Kerrey-Simpson Package Would Destroy Social Security Benefits

Politicians with axes to grind frighten us with tales of the Social Security system going bankrupt. By the year 2030, we are told, retirees will not be able to get all of their promised benefits.

The latest in that genre--Sen. Bob Kerrey (D-Neb.) and Sen. Alan K. Simpson (R-Wyo.)--promote their new package of bills in Congress, which would cure the system with major amputation. In the process, they would deprive the elderly of a major part of their retirement income, threaten the security of what is left and injure the economy for all.

The issue is not the presumed balances in the Social Security trust fund. There are indeed no piles of $100 bills in the fund waiting to be paid out. The money is essentially an accounting fiction, entries in computers that can easily be replaced by new fictions, new entries in computers. For example, if the trust fund--currently financed by our payroll taxes and “interest” on the accumulated balances--were short, we could simply double the rate of interest that the Treasury credits to existing fund balances, or credit, for example, 10% of our income taxes to those funds, in addition to the payroll taxes that already go there. Presto! Balance--indeed, surplus--now and forever.

Conversely, of course, if the economy were no longer producing, perhaps because of a war that destroyed our productive facilities, the balances in the trust fund would not do the elderly--or anybody else--any good.

A real issue is the declining ratio of young working people to elderly retired people that we can expect in the decades ahead. For the nation as a whole, a trust fund, governmental or private, will not feed those not working. We cannot eat checks or currency. Somebody must work to bake the bread that those not working wish to eat. And those working must be willing to give or be coerced into giving those not working an appropriate share of that bread.

The declining ratio of young workers to elderly retirees will be balanced somewhat by the projected decline in the proportion of non-working children. Thus, the ratio of workers to non-workers will not decline as much as some fear mongers imply. And to the extent to which it does decline, there are remedies.

One, rarely mentioned, is to encourage people to have more children who will be working in the year 2030. Aside from the coercion of limiting the use of contraceptives or of choice regarding abortion, this might entail allowances or tax credits for children and government provision for child care from the earliest ages. The latter would have the added advantage of encouraging more women to enter the labor force.

Another remedy would be the encouragement, rather than the limitation, of immigration. Most immigrants come here looking for work. They and their offspring would swell the work force for decades.

We might also think again about our tolerance of unemployment, whether structural or due to misguided efforts to slow the economy in the interest of fighting inflation. Prosperity--along with education and training programs that make all of our population productive members of society--would go a long way; they’d even swell that trust fund, for whatever that is worth.

And without forcing the elderly to work, we could remove governmental impediments to their working. We might look again at the provision whereby Social Security benefits are delayed for those who chose to work between the ages of 62 and 70 and have significant earned income.

The Kerrey-Simpson proposal would accomplish few or none of these fundamental improvements. Rather, it would drastically reduce benefits in the name of “saving” them.

* It would immediately cut 0.5% from the cost-of-living index each year, so that in five years benefits would be down by 2.5% per year, by establishing a commission that might bring about even greater cuts. If the 0.5% cuts were continued, in 20 years that would mean a reduction of about 10% in benefits.

* An even more severe cut would be imposed by limiting cost-of-living adjustments for the top 70% of benefit recipients to the amounts received by those in the 30th percentile. This would have the insidious effect of converting Social Security from an entitlement for all who contribute into a program giving full benefits only to the poor. That would gravely endanger its mass, middle-class political support.

* The Kerrey-Simpson proposal would permit--and in one bill, mandate--employees to divert two percentage points--almost a third--of their 6.2% payroll contributions to private investment funds, a step that would immediately drive the Social Security trust fund sharply into the red. It would also have the fund invest 25% of its assets in corporate equities--a new move toward socialism? These changes would subject a significant part of retiree benefits to the uncertainty of the stock market, sharply cut federal revenues and increase outlays. Would this new imbalance be corrected by increases in income tax rates or further drastic cuts in programs for education, research, health and everything else? Do we really want either?

* Kerrey and Simpson would sharply reduce benefits for the baby boom generation and their children by gradually increasing the age of full eligibility, now 65, from the already legislated 67 to all of 70 years. Given normal life expectancies, this would prevent millions of Americans--particularly middle-class men--from ever receiving benefits.

The fundamental theme of the Kerrey-Simpson proposal--that it is a move from “a consumption-based system into a system that encourages saving and retirement”--is fallacious. Kerrey and Simpson would do nothing for national saving and investment; it’s not clear that their plan would increase private saving, and they would only increase public dissaving by forcing the government to borrow more from private investors.

The way to “save Social Security” is to ensure--as I believe is ultimately likely--that in the decades ahead our economy will grow vigorously. Our working population will then be sufficiently prosperous to be happy--as they have been for more than half a century--to accord their parents and grandparents the security they have every right to expect. Meanwhile, our Social Security system, arguably the most efficient insurance system of any kind in the world, ain’t broke. Let’s not fall for schemes to take it apart in the guise of “saving” it.