Some Thoughts on Social Security
Many, many corporate defined benefit pension plans and many, many multiemployer “Taft-Hartley” union defined benefit pension plans are in financial trouble. Why? Because they raised benefits too high. Because their stream of contributions to the plan were too low. Because the demographic mix of active participants (workers) to inactive participants and beneficiaries (retirees) shifted toward more inactives. (This is important because most pension plans are wage-based, with contributions to the plan being based on a percentage of the wages paid to active employers. When the number of actives goes down, the amount of contributions goes down.)
If all this sounds familiar, it should. Large corporate and multiemployer plans are a good model for the ills currently facing Social Security. So it makes sense to look at what corporations and unions are doing for their pension plans to keep them solvent. Private pensions are doing some or all of the following:
1. Cutting future benefit accruals and COLAs. In the private pension context, you can’t cut vested benefits as a matter of law. In the Social Security system, you can’t cut vested benefits (i.e., current retirees’ current benefit levels)as a matter of politics. But you can cut future accruals for active employees (i.e. younger workers) legally, because they haven’t vested yet – the worker has no property right in those future accruals. And you can cut COLAs to retirees, because those increases are essentially gratuitous. While politically unpalatable, this is the route Social Security will likely take. President Bush’s plan is essentially a plan to cut future COLAs for some participants ("the rich") by price-indexing them rather than wage-indexing them.
2. Raising contributions. In the private context, this means the company will put more money into the plan. But where does it come from? The company doesn’t care whether it pays wages or benefits – it’s all just the cost of labor, the cost of hiring Person X. If the cost of benefits goes up, over time the company will just pay less in wages, i.e., the worker’s salary will essentially be “taxed” to pay for benefits that are being paid to current retirees. Meanwhile, and similarly, in the government context, raising “contributions” to Social Security means raising payroll taxes, either as an increase in the rate or an increase in the ceiling for wages subject to the tax.
3. Investing in equity markets to get higher returns. The oddity of the Social Security debate and the Chicken Little fear fomented by Democrats that investing in stocks is too risky is that many, if not most, Americans – including the mostly Democratic members of teachers’ unions, members of public employee unions like CALPERS, etc. – have 60-70% of their pension funds invested in equity markets already. Over time, these investments have paid off and enabled higher benefits. (Too high, given the downturn in the markets in 2000-2002, but that’s the fault of raising the benefits, not a fault in the idea of getting a higher return over time through equities.) A bold idea – probably too bold – would be to take the current SS surpluses and, even without PSAs, invest broadly in the market, rather than spending them on other government programs. The SS system would get the return, and the influx of capital would provide a boost to the economy. And then their really would be a SS “trust fund,” rather than just IOUs.
4. Shifting the retirement plan away from defined benefits toward 401ks that are owned by the individual employee, who gets to reap the benefit of market returns over time. In the Social Security context, this is essentially President Bush’s plan for personal accounts. Why the Democrats are so fearful of something that is so normal in the rest of society is a mystery. Or maybe it’s not such a mystery. But that’s another story.
As for Social Security, as a conservative, I can get behind #1 cutting future accruals (if it were across the board price-indexing for everyone), #3 investing the SS “trust fund” in real assets, i.e., the equity markets (although I would obviously be leery of the U.S. government gaining too much power in the economy if they had trillions to invest) and #4 personal 401k-like accounts (in a big way, because it is the most conducive to individual freedom and dignity).
If all this sounds familiar, it should. Large corporate and multiemployer plans are a good model for the ills currently facing Social Security. So it makes sense to look at what corporations and unions are doing for their pension plans to keep them solvent. Private pensions are doing some or all of the following:
1. Cutting future benefit accruals and COLAs. In the private pension context, you can’t cut vested benefits as a matter of law. In the Social Security system, you can’t cut vested benefits (i.e., current retirees’ current benefit levels)as a matter of politics. But you can cut future accruals for active employees (i.e. younger workers) legally, because they haven’t vested yet – the worker has no property right in those future accruals. And you can cut COLAs to retirees, because those increases are essentially gratuitous. While politically unpalatable, this is the route Social Security will likely take. President Bush’s plan is essentially a plan to cut future COLAs for some participants ("the rich") by price-indexing them rather than wage-indexing them.
2. Raising contributions. In the private context, this means the company will put more money into the plan. But where does it come from? The company doesn’t care whether it pays wages or benefits – it’s all just the cost of labor, the cost of hiring Person X. If the cost of benefits goes up, over time the company will just pay less in wages, i.e., the worker’s salary will essentially be “taxed” to pay for benefits that are being paid to current retirees. Meanwhile, and similarly, in the government context, raising “contributions” to Social Security means raising payroll taxes, either as an increase in the rate or an increase in the ceiling for wages subject to the tax.
3. Investing in equity markets to get higher returns. The oddity of the Social Security debate and the Chicken Little fear fomented by Democrats that investing in stocks is too risky is that many, if not most, Americans – including the mostly Democratic members of teachers’ unions, members of public employee unions like CALPERS, etc. – have 60-70% of their pension funds invested in equity markets already. Over time, these investments have paid off and enabled higher benefits. (Too high, given the downturn in the markets in 2000-2002, but that’s the fault of raising the benefits, not a fault in the idea of getting a higher return over time through equities.) A bold idea – probably too bold – would be to take the current SS surpluses and, even without PSAs, invest broadly in the market, rather than spending them on other government programs. The SS system would get the return, and the influx of capital would provide a boost to the economy. And then their really would be a SS “trust fund,” rather than just IOUs.
4. Shifting the retirement plan away from defined benefits toward 401ks that are owned by the individual employee, who gets to reap the benefit of market returns over time. In the Social Security context, this is essentially President Bush’s plan for personal accounts. Why the Democrats are so fearful of something that is so normal in the rest of society is a mystery. Or maybe it’s not such a mystery. But that’s another story.
As for Social Security, as a conservative, I can get behind #1 cutting future accruals (if it were across the board price-indexing for everyone), #3 investing the SS “trust fund” in real assets, i.e., the equity markets (although I would obviously be leery of the U.S. government gaining too much power in the economy if they had trillions to invest) and #4 personal 401k-like accounts (in a big way, because it is the most conducive to individual freedom and dignity).
posted by PDB at 6:58 AM
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