David Frum on Social Security

As PBS Watch noted, David Frum at National Review online gets it exactly right on the Social Security "Trust Fund." As David said on Feb. 22: Nobody is denying that the bonds and notes in the Social Security Trust Fund are valid. Of course they are. But when Democrats make this point, they are turning what is really an economic question into a legal one. Yes, yes, yes, the bonds are a binding obligation of the United States government. But the Dems want us to believe that they are also a valuable resource for the United States government - and that is hooey.

Yes, if you or I owned a big bunch of US government bonds, we'd feel pretty comfortable. We could cash them and retire to enjoy our claim on the future labor of others. But it does not do the US government much good to own a big bunch of its own bonds.

The Trust Fund is and always has been a dodge, in this sense: the economic problem of Social Security would be precisely the same if the Trust Fund had never been invented in the first place. It will not make the job of finding the money to pay the promised benefits even an iota easier after 2018 that the US government engages in a preliminary round of bond-cashing. It will still have to raise other taxes or cut other spending, just as if the Fund did not exist.

And as David said on Feb 23: Franklin Roosevelt separated Social Security from general revenues to create the illusion that this redistributive pension system was instead an individual saving plan. Because individuals were led to believe that they were getting back only what they had paid in, plus interest of course, they were persuaded to feel a stronger entitlement than they might have felt had they realized that some were getting back a whole lot more than they paid in and others rather less.

For that reason, Democrats have historically resisted what might seem like the obvious left-wing fix to the system: ie, scrap the whole thing, abolish the regressive payroll tax, raise income taxes, and fund pensions out of general revenues. That fix would have let the cat out of the bag. And so Democrats rejected Moynihan's tactically cunning solution as ultimately strategically unwise - and instead went along with a payroll tax increase that may have injured the people the Democrats claimed as their constituents, but nonetheless preserved what many Democrats regarded as an essential illusion.

As PBS Watch said the Social Security "Trust Fund" bonds are not in the same category as other Treasury bonds. If the government failed to pay on any ordinary treasury bonds, all treasury bond holders would immediately get the word and an economic panic of global proportions would ensue. However, there is only one holder of Social Security "Trust Fund" bonds, the U.S. government itself, which need not panic if Social Security is modified. If Congress decides to reduce, delay, or otherwise modify Social Security benefits, that amounts to a default on the "Trust Fund" bonds, no other type of default is available. But no panic need necessarily ensue, depending on how the change is handled politically. Any panic resulting from a "Trust Fund" default will be a politically engineered panic. Holders of real Treasury bonds should in fact be reassured by any move that takes the pressure of "Trust Fund" bonds. Their holdings would be incrementally more secure as a result.

GOPBlogers described Paul O'Neil's Retirement Plan which proposed that the federal government invest $2,000 for every newborn American, adding $2,000/year for each year until the child reaches age 18. Without adding a single cent beyond compounding after the child turns 18, he or she would retire at age 65 with $1,013,326 in the account, O'Neill reckons.

I don't know that I agree with Paul O'Neil's plan but it does show why the Democrats are so opposed to any form of privatization:

1. They would not be able to spend that part of the SSI tax that the government put into the private plans. Since the primary purpose of the Democrats is to raise as much money in taxes that it can, and then spend that money to keep themselves in power, they are horrified at the thought that they might lose 30% of the SSI income stream and that those funds might be placed outside of their reach. They don't understand that it is the taxpayer's money; they view it as the government's money and they want it all.
   
2. Once someone had enough in their private plan that could support them in retirement, they would not worry about what the government might or might not do with social insecurity so the Dems could not scare them on this topic.
3. If a person owned his own retirement plan, and not the government, the Democrats fear they might become Republicans