Let’s Totally Revise Social Security

Don’t blame Democrats for last week’s defeat of the balanced budget amendment. They did the politically smart thing. They took advantage of a vast hole in the Republicans’ Contract With America - its silence on the issue of Social Security.

A band of senators, led by North Dakotans Kent Conrad and Byron Dorgan, exploited people’s natural skepticism about Washington by predicting that Republicans would use the balanced budget amendment as an excuse to loot the Social Security trust fund and impoverish the nation’s orphans and retirees.

There’s one teensy flaw in that argument. The Social Security trust fund no longer exists. Congress has plundered it for years to finance ongoing federal operations. John Goodman, head of the National Center for Policy Analysis, explains that “every dollar that comes in for Social Security is spent the very hour - the very minute - it comes in.”

Conrad and Dorgan claimed that they don’t want Congress to rob the fund, but there is barely anything left to steal. Even under the rosiest scenarios, the Social Security trust fund (which actually includes separate accounts for old-age and survivors insurance, disability insurance and hospital insurance) will begin losing money in 1999.

In fact, the key question of our era is not whether Congress will raid Social Security but whether “entitlement programs” - Social Security and Medicare Part B - will push the country into bankruptcy.

Under “intermediate assumptions” by the trustees of the two systems, Medicare will cost Americans $41 billion this year, with the annual taxpayer burden expanding to $156.1 billion by 2015. Meanwhile, the Social Security trust funds will begin losing money in three years ($2.6 billion), and the yearly shortfall will increase to $155.9 billion in 2015.

The cumulative deficits for the next 20 years will come to $1.021 trillion for Social Security and $2.158 trillion for Medicare - a combined total of nearly $3.2 trillion. The bad news is that the “intermediate assumptions” probably understate the crisis. Americans are living longer than ever before, and the greater the average life span, the larger the entitlement gap.

Congress has tried to paper over the problem in the past by raising taxes and pushing back the age at which people may retire and collect benefits. Republicans had a chance to propose something far bolder and more visionary this year - but they balked.

So consider an alternative to the status quo. Call it the Chilean model, after an experiment undertaken in Chile 15 years ago. It consists of three parts: First, tell new workers they can’t enter the social security system and that they must place a certain percentage of their earnings into a certified pension plan instead.

Second, let people under a certain age (say, 55) stop paying into social security and start putting money into a private plan. The government still will guarantee social security payments commensurate with the workers’ lifetime contributions.

Finally, maintain benefits to everyone 55 and older.

Chile began using such a system in 1980, and the results are astounding: The savings rate in the country has jumped from single digits to 25 percent. The pension plans have produced annual yields averaging 14 percent - as compared to Social Security returns of less than 1 percent.

The retirement accounts have fueled an economic explosion in the country. The funds provide 40 percent of Chile’s wealth, and the economy has grown by an annual average of 7 percent since 1985 (after correcting for inflation) - more than five times the growth rate in the United States.

The difference between Chile’s system and ours is freedom. The Chilean people handle their individual retirement plans, while our system pulls 15.3 percent of every earned dollar into a fiscal black hole.

Most Americans appreciate the entitlements problem. A recent Frank Luntz poll indicated that baby boomers are twice as likely to believe in the possibility of UFOs than in the possibility of ever receiving a Social Security check. Russell Roberts of the Center for the Study of American Business - and a former staffer at the Social Security Administration - says bluntly, “Everyone under the age of 45 is an enthusiastic hater of Social Security. That’s a dramatic change from 20 years ago, when it was considered holy.”

The balanced budget vote dramatized the high price of political cowardice. Republicans had a chance to promote reforms that would honor old promises, promote future growth and protect younger generations from crushing burdens. Instead, they held their tongues - and handed victory to Conrad, Dorgan and the other Chicken Little Democrats.

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