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Nationally syndicated columnist Robert Novak (pictured), a graduate of the University of Illinois, presided over a recent debate on social security in Chicago. Ralf Seiffe reviews...

Thursday, May 12, 2005

By Ralf Seiffe

OPINION - What passes for debate around Social Security ranges from distinguished to dishwater but regardless of the debater’s position, they may be missing entirely the biggest looming problem.

The CATO Institute held a mini-forum on the subject last week featuring the wisdom of Bob Novak, the syndicated columnist and the sparring of Dean Baker, PhD, from the Economic Policy Institute versus Ed Tanner from Cato.

Novak addressed the political, mostly, faulting the president for not providing a debatable plan. Failing to create a plan led to uncertainty on which the Democrats have powerfully capitalized.

Novak’s take on what to watch was interesting; his advice was to monitor Bill Thomas in the Ways and Means Committee. Novak reasoned that Thomas is facing his term limit as committee chairman and that he wants to leave some mark on the sands of history.

Novak’s explanation of why he’s known as the “Prince of Darkness” was worth the modest admission price Cato asked; unfortunately the debate was far more predictable.

Baker is the author of Social Security - The Phony Crisis and he took the position that title predicts. He acknowledged the fact that we are living longer and that there are fewer workers to support the retired than the system previously enjoyed.

Nevertheless, he postulated, there is no crisis that a little tweaking would not solve. His prescription was to raise the wages subject to payroll tax to 90% of all payroll, up from the mid-80’s percentile today. He told the crowd that this would cover the half-percent shortfall in funding the system needs to remain solvent.

To impeach private accounts, Baker challenged supporters to come up with a combination of equity price increases and dividends that would provide the return required to make the accounts pay off. That’s an easy answer--even if one makes the worst possible decisions.

If, for example, the exuberance of the markets seduced you at the worst possible times, you would have invested in September 1929 when the Dow Jones Industrial Average was at the decade’s apogee of 381.

Held through the Great Depression, World War and Malaise, until today, you would have earned 4.6% compounded annually. Decide to invest the day the market hit 1,000 for the first time in November 1972? You’d earn 7.4%. Made another bad decision to invest in the market in January 1987 when it hit 2,000? You would have earned 9.5%.

So the difference between the best decision and the worst decision ranges from three times the projected “return” on Social Security to 6.3 times that imaginary number.

Here’s another thought, Dr. Baker.

Let new workers invest all their 12.4% Social Security for the first five years they work. A 22 year old, earning $12.50 per hour and retiring at 67, would accumulate about $310,000 at the average of these worst rates. Baker also asked for a dividend rate. Add a 1.3% dividend yield and the nest egg rises to more than $520,000 at retirement.

To put this in perspective, that’s about ten times the average pension obligation United Airlines pushed off on the taxpayers, according to Wednesday’s radio news reports.

Not only that, at a 5% return thereafter, the retiree could replace his income and completely replace Social Security without touching the principal.

Ed Tanner alluded to better returns but also made the case that compulsory Social Security is not the best feature of a society interested in individual freedom. As such, choice to participate or not is an admirable societal goal, regardless of whether one stays in Social Security or not.

At the reception following, however, a more important question emerged that makes the debaters’ effort almost moot. Sheila Weinberg, the founder of the Institute For Truth In Accounting, and an expert in Social Security financial concepts, asked a profound question.

She wondered if future generations, asked to pay for the baby boomers’ retirements, might simply refuse.

This isn’t a new concept but Weinberg attached a rationale that will begin to make sense just a few years from now. She asked if future taxpayers might look at history and decide that the baby boomers had already spent their Social Security money. The increased taxes that were collected and should have been devoted to the “lock box” but were spent on other government projects, purchased at the expense of posterity.

At that time, these future taxpayers will also be paying off the bonds that the government is now printing to support the deficit we’re accumulating. Faced with this, why should the baby boomers’ children--and grandchildren--agree to a much higher payroll tax and put off their own lifestyles to support promises made by profligate politicians who refused to see the obvious in 2005?

Around 2022, the generation then entering it’s peak earning years will face large payroll taxes and a marginal tax bite. That may motivate them to mark the intergenerational Social Security bill “PAID”.

In hindsight, private accounts will then never look so good.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.