By Stephen Moore & Peter Ferrara | May 2012 | American Spectator
Let workers choose: the New Deal, or a better deal?
Perhaps compulsion is the problem. The argument conservatives too often make seems to be: “Trust us; we know what’s best for you.” Yet when was the last time that voters trusted politicians of either party to make wise decisions on their behalf? With congressional approval now hovering in the teens, there is little likelihood the public will back fundamental reform of the $1 trillion entitlement system. But there is another way: Give individual citizens the freedom to either stick with the government-run plan, or choose a market-based option. Those who like Social Security and Medicare could keep them as they are. Those who think otherwise would have alternatives.
Just look at what happened when House Republicans proposed to fundamentally change Medicare and give seniors private insurance instead. Democrats ran TV ads—the campaign was dubbed “Mediscare”—telling seniors the GOP was trying to destroy Medicare. One commercial shows a man in a suit pushing the wheelchair of an elderly woman. The man leads her to the edge of a cliff and throws her off, while “America the Beautiful” plays in the background. Scary stuff.
But if Republicans gave seniors the choice, between the new Medicare and the old, could Democrats block that approach? Ultimately, we don’t think so. And political benefits are just the hors d’oeuvre. We also believe that choice-driven programs would achieve social-welfare goals more effectively, serve seniors and the poor far better, and cost just a fraction of what taxpayers pay for current programs.
Let’s examine how this model might apply. Baby boomers are now beginning to retire; eventually more than 75 million boomers will move onto Social Security and Medicare. For decades, the federal government’s own reports have shown that Social Security will be unable to pay boomers all promised benefits without dramatic, unsustainable tax increases. Medicare’s prospects are even worse.
Last year, Social Security ran an annual deficit for the first time since President Reagan and Congress raised the payroll tax back in 1983. Under government actuaries’ middling projections for economic and demographic growth, those deficits will continue until the Social Security trust funds run dry by 2037. After that, paying all the promised Social Security and Medicare benefits that are financed by the payroll tax will require almost doubling the tax from 15.3 percent today to nearly 30 percent.
Under more pessimistic growth projections, the Social Security trust funds will run out of money by 2029. In that case, paying all promised benefits to today’s young workers would eventually require a total payroll tax rate of 44 percent, three times current levels.
Social Security operates as a pure tax-and-spend system, so it has no real savings or investments anywhere. Even when it was running annual surpluses, close to 90 percent of the revenue that came in was paid out within the year. Remaining annual surpluses were lent to the federal government and spent on other programs, from foreign aid to bridges to nowhere. The Social Security trust funds received only internal federal IOUs, which promise the money will be paid back when it is needed for benefits. But those federal IOUs represent not savings, but actual additional liabilities for federal taxpayers.
Such a tax and redistribution scheme does not earn real market returns, as a fully-funded savings and investment system would. Consequently, over the long run the “trust fund” can pay only low, below-market benefits. Studies show that for most young workers today, even if Social Security does somehow pay all it has promised, those benefits would represent a real rate of return of around 1 to 1.5 percent, or less. For many, the effective return might even be negative. That’s like putting your money in a savings account, but instead of earning interest on it, you end up paying the bank for the pleasure of keeping your deposit there.
There is a better way. Workers could be empowered to save and invest the money they and their employers would otherwise pay into Social Security. Studies show that an average-income, two-earner couple would, over the course of their careers, accumulate close to a million dollars or more, given standard, long-term, market returns, and depending on what fraction of their Social Security contributions they are allowed to invest. Lower-income workers could regularly accumulate half a million dollars over their careers.
Those accumulated funds would pay all workers of all income levels and family combinations much higher benefits than Social Security even promises, let alone what it might pay. That includes one-earner couples with stay-at-home moms caring for the children. Retirees would be free to leave any portion of these funds to their children at death, further strengthening the family. Under Social Security, if you die, your heirs get a small death benefit, and Uncle Sam keeps the rest.
Read the full story here.
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John Malcolm 