by D. Dowd Muska
hat do Nevadas public employees have in common with the citizens of Chile, Australia, Hungary and Singapore? All of their pensions are backed by real assetsnot worthless IOUs from their countries central governments.
Advocates of Social Security privatization regularly cite the successful shifts foreign nations are making from tax-funded pension systems to choice-driven market plans. Theres plenty to talk about, of course. Chiles immensely popular program, implemented in 1981, has inspired privatization efforts in dozens of nations.
Yet talk about the worlds liberation from state-run pension plans often obscures a similar story here at home. Existing privatization successes in the U.S. are dirty little secrets the entitlement industry would like to keep hidden. But with Social Security reform perhaps the hottest topic on the nations radar screen, a remarkable fact is seeping out: The six million public employees allowed to opt out of the Social Security system are enjoying rates of return most Americans can only dream about.
The Broken Code of Silence
ts hard to find someone still willing to defend Social Securitys status quo. For decades conservative and libertarian intellectuals stressed that with the number of retirees and Americans life expectancy both on the rise, a state-run pension system would either go bankrupt or place a crushing tax burden on future generations. Occasionally a politician might fess up to this looming disaster, but with reelection the primary goal for legislative careerists, most followed the standard operating procedure: Keep your mouth shut.
Clearly, the code of silence has been broken. Activism by both Baby Boomers and Generation Xers, privatization efforts abroad and the growth of individual retirement accounts and 401(k) programs at home have inserted backbones into more than a few elected officials. And its not just politicians on the rightliberal icons such as Nebraska Sen. Robert Kerrey and New York Sen. Daniel Patrick Moynihan are now off the Social Security reservation.
Militant unions and the greedy geezer lobby are perhaps the only two groups left wailing about irresponsible giveaways to Wall Street speculators. A clear majority of Americans have gotten beyond the denial phase, and polls indicate that the most popularyet most unworkablefederal program in history is now earning the scorn it has always deserved. The private sector is now looked to for a Social Security solution that cant come too soon.
The fiscal insanity of Americas nationalized pension program is staggering. The systems impending insolvency is the chief horror. Social Security could start running a deficit as early as 2006, and will go entirely bankrupt a few decades later. In April, the systems trustees revealed that Social Securitys total unfunded liability, adjusted for inflation, is $17.9 trillionalmost four times the national debt. The so-called Social Security Trust Fund, of course, is the biggest mirage in American public policy. Unlike IRAs or 401(k) programs, the fund contains no stocks, bonds or other real assetsjust promises. By law, Social Security can only invest in U.S. Treasury bonds. And as University of Nebraska financial economist Karl Borden points out, "no real assets" underlie government securities. "Simply stated," writes the Heritage Foundations Daniel J. Mitchell, "the Trust Fund is a hoax. It contains nothing more than money the government owes itself."
So the Trust Fund is nonexistent and the system faces imminent bankruptcy. Social Security has a third layer of madness, though: the payroll tax. Three-quarters of Americans face a higher burden from the payroll tax than from the federal income tax. And with lobbyists with the National Committee to Preserve Social Security and Medicare pushing for yet another payroll tax increase (it would be the 39th hike since the programs inception), theres a chance workers will be making an even greater contribution to the system in the near future.
What does all this mean for Joe Sixpack and Jane Diet Coke? As with any Ponzi scheme, those who got into Social Security early have been handsomely rewarded, while latecomers will be lucky to get anything at all. Ida Mae Fuller received the first Social Security check in 1940. In a harbinger of things to come, she received almost $21,000 in benefits by the time of her death in 1975, after contributing only $44 to the system. Few made out as well as Ida Mae, but for decades Social Security was a good deal for American workers. Payoffs were greater than employees payroll tax contributions, and by 1980, an average worker got back $145,400 in benefits, according to calculations by economist William T. Harris.
Unfortunately, Social Securitys salad days are over. Congressional expansion of benefitsand Americans habit of living longerare bursting the bubble. Whereas 16 Americans worked for every Social Security recipient in 1950, now the ratio is 3.3 to 1.
A typical male worker born in 1965 is projected to pay $195,800 in payroll taxes during his productive years, and receive only $139,600 back in Social Security benefits. Men have it bad under the present system, but women have it worse. Forty percent of unmarried women rely on Social Security for 90 percent of their retirement income, as opposed to just 29 percent of menand the poverty rate among elderly women is twice that of men.
Regardless of gender, those earning lower incomes are most squeezed by Social Security. The payroll tax is perhaps the most regressive tax in American history. As Peter J. Ferrara and Michael D. Tanner note in their new booklet Common Cents, Common Dreams, because the payroll tax hits income from wages and not investments, "the burden of financing Social Security falls primarily on middle- and low-income Americans." If anything, the revolution against Social Security should start not with plastic surgeons and software tycoons, but waitresses and janitors.
"Todays Social Security system is anathema to real savings and wealth creation," writes Carrie Lipps, an analyst with the libertarian Cato Institute. "It provides dismal benefits in return for a lifetime of high taxes and leaves the elderly dependent on the government."
Public Employees Take a Pass
n Nevada, there is one group of workers who have little reason to worry about Social Securitys failings. Members of Nevadas Public Employmees Retirement System (PERS), like their colleagues in states from California to Maine, are taking a pass on the biggest investment scam in history.
Nevadas public employment pension fund began in 1947, and now has over 70,000 active members. It writes checks to almost 19,000 retirees, and the stocks and bonds it owns have a market value of over $9 billion. All 17 Nevada school districts participate in PERS. Virtually every city in the Silver State takes part, as well as every county, and a great many utility, irrigation and sanitation districts.
PERS delivers for its beneficiariesbig time. The funds annualized return since 1984 is 13.6 percent. Silver State government retirees received an average monthly compensation of $3,649 in 1997several times the size of a typical Social Security check. (For retired Silver State policemen and firefighters, the amount was even higher: $4,927.)
Lets leave aside the first conclusion one draws from PERSthat perks and privileges unavailable to private sector workers are commonplace in Silver State public employment. Nevadas government worker pension fund also has major relevance to Social Security reform at the national level. PERS, like its siblings in other states, has a Jeckyl-and-Hyde nature. On the one hand, the pension fund is in-your-face proof that arguments against Social Security privatization are baseless. On the other, its success could help politicians justify giving unelected bureaucrats the power over all Americans retirement income.
PERS participants do not control where their investments are placed. Nevadas governor appoints the seven officials who comprise the Public Employees Retirement Board. This committee makes investment decisions, while day-to-day operations are run by the agencys executive officer, George Pyne.
For government work, PERSs performance is phenomenal. (The agency is user-friendly to its members, and even free-market scribes digging for information.) But as lucky as PERS members are, they dont have the freedom to shift their investments around. And that lack of control is appealing to paternalists, who recognize that using tax hikes and benefit cuts to prop up Social Security is no longer tenable. As the New York Times reported in June, liberals are "increasingly rallying around the idea of having the Social Security system rather than individuals invest in the financial markets."
This notion is rather temptingafter all, if seven buddies of Bob Miller have somehow been able to produce a return of 13 percent a year, just think what a panel drawn from the nations pool of financial experts could do. But the central-planning approach has almost as many perils as a tax-funded, pay-as-you go system.
A national pension fund would be worth trillions of dollars. Thus, handing it over to a federal agency would be state corporatism at its worst. As Tanner notes, "Investing the trust fund would allow the U.S. government to purchase if not a controlling then a commanding share of virtually every major company in America."
"Allowing a fund of such magnitude to be invested by government bureaucrats ... subjects the fund to political influence," agrees Borden. Many government pension funds are already subject to PC litmus tests, including bans on investing in companies accused of pollution and businesses that dont hire enough employees with the right pigmentation or chromosomes. (Currently, PERS has no such restrictionsthe fund has 662,000 shares in Philip Morris. Joe Neal, call your office.)
Pension funds might also be used to promote as well as punish. The Clinton administration has already flirted with the idea of forcing employers to invest a portion of their pension funds in currently fashionable enterprises, such as renewable energy companies.
There is an alternative. All legislators need do is look to Chile, the worlds privatized retirement income trailblazer. There, workers can choose from 14 different pension funds, all of which compete for customers with higher rates of return and superior customer service. While the Chilean government provides a minimum level of benefitin case of a funds collapseworkers pensions are free from bureaucratic meddling. Theyre portable, withdrawals are possible, and when retirees die, the funds remaining in their account are left to their heirs.
Its likely that the debate over Social Security reform will dominate much of the 106th Congress. With a president facing impeachment and an already timorous opposition party now further spooked by disappointing off-year election results, the climate doesnt appear ripe for bold, free-market Social Security reform. PERSs limitations aside, for the time being the best way for a resident of the Silver State to secure fiscally sound golden years is to find a position in public employment. A hiring freeze is currently in place for state workers, but I hear the Mineral County Housing Authority and the East Fork Swimming Pool District might have some openings.NJ
D. Dowd Muska is a contributing editor of Nevada Journal.