When hyperliberal Democratic President Franklin D. Roosevelt, in the midst of the Great Depression, first broached the subject of creating the Social Security system, he candidly envisioned it as a watershed in American life. Americans would be moving from an era of individualism to an era of big government.
Now President Bush is seeking to transform this hallmark “New Deal” program by offering what he called in his State of the Union address a “better deal.” If this deal is done correctly, it can help move Americans away from big government and back toward the highlands of individual self-reliance.
“[S]ecurity was attained in the earlier days through the interdependence of members of families upon each other and of the families within a community upon each other,” Roosevelt soothingly said in a June 8, 1934, message to Congress. “The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the nation as a whole through government in order to encourage greater security for each individual who composes it.”
But if Roosevelt envisioned the government’s supplanting the family as the chief guarantor of financial security in America, even he did not seem to foresee Social Security’s becoming the massive, tax-funded, federal Ponzi scheme it is now.
“I believe the funds necessary to provide this insurance should be raised by contribution rather than by an increase in general taxation,” said Roosevelt, ” . . . leaving the federal government the responsibility of investing, maintaining and safeguarding the funds constituting the necessary insurance reserves.”
Today, however, American workers pay a mandatory 6.2% federal payroll tax to take part in the Social Security system. Their employers pay another 6.2% Social Security payroll tax on their behalf. Every penny of the revenue derived from these taxes is spent each year by the federal government. Some goes to pay benefits to current retirees, and some goes to pay the general expenses of a federal behemoth that this year will consume $2.6 trillion, while running a deficit of more than $400 billion.
Some of the Social Security payroll taxes paid by Americans in their 20s this year will go to fund such things as the National Endowment for the Arts and the Corporation for Public Broadcasting. Yet, when these young workers reach retirement age, there may not be enough payroll-tax revenue to cover the benefits they will have merited from a lifetime of paying those taxes themselves.
“The system . . . on its current path,” President Bush stated plainly in his State of the Union address, “is headed toward bankruptcy.”
Fifty years ago, as Bush explained, there were 16 Social Security taxpayers for each Social Security recipient. Today, there are just over three taxpayers for each recipient. When the younger generation retires, there will be only about two taxpayers for each recipient.
This cannot stand.
“So here is the result,” said Bush. “Thirteen years from now, in 2018, Social Security will be paying out more than it takes in. And every year afterward will bring a new shortfall, bigger than the year before.”
“If steps are not taken to avert that outcome,” said Bush, “the only solutions would be dramatically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs.”
President Bush, however, is ready to forge a solution now by reforming Social Security through the creation of personal retirement accounts.
“If you are a younger worker,” Bush said in the State of the Union, “I believe you should be able to set aside part of that money in your own retirement account, so you can build a nest egg for your own future.
“Here is why personal retirement accounts are a better deal,” he said. “Your money will grow, over time, at a greater rate than anything the current system can deliver, and your account will provide money for retirement over and above the check you will receive from Social Security. In addition, you’ll be able to pass along the money that accumulates in your personal retirement accounts, if you wish, to your children and grandchildren. And, best of all, the money in the account is yours, and the government can never take it away.”
Redirecting what has long been called the Third Rail of American politics so it points toward a society where Americans will enjoy greater wealth and greater control of their own economic destiny will require a monumental political effort.
There are dangerous potential detours along the way. The proposal, for example, could become an excuse for raising taxes by increasing the level of income subject to the payroll tax (which would impose a massive marginal tax increase on many middle-class families). It could also be used to create a cumbersome new bureaucracy of government-operated mutual funds that confound, rather than expand, the free-market. And if Republicans lean over too far to accommodate Democrats, as they did during the debate over Medicare prescription drugs, they might do something like introduce means-testing into the program (as even Bush suggested in his speech), and rather than modernize Social Security, convert it into on old-fashioned welfare program.
But if this Congress can avoid these traps and enact President Bush’s core idea of personally owned, inheritable, Social Security retirement accounts, it will strike an historic blow against big government and in favor of individual liberty.