Last month, not long after Promontory issued a Cassandra-sized warning over America’s looming pension-fund crisis, Bloomberg weighed in with a plan to rescue Social Security. For those of us with a professional as well as a personal stake in pension-fund sustainability the article lends an authoritative voice for badly needed change. Unfortunately its proposals are instructive less as a reform blueprint than a specimen of stale Washington orthodoxy.
The article opens with cold, inconvenient truths. It notes regretfully how the issue of pension-fund reform has been neglected in a presidential race that has produced more swamp gas than oxygen for an electorate desperate for fresh ideas; it is illustrated with smart, reader-friendly graphics that explain how the number of workers supporting a growing population of retirees is not enough to pay all the benefits they are due; it warns correctly that the Social Security fund will deplete itself by 2034 and it lays out a host of initiatives – from increasing the number of tax-paying legal immigrants to raising the retirement age – to preempt this.
There is nothing new here. The piece reads like those reams of white papers written by think-tank wonks as entrée for jobs with incumbent administrations. However well-penned they tend to ignore the political street fights that maim or emasculate even competently authored and badly needed legislation. Moreover, even if a bill would survive a floor vote and the markup committee it would likely fall prey to lobbyists in the pay of those interests that would oppose it as a law. While Promontory likes the idea of promoting immigration and raising the retirement age as a way to right the actuarial gap, for example, such initiatives would certainly be torpedoed by nativist lawmakers and labor unions. After all, if such initiatives haven’t been tried at the state level why would it work on the federal one?
Sensing a tactical defeat, presidents often back away from what are at heart the warmed-over palliatives of a failed establishment. Remember the last White House effort to pass new immigration laws or the Simpson-Bowles plan to reduce American indebtedness? Even those modest proposals were abandoned, fatherless, to their fate. Meanwhile, the wonks typically resign after a year or so in government to write books about their experiences in the West Wing, which they refer to with fashionable contempt as “the dark side,” and return to their hot houses as senior fellows. Verily thus does the Beltway’s circle of life repeat itself.
As a consumer and a fan of Bloomberg, Promontory was hoping to see more bold ideas alongside the artsy graphics. (The empty, spider-webbed vault as an icon for pension-fund insolvency is particularly good). If the problem is too many retirees and not enough laborers the only solution is to winnow the ranks of beneficiaries. And the only way to do that is to allow taxpayers to opt out of Social Security in exchange for an annual credit equal to their erstwhile Social Security benefits payments, but redeemable only against long-term capital gains. At the same time, pensioners should be able to make considerably larger annual contributions to their IRAs – in the neighborhood of $25,000 or more – while income taxes charged on IRA balances held longer than 10 years or so should be assessed at a much reduced rate or lifted altogether.
Let us now take a cleansing breath while some of our readers untwist their knickers. This is not another robber baron’s plot to “privatize” our national retirement plan. (For that, help yourself to Paul Krugman’s latest jeremiad against bankers and their drones in Congress.) It is a matter of fitting a safety valve on a program that, in its current state, will collapse under the weight of a crushing demographic imbalance. Making Social Security a voluntary system would relieve it of an unsustainable burden while encouraging long-term investment. It would profitably exploit a revenue source that is currently underutilized while unleashing capital available to corporations, federal, state and municipal governments to pay for new public works, infrastructure and businesses. And it would establish once and for all a mechanism for means-testing pensioners with the self-made and self-selected new “retirement rich” on one end of a sliding scale of benefits that would culminate at zero. The objective should not be to kick the rich out of Social Security but to encourage them to do so on their on own, leaving behind the money they contributed and the benefits due them that may be instead redistributed among those in need. If diplomacy is the art of letting someone have your own way why not apply the same net-sum principal to pension-fund reform?
For too long our nation’s capital has been a place where good ideas go to die, done in by a lethal brew of dogma, lassitude and captive interests. While Promontory may concede that the returns on financial liberalization have diminished and should be re-examined it still believes that transparent, well-regulated markets remain the most effective way to leverage human industry. The financial reform introduced forty years ago was a prudent response to a rapidly changing global economy just as Social Security was a judicious answer to the exigencies of its time. But reform that does not adjust to new realities becomes an end of itself, ossified, corrupt, an enemy of change.
Let’s hope that today’s election produces the kind of thoughtful leadership that understands this.