Social Security? It already is
By Andrew G. Biggs
posted April 15, 2002
Don't "Enron" Social Security, Senate Majority Leader Tom Daschle
(D-SD) cries, attacking President Bush's reform plans to let workers invest
part of their Social Security taxes in personal retirement accounts. Sen.
Joseph Lieberman (D-Conn.) is less subtle, holding a press conference
recently where he and some fellow Senate Democrats beat the Enron-Social
Security analogy like a drum. But guess what, senators? Social Security
is already "Enron-ed." And personal account-based reform plans
are the way to prevent all Americans from losing money as many Enron workers
Daschle compares Bush's personal account reform plans with the collapse
of the giant energy corporation, which took many workers' 401(k) retirement
savings with it. "I don't want to 'Enron' the people of the United
States," said Daschle. "I don't want to see them holding the
bag at the end of the day, just like Enron employees have held the bag.
I don't want to destroy their Social Security system." Democratic
strategists think that tarring personal accounts with the Enron brush
can defeat Bush's Social Security reform plans as well as bring electoral
success in the fall.
In truth, it's not the president's personal account reform plans that
most resemble Enron - it's the current Social Security system itself.
Enron's murky "off balance sheet" accounting practices highlighted
its assets and downplayed its debts - as does Social Security's "trust
fund" accounting. While the trust fund's trillion dollars in government
bonds are "assets" to Social Security, they are debts to the
rest of the government - which will have to raise taxes or cut other programs
to repay them, just as if there had been no trust fund at all. That's
why the non-partisan Congressional Research Service stresses that "the
trust funds themselves do not hold financial resources to pay benefits."
Making matters worse, politicians regularly exclude liabilities to the
trust fund when referring to the public debt; the Social Security trust
fund is apparently an asset to everyone but a liability to no one. The
fund is like a private corporation financing its pension plan with bonds
issued to itself - a practice that is illegal in the private sector.
Making matters worse, Enron's employees were dangerously undiversified;
some held all of their 401(k) contributions in Enron stock, a step no
financial advisor would recommend. Similarly, 60 percent of Americans
receive the majority of their retirement income from Social Security benefits;
one third receive 90 percent or more from Social Security, and for almost
20 percent, Social Security is all they've got.
Worst of all, Enron itself went bankrupt, taking many workers' pensions
down with it. Likewise with Social Security: Its own trustees declare
the program insolvent. And Social Security's bankruptcy won't just affect
the very young: A 49-year-old woman today can expect to see her benefits
cut by one-quarter during her lifetime. Younger workers will not receive
even a single year of full promised benefits. For Social Security to pay
full benefits payroll taxes must rise by 50 percent, yet payroll taxes
are already the biggest tax burden for most households.
The president's Commission, headed by former Democratic Sen. Daniel Patrick
Moynihan and AOL/Time Warner head Dick Parsons, proposed letting workers
invest part of their Social Security taxes in personal investment accounts.
Workers would know exactly how much they have saved for retirement, and
the government could not "raid" those funds to pay for non-Social
Security spending. The Commission's plans are certified by Social Security's
actuaries to pay substantially higher benefits than the current system
is capable of doing. And lower-income retirees would receive more than
Social Security promises. The Commission also added special protections
for widows and a new anti-poverty benefit for minimum-wage workers.
Moreover, workers could invest only in highly diversified stock and bond
mutual funds. That's why reform opponents' scare tactics are ridiculous.
At Enron's height, it constituted less than one percent of the $13.4 trillion
U.S. equities market. Even if a worker invested in nothing but stocks,
his savings would have been only minutely impacted by Enron's demise.
A worker diversifying his account with overseas equities, corporate, or
government bonds probably wouldn't have noticed.
Lack of diversification. Opaque accounting. Imminent bankruptcy. These
terms describe Social Security much as they do Enron's foggy finances.
The president has laid his reform cards on the table. It's time for personal
account opponents to do the same. The Social Security reform debate today
is an event at which only one team has shown up. Until reform foes put
forward real proposals of their own, we can only conclude that they favor
the Social Security status quo. And under the status quo the system goes
broke. That's the real "Enronization" of Social Security.
Andrew G. Biggs is a Social Security analyst at the Cato Institute
and was a staff member for the President's Commission to Strengthen Social
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