Privatize Social Security Before I Spend Your Pension!

By: Paul Kasriel | Fri, Jan 28, 2005
Print Email

If there were no social security system in this country and the body politic decided that it wanted one now, it is unlikely the model we currently have would be the one chosen. The current social security model, where each succeeding generation of workers pays the benefits of its predecessors, was adopted during the Great Depression as a welfare program for the aged. During the Great Depression, those senior citizens who were able to work could find little employment. And many of those seniors who had saved for their retirements or had pensions found their nest eggs greatly reduced because of the depressed economy and the stock market crash of 1929. So, a welfare program for the aged, established during the Great Depression, persists today. Talk about the tyranny of the status quo!

If we were starting from scratch today to establish some kind of government-forced retirement saving program, it would undoubtedly be one in which employees and employers would be required to contribute a certain percentage of the employee's salary into an account "titled" to the employee. The employee would have investment options - index stock funds, index bond funds and a money-market fund. The retirement benefit received by the employee would be the value of the fund at retirement. The employee would not have access to the fund until retirement. In the event the employee died prior to retirement, his or her heirs would receive the accumulated value of the fund. This would be the basic framework of a social security system if one were being created today. It has the elements of President Bush's partial reform of the current system.

I strongly am advising my adult children, Marisa and Matt, to urge their congressmen and senators to not only support President Bush's partial privatization of social security, but to go for the full Monte. Why? First and foremost, there is no way they will receive the benefits "promised" to them under the current system. So, rather than having the federal government dictate what their benefits will be, they will likely be better off investing their own and their employers' contributions.

But there is another reason why Marisa and Matt should push for total privatization of social security. That reason is to protect them from future presidential administrations like the current one. President Bush's desire to privatize social security almost could be construed as a plea to stop him from spending my kids' pensions.

How has President Bush, and his cohorts in Congress, spent my kids' pensions? Prior to President Bush taking office in January of 2001, the federal government had run budget surpluses of $6.9 billion in fiscal 1998, $125.6 billion in fiscal 1999 and $236.4 billion in fiscal 2000. And during his first year in office, President Bush (43, not 41) presided over a budgetary surplus of $127.4 billion. The chart below shows the contribution of the so-called off-budget financial position to the overall federal surpluses of fiscal years 1998 through 2001. The greatest part of the off-budget accounts relate to the income and outgo of the Social Security System. Because we baby boomers greatly outnumber our parents, Social Security has been running some relatively large surpluses in recent years. As can be seen by the fact in the chart that the off-budget surpluses (the bars) are higher than the total budgetary surplus (the solid line) in fiscal years 1998 and 2001, it was the Social Security System's surpluses in these years that enabled the overall federal budget to be in surplus. Similarly, the overall federal budget deficits in fiscal years 2002, 2003 and 2004 would have been even deeper had it not been for the Social Security System's surpluses in these years of roughly $155 billion to $161 billion. (There is a certain irony that some Bush administration members have, off the record, floated the notion that the transition borrowing necessary to partially privatize Social Security be "off budget." I doubt that these same people ever mention that the "on budget" federal deficit in fiscal 2004 was $568 billion, rather than the popularly-reported combined on- and off-budget deficit of $412 billion.)

What does this have to do with spending my kids' pensions? It is estimated that the Social Security System will start running deficits in 2018, when more of us baby boomers will be eligible for our Social Security "pensions." This means that the Social Security System will have to start dipping into its trust fund. But as is well known now, this trust fund is nothing but IOUs of the U.S. Treasury. So, in order to make good on these IOUs to the Social Security trust fund, the U.S. Treasury will have to go into the market and borrow more unless the federal government cuts its non-Social Security spending or raises taxes. The U.S. Treasury has known for years that the Social Security System was going to start calling some of its IOUs in 2018. Knowing that the Treasury would likely have escalating liabilities coming due starting in 2018, the prudent thing to do would have been to pay down the outstanding publicly-held debt prior to 2018 so that the Treasury would have more borrowing "capacity" going forward from 2018.

This is exactly what was being done at the end of Clinton administration. But in 2001, Fed Chairman Greenspan, the nation's de facto chief economist, endorsed the Bush administration's tax cut. At the same time that tax cuts were being proposed in 2001, federal nondefense expenditures were escalating. Then, of course, defense expenditures escalated after September 11, 2001. And then along came the tax cuts of 2003.

The Social Security trust fund, part of my kids' implicit pensions, has been helping to finance the fiscal profligacy of the Bush administration. Their "piggy bank" has been raided by the "adults." Not only would a privatized social security provide a better guarantee that my kids' will get a better return on their forced pension contributions, it would make it much more difficult for future administrations to run reckless fiscal policies. So Marisa and Matt, try to get full privatization of Social Security so that future administrations can't spend your Social Security "pensions."


Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

Copyright © 2005-2012 The Northern Trust Company

All Images, XHTML Renderings, and Source Code Copyright ©