who are well-versed in actuarial matters, the statistics of the labor force, demographic trends, the rules of the system, and whatever else may be needed to project future needs — i.e., dollar outflows that will come due as various cohorts start drawing their Social Security checks. The report also estimates future intake from payroll taxes (plus some interest on money which it has loaned to other parts of the government) and compares the intake with the outflows. If the intake exceeds the outflow, the Trust Fund grows, otherwise it makes up the shortfall. On this basis, the Trustees have long since reported that the fund will start shrinking around 2019 and be exhausted by 2029. [39]

That, however, is as far as the oversight goes. There is no thought that current intake from payroll taxes should be devoted entirely to savings, while the outflow to current retirees should be financed entirely by interest on past investment. That is what is needed, and to make it work, there must be some monitoring of the investments. New expertise is required to evaluate what the U.S. Treasury is doing with any money loaned to it by the Social Security system. What is the impact of specific government expenditures upon the future buoyancy of the economy, in the time frames required for the pensions being built up?

This is a difficult and undeveloped expertise, for all the reasons pointed out in this article. We’re talking about future economic benefits which, when they arrive, will bear no price stickers. They don’t come in readily defined units, nor is it easy to say which particular actions of the government at any time in the past contributed to their existence, or how much. In some sense the revenue which they produce is intermingled in the total tax base available to the government (other than Social Security taxes) at the time the pensions are to be paid.

For all the difficulty, and for all the powerlessness of a Social Security Board of Trustees to do anything but advise Congress and the electorate, this is the sort of estimates it must develop, and bring into confrontation with its estimates of future outflows. The information will always have to compete with people’s private interests and wishful thinking, and will always have to contend with special pleading. If "future economic impact" becomes a serious criterion for government expenditures, the initial effect is likely to change people’s rhetoric more than their enthusiasms. Still, the formulation of even spurious rhetoric works back upon the demands which people make, and in any case, an estimate of "future economic impact" is necessary for a rational comparison of investments with promises. We can hope for at least a little improvement in public policy.

4. Establish individual Social Security accounts.

What people don’t own, they don’t protect as well as they should. When people’s savings are all dumped into one big pool, and later distributed according to their respective "needs", they behave as might be expected: they assiduously grow their needs. Since nothing is done to advertise a relationship between what is done with their savings and what they can hope to get later, they pay no attention to the management of the savings. Individual Social Security accounts would be the greatest educational invention since the parable of the bees and the grasshoppers.

The educational effect could be enhanced by sweeping the "employer share" of the payroll tax into the employee’s statement of both pay and deductions.

In addition, individual Social Security accounts could (if properly designed) alleviate some vexing problems that arise in connection with divorce and remarriage.

5. Set a compulsory minimum, with option to buy more.

It is reasonably fair to make "career insurance" mandatory, for fate can turn any prince into a pauper, on a moment’s notice. We don’t want people starving in the streets, nor stealing for their daily bread. It is tempting for the fortunate, whose prosperity seems already secured, to opt out of "career insurance", but the rest of us are entitled to demand that they protect themselves (and us) against their absolute beggary, just in case. Besides, a great many people are simply improvident, or are over-optimistic.

At the same time, the compulsory minimum should be a minimum — just enough pension to live on, not enough to encourage goofing off during the working years.

If only the minimum coverage is compulsory, why should there be an option to buy more? After all, the worker can buy additional coverage of any sort from private providers. A worker who distrusts private businesses can buy government notes or bonds directly just as well as through the Social Security system.

First and foremost, the system should sell more than minimum benefits because it’s the variable part that makes individual accounts rewarding. We were hoping, remember, to fashion a system which motivates citizens to keep a critical watch over government investments. Minimum coverage, however, is a defined benefit. So, for that matter, are notes and bonds. If everyone is guaranteed pretty much the same return regardless how the government fares, what’s the incentive to look at government activities with the eye of an investor? There’s a group incentive to avoid outright default, but that’s about all.

The need is for a public financial instrument whose return, like that of common stock, varies with the success of the enterprise. Such an instrument would not necessarily be coupled with the Social Security system, but since we contemplate making the latter a guardian and accountant of government investments anyhow, it makes sense to let it pioneer this sideline. A "Social Security Bonus Annuity", varying like a stock dividend according to both the success of government investments and the individual’s contribution to capital, would be a natural way to start. Think of it as a very long-term dividend.

There are also reasons of employee convenience. Both workers and those who sell them private insurance (or, as employers, purchase it for them) will always build Social Security benefits into their retirement plans. Unavoidably, it influences the type and the amount of annuities which they will need. There is a certain convenience in having Social Security benefits commence when a private pension does. On this account, Social Security should be willing to sell -- for an additional contribution which is actuarially fair -- minimum benefits that start earlier than the norm. Likewise, for the standard contribution, it should offer to enlarge benefits if they start later than the norm. This latter option will become increasingly important as people live longer, and the option need not be exercised until they have already found themselves hale and hardy at the retirement age for which they originally paid.

6. Identify and Earmark Tax Revenue from Government Investments.

This is the hard part, but it’s implicit in everything that’s been said. The entire intake from Social Security payroll taxes is to be invested, either in private enterprises or in activities of the government. When the time comes to pay pensions, the government’s share is to be paid out of revenues other than Social Security payroll taxes. In other words, it must tap into "general revenue". That, however, is too vague. We want it paid out of earmarked portions of general revenue that may be fairly attributed to the results of the system’s past investments. This is especially true of any variable, "bonus" benefits.

Ideally, investments would generate identifiable revenue, such as the tolls from bridges and highways. However, most government investments are of another sort. The benefits which they eventually generate can’t be sold by the piece, and are simply recompensed out of the total tax bill. Earmarking portions of general revenue which are to be credited to past investments will be a matter of head-scratching, back-scratching, and negotiations. But what else is new? Is this any different from the way an employee’s marginal product is established in private industry?

The part on which we should get started is the head-scratching.

XIV. Transition

XII. Government Investment: In What?

Affordable Social Security: Overview Issue #10, May, 1999: front page A Word In Edgewise: home page Dick Fredericksen's home page