Every Fiber of Senator Boxer's Being Won't Guarantee Your Social Security Check
By Nathan Smith
Posted On March 01, 2005

You can count on Social Security, and with every fiber of my being, I will make sure it is there not only for my generation, but for my children’s generation and for my grandchild’s generation. – Senator Barbara Boxer, February 11, 2005

Opponents of Social Security privatization often claim that private accounts mean trading a guaranteed benefit for a gamble. The phrase “guaranteed benefit” implies that political risk does not exist. But despite every fiber of Senator Boxer’s being, political risk does exist.

According to polls, the public understands that Social Security benefits are far from guaranteed. When a CNN/USA Today/Gallup poll in January asked 743 non-retired respondents “Do you think the Social Security system will be able to pay you a benefit when you retire?” 50% of the respondents answered “No”—a 9% increase over four years before. The result was confirmed by a similar question in a Newsweek poll on February 3-4. To the question “When you retire, do you expect that Social Security will be able to pay all the benefits you are entitled to under current law, or not?” 49% of non-retired respondents, and 62% of those under 35, answered “No.” Actually, the phrase “the benefits you are entitled to under current law” is meaningless, first because we are not “entitled” to any benefits at all (Flemming v. Nestor, 1960), second because “current law” is ambiguous. Current law dictates the wage-indexed benefit formula that will provide new retirees with gradually increasing benefits, but when the trust fund is exhausted benefits will be cut. And that is also part of “current law.” (No private plan would be this ambiguous.) So it is not clear whether half the Boomers and two-thirds of the young expect to get reduced benefits or no benefits, though the wording of the first question favors the latter reading. But the public’s distrust of Social Security is strong.

These poll results should give pause to even the most convinced defenders of the Social Security system. Up to now, the Social Security system has probably undermined the savings rate and slowed economic growth, but it has been successful in transferring large amounts of money to the elderly and raising their standard of living. But it was supposed to do more than that. Social Security was supposed to deliver “peace of mind.” It wasn’t just money for old people. It was supposed to be a psychic gain for the whole population. No one would have to worry about a destitute retirement. Well, that failed.

But while the public recognizes political risk, the pundits and the political class are strangely blind to it. Even supporters of private accounts sometimes seem to be conceding that while workers would enjoy higher returns from private accounts, they would also incur more risk. More risk than what? This weird lacuna is a side-effect of economists’ habit of modeling government in a naïve way. In most economic models, individuals are assumed to be self-interested “rational agents,” but the governments are omniscient, transparent, benevolent, and keep their promises—an obvious fallacy.

A relatively young branch of economics, public choice theory, attempts to remedy this defect. Public choice theory applies the “rational agent” assumption to the political sphere. It predicts government behavior by analyzing the incentives of the people who comprise it—voters, lobbyists, politicians and bureaucrats. The results are highly subversive of faith in government. Nothing will turn a person libertarian faster than reading a hundred pages of public choice theory.

So I was delighted to see Senator Boxer introduce an argument from public choice into her speech:

Another message I have today is to people 55 and older: don’t believe a word the President says about your benefits being safe.

It simply isn’t true. It can’t be. And here’s why: in order to privatize Social Security and continue to pay your current benefits, the federal government will have to go into debt up to $2 trillion in just the next ten years – that’s up to $380,000 of debt every minute for the next 10 years.

When the choice is between the 20 percent of the American people who are retired or nearing retirement and the 80 percent of the people who will shoulder the burden of the extraordinary debt through higher taxes and higher interest rates, will the politicians respond to 80 percent of the people or 20 percent of the people? Even if they want to side with 20 percent of the population against the 80 percent, they simply will not be able to do that and remain in office.

Bravo! But while Senator Boxer thinks she is arguing against Bush’s Social Security reform proposal, she is really arguing against the entire Social Security system.

It’s always the case that Social Security taxes the majority in order to pay benefits to a minority. History shows that this doesn’t necessarily lead to an electoral revolt of the subsidizers against the subsidized, due to concentrated benefits and diffuse costs. So Boxer is wrong to claim that Bush’s promise to the over-55 group “can’t be” fulfilled. But an electoral revolt is possible. And the heavier the burden of “higher taxes and higher interest rates” on the working majority gets, the more likely this revolt becomes.

The burden will get heavier. At present, the payroll tax raises more than Social Security pays out in benefits, and this surplus is increasing. Each year, we can buy a bit more guns and butter, even without raising taxes or increasing the deficit. In 2008, the surplus will start shrinking. More tax revenues, spending cuts, or borrowing will have to make up for less surpluses. Ten years later, in 2018, payroll tax receipts will no longer suffice to pay benefits, and Social Security will begin using the “trust fund.” The Social Security Administration will send an IOU to the Treasury department and Treasury will pay it. To do so, we will need to raise taxes, borrow, or cut other government spending more. Thereafter, the fiscal crunch will steadily worsen. All this is long before the projected exhaustion of the trust fund in 2042.

In short, the scenario Boxer describes is simply the status quo. Boxer has shown why the public is right to doubt that future Social Security will benefits will be paid. As Boxer argues, future workers are likely to get fed up with the system and vote away the benefits of retirees. Against that, all she offers are the fibers of her being.

Boxer is right that people over 55 should not fully trust Bush’s promise to preserve their benefits. But a fortiori we should not trust Boxer’s claim to be able to preserve ours. Bush does not have the power to bind his successors. No democratic politician has the power to defy the will of the majority indefinitely. That is why we do not want our retirement income to consist of checks distributed at the discretion of Congress. That is why we need private accounts.

I am confident that the market risk to which workers would be subject under private accounts is less than the political risk to which workers are subject under the current system. In other words, you are less likely to see your private account’s value decimated in a stock market crash than you are to lose your retirement check when a future politician pulls the plug on Social Security.

But I can’t back that up. The trouble is that while we know something about estimating market risk, we don’t have the tools to estimate political risk. To do so, we would need to compile data tracking a wide range of transfers, public-policy-induced economic rents, and other government benefits over time, and estimate how far the realized values of government benefits deviated from their expected values. We could then measure risk over the short, the medium, and the long run, and compare political risk to the levels of risk that obtain in the private sector. I am not aware of any research that attempts this.

However, two other advantages of market risk over political risk may be readily noted.

First, market risk gives people a choice. Whatever unknowable level of political risk there is in the current system, we’re all subject to it. The risk-averse can’t sacrifice a portion of their future benefits for greater safety. Nor can anyone seek higher returns while taking a greater chance of a loss. With private accounts, each person can choose a mix of assets that corresponds to his own risk-return preferences.

Second, market risk gets the incentives right. Whenever people have an asset, or a source of income, whose value is variable, they have an incentive to maximize its value. Market risk motivates people, and their agents, to survey the landscape for good investments, to investigate companies, to channel money into promising ventures and withdraw it from moribund ones, and to oversee the companies in which they hold shares, to prevent corruption and abuse. Political risk motivates people to form lobbies like the AARP, which seek to influence politicians, sometimes causing them to resort to demagoguery and deception, and which conduct campaigns to influence public opinion to the advantage of the class that benefits from the transfers. The difference is that the former set of activities is economically useful, while the latter is not.

Aside from increased immigration, our best hope of avoiding the grim choice between tax hikes and benefit cuts that Social Security’s financial problems now seem to entail lies in the beneficial impact that private accounts may have on capital markets. However, we should not rely on this. We should restrain benefit growth to keep the system solvent, but private accounts are the only way to give the public a reason to trust the system again. Instead of promising us the fibers of her being, Senator Boxer should let us keep the fruits of our labors.

Nathan Smith is a writer in Washington, D.C.

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