Real Kato Blog: The Social Security Scare

There seems to be a deep misunderstanding about how Social Security works, and that misunderstanding begins in the White House.

Bush is now aggressively campaigning to push his Social Security "reform" idea. The word "campaigning" is particularly appropriate, because Bush's election campaign strategists are among the people coming up with the sound bites and talking points to sell this idea to Congress and the American people.

It's all a bunch of crap.

One of the main thoughts Bush is trying to foist on us is the idea that Social Security will go "bankrupt". Wrong. It's not as if we'll simply shut down Social Security if the trust fund dries up; we'll just have to reduce benefits. There will always be people paying into the system, so there will always be some money available to pay out.

The next mistaken idea is that Social Security is a retirement investment program. "People can get better returns on their investment by putting money into the private sector," say the reform advocates. But this is wrong too. Social Security was designed to ensure that we wouldn't have a bunch of homeless and starving old folks. We tried to be fair by allowing people to benefit from Social Security if even they didn't need the money, but the basic concept was security, not wealth. If people try to save for their own retirement and fail, Social Security is there to back them up. We don't want to be a country with a bunch of starving and homeless elderly people; that's not the mark of a civilized society.

The third mistaken idea is that people will make more money from private investment than from Social Security. I believe that is often untrue also. Most people don't know much about investing. Aggressive investors will face a lot of risk; conservative investors will see their returns eaten up by mutual fund fees.

Bush's idea is to let people divert their payroll taxes into a private investment account. I can't imagine how anyone could think this is a good idea. One, by diverting money away from the Social Security trust fund, it will run out of money faster. So we'll either have to eliminate benefits sooner, or we'll need to throw in billions of dollars from some other source. Bush likely intends to simply borrow the money and hike up the budget deficit. That will result in higher inflation, higher interest rates, and lower growth. It's garbage.

The correct solutions are: to raise the retirement age, to introduce means-testing for benefits so that wealthy retirees receive less, and to raise the amount of income subject to payroll tax. (Right now the payroll tax is regressive: the more you make, the lower the percentage of income you have to pay into Social Security. How did that happen?) But those solutions are politically unpopular, so that means no one will have the balls to implement them... including a second-term President with nothing to lose.

Sigh.

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