To: SSU Students
From: Jude Wanniski
Re: Social Security, Same Old, Same Old
This is the last lesson of the summer session. As promised, I’ll take you back 25 years to read a few of my WSJournal editorials on Social Security. Guided by Arthur Laffer, who was a consultant to Treasury and knew the system had gone into an enormous actuarial deficit, I began writing a series of editorials about the “problem,” and how it could be solved only through capital formation. In this first editorial, note the AFL-CIO rejects this idea by saying there is plenty of capital formation. The Social Security actuarial deficit is even bigger now, because life expectancies continue to stretch. This means there has to be even more capital formation so two workers can support each retiree in 20 years, where there are three workers now. The AFL-CIO still officially opposes capital formation via lower tax rates on capital, so we have the same old debate today. Many of you in SSU were not even born in 1975. The lesson will help you understand how hard it is to make headway on economic problems unless you are a supply-sider. By the way, neither George W. Bush nor Albert Gore address the Social Security problem in any meaningful way. Neither propose cutbacks or elimination of the capital gains tax, which stands as the highest barrier to capital formation. Neither Bush nor Gore have supply-side economists on their staffs.
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The Wall Street Journal
REVIEW & OUTLOOK
The Social Security Report
Last July, after we made the first of a series of comments on the dreadful state of the Social Security System and the need for immediate reform, an adviser to the system suggested we were being unfair in leaving the impression that the government was not addressing the problems. It was pointed out that an Advisory Council had been formed and "we should expect to receive, within the next year, carefully prepared and well thought out recommendations for the long-run financing and benefit structure of the system."
The Advisory Council has now finished its work. And at the risk of being criticized as unfair, we repeat that the government is not addressing the problems of Social Security. The council's tentative recommendations have not been well thought out. It still does not see that there is both a financial and an economic problem, and it is likely that if its laundry list of proposals to correct the financial problem were adopted, the economic problem would be made much worse.
The financial problem is that even based on SSA's optimistic actuarial assumptions about the next 75 years the system is in deficit in the amount of $1.3 trillion, discounted to present value. This means that if there are no changes in tax and benefit levels, financing the deficits over the next 75 years would require a fund of $1.3 trillion in hand today and earning interest.
The economic problem is that because the system is financed pay-as-you-go, if the deficit is covered by increased taxes on capital and labor, economic growth will slow, pushing the Social Security System further into actuarial deficit and requiring even higher taxes. If no change is made in the present system, in 25 years benefit outlays will hit $350 billion a year -- assuming 3% inflation -- all of which has to be paid out of taxes on capital and labor.
Only one of the council's major proposals addresses this problem, easing the financial condition of the system without damaging the economy. It must be approved by Congress if there's to be any hope for the system's future. When Congress three years ago tied benefits to the Consumer Price Index, which was reasonable, it also tied future benefits to both price increases and wage increases. This double-indexing of benefits will by itself bankrupt either the system or the economy and has to be eliminated. Otherwise, before too many years, workers will get higher benefits when they retire than the wages they were getting when they worked.
In its other proposals, though, the council only considers ways to close the deficit once double-indexing is removed. One tentative idea is to push the retirement age to 68 from the present 65 in the year 2005. Some members of the council think that because it's likely people will live longer in the year 2005, they'd like to work longer. It's hard to see how this could close the deficit. If people are going to live three years longer than the actuaries now contemplate, they'll collect benefits for the same number of months even if they do retire at 68.
The other proposal put forth by the council last month would have raised the wage base for Social Security taxes in 1976 to $24,000 a year from $14,000 at present, which would have had a severe effect on the profits of both capital and labor. However, the council reversed itself yesterday on that proposal and recommended dipping into the general fund to support some of the Medicare costs that come under Social Security. This is not much of an improvement either, since it would add a further burden to an already overloaded federal budget.
Very similar considerations apply not only to 1976 but to the long run. There is no way to resolve the economic problem inherent in the Social Security pay-as-you-go system by raising the tax rate, either on payroll taxes directly or through contributions from the general fund. The economy will produce less with higher taxes, an axiom that has now gained wide acceptance as it applies to the short run. But the Advisory Council's tunnel vision does not permit it to see this problem in either the short run or long run.
The AFL-CIO doesn't quite see it either, as the letter from their Mr. Seidman on the opposite page indicates. While he accepts the argument that the central question turns on the sufficiency of capital formation, he argues that capital sufficiency is evidenced by the rapid growth in corporate cash flow, which is perhaps the very worst of all the ways to measure capital growth. If the AFL-CIO really believes there is no problem of capital formation, it should ponder the question of why even at the height of the latest boom we found ourselves with a surplus of labor. This is a subject we will discuss in a future editorial.
Unless its final report is sharply different from what we've seen, we can only express disappointment in the half of a job the Advisory Council has done so far. Before President Ford passes any of these recommendations on to Congress, it would be wise to do the other half.
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The editorials caused quite a stir, as little old ladies who read the WSJ bombarded their congressmen with letters wanting to know if their checks would soon stop. Here is a follow-up I wrote three weeks after the previous editorial.
The Wall Street Journal
REVIEW & OUTLOOK
February 12, 1975
$1.3 Trillion Under the Rug
We note that eight ex-bigwigs from the Department of Health, Education and Welfare trotted out a stack of Bibles on which to swear nothing was wrong with the Social Security System. Suggestions that there is a serious problem, they said, are "destructive," "irresponsible" and "baseless."
Apparently the former HEW and Social Security heads were upset because discussion of the system's actuarial deficits has caused some recipients to worry about whether they will receive their next check. We would also like to do our part to calm such fears. We cannot realistically conceive of a way the system would not meet its obligations in the next few years.
We do take exception, though, to Wilbur Cohen's willingness to extend the same assurances out "20, 30 or 40 years" and indeed to say that failing to do so is "vicious." Social Security is a pay-as-you-go system, meaning that benefits to be collected 40 years from now must be financed out of what the economy produces 40 years from now. Whether in the next 40 years the economy grows fast enough to afford such benefits depends heavily on government economic policies, not least the level of taxation, to which Social Security's payroll tax contributes.
We further take exception to the claim that the current debate is nothing more than a rerun of the arguments that took place when the system was founded. No one we know of seriously wants to abolish the system. For that matter, we are quite content with the fact that it is something different from the usual private pension plan.
Back in the original debates one big issue concerned the accounting problem. The pro-Social Security forces won, and accounting for the system is not done on the "full-reserve actuarial concept" that would apply to a private pension system. Rather, to reflect the pay-as-you-go aspect, a new and less stringent method of accounting was developed.
Under this "dynamic assumptions" method, the actuarial deficit of the Social Security System is now $1.3 trillion over the next 75 years, discounted to present value. This is the first time the official actuarial concept has shown a deficit of any such proportions.
Somehow it seems to us that if you are facing a deficit of such size, it is not exactly irresponsible to take some notice of the fact. Indeed, it somehow seems to us the irresponsible thing to do is to sweep the $1.3 trillion under the rug.
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Next week, we start the fall semester of SSU. If you are not already registered, please do so. And if at all possible acquire a copy of the textbook, The Way the World Works. It is available on Amazon.com, in its 4th edition, and can also be purchased at our online “student bookstore.”