February 21, 2011
The only hoax here is the so-called crisis; Social Security's critics are stoking baseless fears—A Commentary by Theodore R. Marmor and and Jerry L. Mashaw
The following commentary was published in the Philadelphia Inquirer on February 21, 2011.
The only hoax here is the so-called crisis; Social Security's critics are stoking baseless fears.
By Theodore R. Marmor and and Jerry L. Mashaw
The continuing discourse about the federal budget deficit and Social Security has proven to be thoroughly misleading and confusing. As a result, most Americans are understandably uncertain about the financial stability of Social Security and its connection to the budget deficit. We offer some examples of how not to regard this connection, all drawn from the public debate of the past year.
Social Security retirement benefits, we regularly hear, must be cut to solve the nation's long-term budget deficit. This is triply wrongheaded.
First, the retirement program has a $2.6 trillion surplus; it's an island of green in a sea of red ink. Second, virtually all of the nation's long-term deficit can be blamed on interest on the national debt and rising health-care costs. Third, the idea that pensions must be cut relies on two assumptions: that the Social Security program is in trouble, and that its revenues cannot be increased - neither of which withstands examination.
Critics regularly claim that Social Security faces a looming fiscal crisis. There may be a crisis someday, but it is not "looming." If, as the program's trustees say, Social Security can pay 100 percent of promised benefits for the next 20 to 30 years, what is the immediate problem? There is none.
Social Security is not free of issues, and there are ways to responsibly increase confidence in the program. But making significant cuts in benefits now on the basis of 75-year projections would be a very strange approach. Would any serious person have made significant policy decisions in 1936 on the basis of predictions about the state of the economy and pensions in 2011?
Some opponents of Social Security claim the crisis is already here. One version of their story is that the $2.6 trillion surplus in the program's trust fund is a "hoax." Because the trust fund holds U.S. Treasury bonds, these critics mock it as relying on mere pieces of paper, or "IOUs."
Bonds, of course, are pieces of paper that promise future payments to the bondholder. But U.S. Treasury bonds are known in the world of finance as virtually riskless investments; there is no more secure financial instrument. Its reliance on Treasury bonds does not make the Social Security trust fund a "hoax."
Similarly, the public is warned that Social Security is a "Ponzi scheme." The critics mean that, trust fund aside, benefit payments to today's retirees are financed by today's workers, and the benefits of the next generation will be financed by the following generation, and so on.
If a private individual - Bernie Madoff, for example - sets up a plan in which future payments depend on attracting new investors, it's an unsustainable Ponzi scheme. At some point, all such schemers will fail to attract enough new investors to pay their existing clientele. The scheme goes bust.
But Bernie Madoffs do not have taxing power. This Ponzi analogy defines any government program or contract that relies on future taxes as a fraud. That makes no sense.
The analogy might apply if it were politically impossible to increase Social Security's long-term financial stability by raising revenues in the future. And one can imagine a world in which the federal government stops making good on some of its promises because of the public's aversion to taxes. But it's very hard to imagine that in the case of Social Security. Whatever they think about taxes in general, polls show that Americans of every age, income group, and political party would overwhelmingly prefer raising the taxes that support Social Security to reducing its benefits.
In short, linking Social Security financing to the broader federal budget deficit is misguided. And arguing that its finances are fictitious or unsustainable is nothing more than a scare tactic designed to tarnish America's single most popular public program.
Theodore R. Marmor is a professor emeritus at the Yale School of Management. Jerry Mashaw is a professor at Yale Law School.