1/26/2005

Social Security Sleight of Hand

It’s been said that there are two sides to every story. Nowhere is that more true than when trying to determine the future of Social Security. One side says Social Security is in pretty solid shape. And they’re right. The other side says Social Security is in tremendous peril. And they, too, are right.

Is it any wonder we can’t agree on what to do about it?

Understanding Social Security itself is pretty straightforward. Today’s workers pay for today’s benefits. What’s left over – and today there’s lots left over - goes into the Social Security Trust Fund, which is like a savings account that can be drawn upon when the day comes that there aren’t enough workers to pay for that day’s benefits. Simple enough.

What happens with that trust fund is where the problems arise. That’s because the trust fund isn’t put into a bank. Instead, it’s loaned to the federal government, which uses it to pay the current bills. In other words, we are spending tomorrow’s Social Security benefits to fund today’s military, highways, welfare and such.

Now, those who say Social Security is on solid ground point out that the trust fund is invested in U.S. Treasury notes and bonds, among the most secure investments around. True enough. And as long as the government makes good on it’s debts, which it always has, Social Security can probably survive another seventy-five years with just some minor tinkering. But that’s a mighty big if.

That’s because come 2018 – a mere thirteen years from now – we’ll need to start drawing from that trust fund to pay social security benefits. At that point, the federal government won’t have the trust fund to borrow from anymore. Instead, they’ll have to start paying it back. And with our government currently spending fifty percent more than it takes in, that’s like expecting a drunken sailor to pay back the twenty bucks you lent him just before shore leave.

Which begs the question – is it Social Security that needs fixing, or the federal government? Seems pretty obvious that it’s not Social Security that’s acting like the drunken sailor. So why are we focusing on it as the culprit, feeling an immediate need to partially privatize it?

For one, it’s the old sleight-of-hand trick, where the magician diverts attention elsewhere so no one notices what’s going on under the audience’s nose. In this case, they want us looking at Social Security so we don’t focus on the fiscal irresponsibility going on today.

For another, it’s like the family that keeps borrowing from their 401k to fund today’s expenses. Instead of fixing today’s budget that makes such borrowing necessary, they seek higher returns on what remains in the 401k to make up the difference. But as any investment professional will tell you, higher returns always come with higher risk.

None of this means that there isn’t a place for private investment as a component of the Social Security program. Yet as I’ve argued before, it should be as a supplement to, not a replacement for, today’s program. Such an approach will create the ownership society that the president envisions, while reducing our reliance upon Social Security.

But for now, we must be ready to bite the bullet in order to get our fiscal house in order. After all, it’s government of the people, by the people, and therefore, it’s time that we the people take responsibility for the mess we’ve allowed on our watch.

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