"But how do we get from here to there?" All along, this has been the most difficult problem for would-be Social Security reformers. Grant, for the sake of argument, that we ought to be investing the intake from Social Security payroll taxes, not shelling it out to current retirees. The fact remains, we’ve already got this horde of retirees, and more of them emerging from the workplace all the time. Their pensions are already promised.
Since the 1980’s, we’ve been collecting a small surplus, and "investing" it (though with no safeguards that the investments do anything real). That surplus is not nearly large enough to generate the benefits that lie ahead, and if today we redirect the rest of the payroll tax into investment to make up for that future shortfall, with what shall we pay current benefits? Are we supposed to level a double tax on younger workers — once to pay for their own future, and once to pay for carefree elders who didn’t do this in the past?
People have gone around and around with this issue. Troubled legislators nibble around the edges of the problem, proposing a little cut in benefits here and a little there, to free up more and more of the intake for investment. Reduce cost-of-living adjustments, raise the retirement age, tax the benefits of well-off retirees — always, of course, beginning a few years down the road, so as to minimize take-backs from people already retired. It’s a dismal process. Everybody has to mumble apologies about "unavoidable pain".
Yet, if we adopt the more thorough reconstruction suggested here, there may be a surprisingly simple solution. After all, investment-like activities of the government won’t be born the day we start associating them with Social Security. Just because we didn’t look at them in that light, or attach any numbers to their results, it doesn’t follow that the government never made any investments.
So suppose we start retroactively identifying past expenditures of the government which had an investment-like character, and earmarking current general revenue which may reasonably be viewed as a return on those investments. We then pay current Social Security benefits out of this return, and direct a corresponding portion of the payroll tax into new investment (and/or reinvestment). To the extent that the new investments (and especially the reinvestments) are in government activities that we were already going to finanace out of general revenue, this part is painless.
At the outset, this seems no more than an accounting gimmick. Some general revenue which had previously been applied to what we regarded as "discretionary current spending" is redirected into the payment of Social Security benefits. A matching amount of payroll tax input is applied to parts of discretionary spending which we classify as "government investment" (or reinvestment). What’s the big deal? We’re only reconstructing the justifications of various outflows. We’re re-labeling certain receipts and outlays.
Whether it ever affects anything real depends whether the counting is honest, and what it reveals about the makeup of government expenditures. Assuming that the expenditures classified as "investments" really have that character, with the time horizons that are attributed, and that the dollar values placed upon the results are reasonably comparable to values which the market places upon the fruits of its investments, we may find ¾ almost anything. We’ll never really know until we get serious about identifying and evaluating government investments.
In principle, it could turn out that past government investments have yielded enough return to cover all Social Security benefits, now and well into the future. In that case, it’s the impending "Social Security bankruptcy" which has been, all along, an accounting illusion. It was built into the design of the system, and in pointing with alarm, critics have been mesmerized by the thinking of the designers themselves. The founders of Social Security had no thought of tying benefits to investments; they only intended to shuffle income from each generation to the next. They failed to think through the questions of a changing workforce, changing incomes, and changing longevity. When these things did change, the simple transfer from payrolls to pensions made the system look bankrupt. But ¾ if it should turn out that the return from past government investments is ample to pay the pensions ¾ correct accounting is just the thing to disperse the fog of faulty accounting.
Of course, an honest reckoning may turn up quite the opposite result. Past generations may not have deployed enough of their government expenditures upon activities with an investment character, or maybe their investments didn’t return enough, to cover all the Social Security benefits which they promised themselves. In that case, we’ll have to continue the forlorn task of trimming benefits.
More than accounting is affected, however, even in the happier case. Remember, part of the scheme is to tie future benefits to the results of Social Security investments. Present-day payers of payroll taxes are going to take an interest in the performance of their investments. If there be a true shortfall in the results of past government investments, the process will be more urgent and maybe more rancorous. With or without a crisis, though, new priorities will enter into the discussion of government expenditures. Some things that are real may be affected. In this, there will be (at least for the short term) winners and losers.
The saving grace is that the benefits of younger workers are father into the future. This gives investments more time to do their work. In turn, it suggests how we can design a phased transition to the new system. As the years go by, retirees who were in the workforce at the time of the reform can receive pro-rated shares of the old-style benefits and the new, investment-based benefits. The proportions are based upon the number of years since the reform.
Depending on our reckoning of the returns from past government investments, we may still have to bleed the payroll tax intake to pay some of the old-style benefits. To get ahead of the game, remaining intake will have to be invested all the more productively. Apart from redirecting a portion of government expenditures, one way to accomplish this is to let workers manage a share of their own Social Security investments, putting it into private or public stocks and bonds according to their own best judgment.
And so, with ingenuity, and with honest appraisal of government investments, we can transform the Social Security system into a watchdog of our economic future. With minimal pain, we can institutionalize gratitude for the accomplishments of the past, and facilitate greater accomplishments for the future. We can restore goodwill between the generations. Beyond that, there could be no greater social security.
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