FOOL ON THE HILL: An Investment Opinion
The second debate has come and gone and neither Gore nor Bush gets to the heart of the matter on Social Security -- developing a fiscally prudent, public safety net for our citizens in need, whether the need stems from the death of a wage-earner, disability, or old age.
Here's the deal. Neither Gore nor Bush, as I read them, gets to the heart of the matter -- developing a fiscally prudent, public safety net for our citizens in need, whether the need stems from the death of a wage-earner, disability, or old age.
The problem, it seems to me, is that both candidates continue to discuss Social Security as a retirement program, as opposed to a public commitment to end the suffering of the poor. The latter is the vision I get when I read these words from Franklin D. Roosevelt, the man who brought Social Security into being:
"We can never insure 100% of the population against 100% of the hazards and vicissitudes of life. But, we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age." -- August 14, 1935
It's true that, over the years, Social Security has become viewed by most as a retirement program. In fact, without a lot of effort, I can find a quote from former U.S. President George Bush that turns this perception into a political promise:
"To every American out there on Social Security, to every American supporting that system today, and to everyone counting on it when they retire, we made a promise to you, and we are going to keep it." -- January 31, 1990
But, the bare facts of today's Social Security program seem to tell a different story, one in line with the vision of a public safety net, as opposed to a retirement plan. According to the Social Security Administration, one in three beneficiaries is not even a retiree. If you study benefits paid to families of deceased wage-earners, you see that these are, by no means, a sufficient substitute for adequate life insurance. In the same way, Social Security disability payments are no substitute for group or private disability insurance.
How often have you heard someone say, in a derisive tone, "No way I'm counting on Social Security. I'm planning for my retirement without it!" When I hear this, I think to myself, "Great!" I'd feel exactly the same way if I ever heard someone say, "No way I'm counting on Social Security disability benefits for my family. I'm buying long-term disability insurance on my own!"
And, when I hear people complain about paying for Social Security benefits that they won't ever need, I wonder how many of these people have adequate disability insurance? According to current U.S. Census data, only 43% of medium and large firms, and just 22% of small firms, provide long-term disability insurance -- less than half the equivalent rates for employer-provided life insurance benefits. My guess is that plenty of free-market-lovin', entrepreneurial capitalists will soon be drawing disability checks from Social Security.
As with any public assistance program, the goal should always be education and incentives that prod citizens towards taking care of their own needs, in the private sector, in combination with realistic economic opportunities for those who make the effort. Nowadays, I think almost everyone agrees with this.
The reality, of course, is that no matter how clever we get with incentives, some fraction of the population will always need help. We get bogged down arguing about whether this is due to choice, lack of responsible financial planning, unfair economic barriers, or just plain cruel fate, but it doesn't really matter. At the end of the day, some people will need help, and I hope we'll never turn our backs on them.
In light of current fiscal projections for Social Security, I see a need to steer reform conversations away from retirement planning and towards these needs of the poor. Almost everyone who has studied the problem in depth, it seems, admits that true reform will have to include either higher payroll taxes or some form of reduced benefits. If a retirement promise was made, isn't this the time to address whether it can reasonably be met?
Al Gore promises me a Social Security "lock box." It sure sounds comfy, but I can't find any specific plan that tells me exactly what this is. How will the funds be separated from the annual budget and how does this solve the problem? Once we define the box, don't we have to put some additional money in it to meet the projected shortfall? Where does the extra money come from? Budget surpluses? If so, it seems to me that the crux of his plan is a payroll tax increase, not a lock box.
George Bush wants to add private investment accounts to the Social Security program. I see this as making the problem worse, not better, by perpetuating the costly notion that Social Security is a retirement program. If George wants to give me additional opportunities to save for my future, I'd prefer he just raise the IRA annual contribution limits.
And, when it comes to rate of return on the Social Security trust fund, both candidates appear to be full of hot air. The main reason that the trust fund gets such crappy returns is that it doesn't exist, at least not in the way it's commonly perceived to exist. We can compare the "trust fund" to a family budget. In this scenario, there is no nest egg beyond monthly income and expenses, and short-term emergency savings. In other words, there is no money to invest for the long term, and without this, stock market rates are not a practical expectation.
If George wants to promise better investment returns on Social Security funds, I need to hear where this long-term nest egg is going to come from. It's clear that it won't materialize without changes in inflows or outflows. That's the real question.
For his part, Al just spreads alarm, relentlessly, about "putting Social Security money in the stock market," as if the capital markets were some kind of scum-ridden cesspool of cheats and con-artists, as opposed to the fundamental engine of our economy.
If either of these guys has something useful to offer, I'd sure like to hear about it. I'd prefer a referendum on whether Social Security should be funded as a retirement plan or a safety net for the poor. Such a dialog won't make voters feel good -- the way that visions of lock boxes and private investment plans do -- but it will get us to the heart of the real problem.
Have a strong feeling on this topic? Make your voice heard in our follow-up poll on the Social Security Reform discussion board.