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Neil H. Buchanan

Scaring the Kids and Grandkids: Tactics to Scare Younger Americans Into Supporting Unnecessary Changes in Social Security


Thursday, September 2, 2010

Social Security is likely to re-emerge soon as a flashpoint in American politics. Last month's marking of Social Security's 75 th anniversary briefly put a spotlight on the program, and the debate over Social Security's future is sure to heat up after the mid-term elections.

Broadly speaking, there are two camps among those who believe that Social Security is a high policy priority. First, there are those who have never liked Social Security, simply as a matter of philosophy. This anti-government position has, however, been an especially difficult one to hold over the decades, at least with respect to Social Security, because of Social Security's success both as policy and as politics.

Even so, this camp now sees an opening to dismantle Social Security, and it is happily repeating dishonest attacks on Social Security that were debunked during the attempt in 2005 to gut the system. During that ill-fated campaign, then-President Bush declared (among many other canards) that the Social Security Trust Funds do not have "real" money in them, but instead are filled with nothing but IOUs. The problem with that argument, however, is that no financial assets have "real" money in them. Bank accounts, mutual funds, stock portfolios, and so on, are all nothing but IOUs. But because the goal of people in this camp is simply to destroy Social Security, accuracy is not a high priority.

The second camp, by contrast, sees itself as the defender of Social Security. Members of this group do not want to end Social Security (or privatize it, which is the same thing). They believe, however, that the system's finances are "broken" and, therefore, that the system must be reconfigured in order to stave off disaster. This "pain now to avoid bigger pain later" camp includes a large number of prominent Democrats and centrist commentators.

These two camps' combined influence has, quite unexpectedly, moved Social Security into the position of being in real danger of fundamental change through a messy political process. Such change would be a mistake, because there is no reason that Social Security should be even a small political issue right now, much less the next big thing in American politics.

In this column, I will address some of the most popular myths that are being used to scare younger people into thinking that Social Security is a bad deal. In particular, I will describe why it is impossible, as some would prefer, to have each generation be responsible for only its own retirement, and no one else's. The fact -- neither a happy nor a sad fact, but just a fact -- is that every generation depends on other generations. And that is true no matter what method of financing a society uses to support its retirement system.

Appeals to Young People's Self-Interest: Scare Tactics and Distortions

Notwithstanding their very different goals and ideals, the two camps described above share the habit of trying to scare young people into thinking that Social Security is a bad deal -- that it is merely a scam by which their parents and grandparents are forcing them to pay taxes now, in order to support a system that will be bankrupt and abandoned just before today's younger workers will have a chance to collect promised benefits. If we scare the kids, the thinking apparently goes, we can get them to support changing Social Security.

Among those who purport to support Social Security, but who profess only a desire to fix its supposed financing problems, it has now become rather common practice to overstate the system's possible future financing difficulties, suggesting both that the system is doomed if it is not changed, and that any fix will be much less expensive if it is enacted sooner rather than later. Neither of those claims is true.

For example, Lawrence O'Donnell, a liberal commentator and former Democratic aide in the U.S. Senate, conducted two telling interviews earlier this week as the guest host on MSNBC's "Countdown with Keith Olbermann." Both of the interviewees appeared to be in their late twenties or early thirties, and thus to belong to precisely the age demographic of those who are widely believed to be the most worried about being ripped off by Social Security.

O'Donnell, therefore, included the following suggestive comment in his questioning of one of his guests: "[T]here are problems in Social Security for you." By "you," he clearly meant people born after the Baby Boom, as he added: "It is solvent until 2037. But workers your age who are contributing to Social Security every day, we can currently tell you that when your time comes to collect, the money will not be there, according to all the projections that we have today."

This statement contains two clear errors. First, as the interviewee started to explain (and as I have explained in a recent FindLaw column), even if Social Security's retirement trust fund reaches a zero balance, it is simply not true that "the money will not be there." The most recent estimate from Social Security's trustees is that the system could still pay 78% of scheduled benefits from 2037 forward, under one conservative forecasting scenario.

O'Donnell quickly (but dismissively) acknowledged this general concept, but he then began, essentially, to bargain down the number: "It will always be able to pay 75, 60 cents on a dollar because it's going to always be collecting something. … Is that going to be OK with people your age to collect 65 percent of what they're projecting?" There was no indication where any of those numbers came from -- and, indeed, they seemed to be simply made up on the spot.

The second clear error was in O'Donnell's statement that the system is doomed, "according to all the projections that we have today." As anyone paying even a little bit of attention to the debate should know, the Social Security trustees themselves have consistently issued three forecast scenarios, in one of which the system never drains the trust funds.

Nevertheless, O'Donnell then told his second interviewee: "It's [a problem] for workers like you if we're content to sit here and say it's OK if we have to pay, you know, three-quarters of the benefits in 2037. It's the younger workers, the workers in their 20s and 30s that will be hit very, very hard by that and very suddenly."

It is especially important to note that the various proposals to change Social Security's finances all involve raising taxes or cutting benefits for future generations. The suggestion, therefore, is that younger workers should support changes to Social Security, because at some point there might be a need to change the system. Or, as the economist Paul Krugman accurately summed up this argument recently: "In order to avoid the possibility of future benefit cuts, we must cut future benefits. O.K."

The O'Donnell interviews are notable for their having appeared on a program with a clearly liberal slant. Even so, a liberal attacking Social Security should not be surprising, because the "respectable" liberal position in Washington is now one that accepts that Social Security is in trouble. The only issue is how to respond. Those who (accurately) challenge that orthodoxy are apparently not part of the conversation.

Generational Independence? Why Private Accounts Would Not End the Burdens of the Young on the Old

The broader question, however, is whether there might have been a better way to set up our retirement support system in the first place. Why, after all, should the children and grandchildren of the Baby Boomers have to support their numerous forebears through the Social Security system? Would it not have been better to have every generation support itself? And if it would indeed have been better to do so, then would it be possible to move toward such a system as soon as we can?

In an op-ed piece celebrating Social Security's anniversary, for example, the journalist Roger Lowenstein offered the following comments: "The actuarial problem in Social Security is that, instead of each generation supporting itself, as in a normal pension system, in Social Security each generation supports its elders," and "We could end the problem forever by raising taxes to pay for the older generation's retirement, allowing each future generation to save for itself."

Lowenstein, though he is a journalist and is not directly trained in public-policy analysis, has become an astute observer of the Social Security system. Even so, these comments seriously misstate the nature of retirement in a modern society. As it turns out, even a "normal" system, in which every worker would save for her own retirement, would not be able to insulate one generation from its parents' retirement costs. No generation can really "pay for itself" during its retirement.

Imagine, for example, that the U.S. had set up a system of private accounts in 1935, with each worker holding money (although, as I describe above, that money is actually IOUs) in an account from which she can draw money to support herself in retirement. To make the mental exercise as simple as possible, we can even assume -- against all odds -- that every retiree saved enough money during her working life to support herself at the level that Social Security's benefits currently allow.

In such a world, each worker would be forever free of paying Social Security taxes. On the other hand, each worker would have to pay (on average) the same amount into her retirement account that she would have had to pay in taxes. Each worker's own spendable income, therefore, would be no different under a "normal" retirement system than it would be under Social Security. (Claims that private accounts could earn higher rates of return by being invested in the stock market have been thoroughly debunked -- as well as being especially preposterous in light of the havoc in financial markets over the last several years.)

Even so, is the worker in the non-Social Security world free of being responsible for the support of retirees? Not at all. When the worker goes to the store, retirees will be there with their money (in this hypothetical, the proceeds from their retirement accounts, rather than a Social Security check), buying goods and services. From the standpoint of a current worker, it does not matter where the people who have money to buy goods and services obtained the money, only that they have the money in hand.

In general, of course, this is good news. Businesses will be happy to sell their wares to retirees, and retirees will not be abandoned to lives of desperation and poverty. On the other hand, however, those businesses can only produce their goods and services by hiring younger people -- workers who have not yet retired -- to work in their factories and offices.

This means that the workers in this world without Social Security must still produce goods for people who are no longer working. If we are willing to allow people to retire, we implicitly are willing to force younger people to work harder than they otherwise would have to work. As long as some people work and some people do not, there is no way to make a generation independent of its retired predecessors.

The Best Way to Reduce the Burden on Younger Workers: Education

Therefore, while it is true, as Lowenstein put it, that "in Social Security each generation supports its elders," that is just as true in any other system that allows people to retire in dignity. Workers must, as a group, always produce more goods and services than they would have had to produce if they were only supporting themselves. The only question is how best to equip them to do so.

The most important issue facing any generation as it enters the work force, therefore, is how productive it can be. This means, in turn, that the most important issue facing every generation (and every member of every generation, even those without children of their own), as it leaves the work force, is: How productive can our children and grandchildren be?

The only path to reducing intergenerational burdens, therefore, is to make each generation as productive as possible. Doing so will allow each generation to provide itself and its parents (and, for that matter, its children) with the highest living standards possible. And the only sure path to higher productivity is better education.

Therefore, rather than scaring younger people into believing that Social Security is an inherently burdensome system that somehow cheats them, in a way that accrues to the benefit of older people, we should redouble our efforts to improve our schools and universities. We cannot change the fundamental fact that every retired generation is a burden on its heirs. We can, however, make that burden much easier to bear.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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