Memo To: Website fans, browsers, clients
From: Jude Wanniski
Re: A 1976 Editorial
Patricia and I are in Ireland, come to kiss the blarney stone and check out just how long it is to Tipparary. While I'm gone, I'm going to run some editorials I wrote for the WSJournal in early 1976. Why '76? No reason, but when I reached for a file, that's the one that came out. What you will be surprised to find, I think, is that these editorials are addressing the same problems we addressed 23 years ago, and with a little editing around the edges, could run today and nobody would notice anything funny about them. The first "Review&Outlook" lead editorial is from January 26, 1976, and is about the long-term deficit in the Social Security system. I was actually the first to sound the alarm about how the politicians were "buying now, paying later" on public pensions for the seniors, in a long series of editorials of which this was only one. It was Art Laffer who first tipped me off on what was going on. I remember him telling me at the time that the problem really won't be dealt with until we get to the end of the century and start worrying about the Baby Boomers retiring in 2012. Hey, we was right.
The Wall Street Journal
REVIEW & OUTLOOK
January 26, 1976
Halfway on Social Security
No doubt President Ford believes he is being responsible in asking Congress to increase the payroll tax for Social Security. Even though the increase would not take effect until next January, after the elections, it is still not easy to ask that employees and employers each be made to pay another 0.3% of wages, bringing the combined payroll tax to a lofty 12.3% of covered wages.
But those who have been following our observations on the problems of Social Security should not be surprised to learn that the tax boost is no solution to the big problem, which is that incredibly high future benefits have been built into the system and will ultimately wreck it. Our impression is that Mr. Ford to this day has not been carefully briefed on the subject.
For an idea of how little Mr. Ford's proposals touch the big issue consider the following: As of last June 30, the Social Security system recorded an actuarial deficit of $2.1 trillion. That's trillion! Mr. Ford's tax increase will trim the deficit to about $1.95 trillion. A separate proposal, ending the inadvertent "super index" that increases benefits to future retirees at approximately twice the inflation rate, would reduce this by roughly half. That leaves a deficit of nearly $1 trillion.
A word about these numbers: The actuarial deficit is the amount of money the government would need to have on hand today, earning interest, to cover the shortfalls present tax and benefit rates would generate over the next 75 years. The above numbers reflect special actuarial methods. Congress mandated for the Social Security system; under the concepts applied to private pensions the numbers would be even larger. These numbers put aside the question of whether present economic policies can generate the capital formation needed to meet the growth and inflation rates assumed in the actuarial calculations.
Even if the President's proposals are adopted, in short, Washington's current politicians will be wishing on their heirs a problem that by generous calculations amounts to $1 trillion. This is precisely what Mayor Lindsay did to New York City, coping with current problems by running up future liabilities in the pension system for his successors to deal with.
At least President Ford is willing to go halfway toward solving the problem, instead of making it worse. His liberal critics in Congress talk of replacing his tax rate increase by jumping the Social Security wage base to $24,000 from the current $15,300. But since benefits are calculated on the wage base, every increase in the base is an increase in future benefits; the liberal "solution" actually expands the actuarial deficits by leaps and bounds.
The size of the problem also makes it painfully clear that it is nonsense to talk of "dipping into general revenues" to pay Social Security benefits. For one thing, there are no general revenues to dip into, which means either income taxes have to be raised or government borrowings increased. How can anyone seriously propose raising income taxes by $1 trillion -- 70% of gross national product -- to close the actuarial deficit, or postpone the problem and have future politicians raise $1 trillion plus interest?
The long and short of these numbers is that more benefits have been promised than can reasonably be expected to be paid. The only solution is to reduce the promises -- which we hasten to add does not mean reducing present benefits. Nor do we think the public would find this reduction unacceptable, or even unattractive, compared with the alternative, which is a remorseless rise in tax rates.
The trick is to find the least painful way to reduce the promises. Almost all of the remaining deficit could be closed I future benefits were tied to prices instead of wages -- guaranteeing the purchasing power of future retirees but not guaranteeing them a share of future economic growth. Or benefits could gradually be subjected to some kind of tax. Or Congress could pass legislation today specifying gradual increases in the retirement age in the future -- economically some such step will be almost mandatory when "baby boom" workers star to retire, and in any event anyone who wants to retire at 65 is given warning to prepare on this own for the first two or three years.
Facing these issues now strikes us as good common sense, since the American people seem receptive to confronting new realities. The Social Security problem can't be wished away, but neither is it so hideous that candidates for national office should fear to discuss it. President Ford has tackled the easy half. A presidential election year is the proper time to debate the hard half.