August 19, 1999

Social Security Spooks

by Walter E. Williams

Walter E. Williams is chairman of the Economics Department at George Mason University and a Cato Institute adjunct scholar.

Liberal Democrats in Congress and Bill Clinton love to attack Republican proposals for Social Security reform. In their quest for votes, they stoke the fears of older Americans by telling them that Republicans want to destroy Social Security by allowing Americans choices in providing for retirement. Most Democrats and some Republicans rank Social Security with God, motherhood and apple pie.

Few people know that about 5 million Americans employed by state and municipal governments do not pay into Social Security. Under the provisions of the 1935 Social Security Act, state and municipal governments could opt out. This Social Security loophole was closed in 1983; however, Congress permitted those 5 million employees, as well as about 100,000 clergy, to remain exempt from paying into Social Security.

Part of President Clinton's plan to "save" Social Security, and championed by Sen. John Breaux, Louisiana Democrat, is to force previously exempted employees into Social Security. If 5 million more workers are forced into the system, it would bring in an estimated $11 billion over five years. Instead of Social Security collapsing in 2030, it would collapse in 2032 and there'd be 5 million more Social Security obligations. Mr. Clinton and Mr. Breaux's proposal is standard for any Ponzi scheme - to keep the scheme going, you have to round up more participants.

Last April, 12 senators, including five Democrats - Dianne Feinstein and Barbara Boxer, both of California; Christopher Dodd of Connecticut; Richard Durbin of Illinois; and Edward Kennedy of Massachusetts - descended on the White House to demand President Clinton not support forcing 5 million of their constituents into Social Security. They warned of the adverse impact on employees in terms of lower rates of return and lost flexibility.

J.T. Young, chief economist for the U.S. Senate Republican Policy Committee, points out a real-life example of the inferiority of Social Security compared to municipal pensions. San Diego city employees are required to put at least 3 percent of their salary into a pension plan (and may contribute up to 7 percent). Say a worker with a constant salary of $32,000 puts a minimum of 3 percent of his salary into a defined-contribution plan that goes into a mutual fund paying an annual rate of 7 percent. Upon retirement, that worker will have $293,385 in constant dollars. Such a return is far superior to Social Security's zero to 2.5 percent rate of return.

If currently exempt workers are forced into Social Security, they'd also lose the flexibility of their municipal pension plans. Municipal pension plans typically award partial benefits for partial disability. Social Security provides benefits only when the individual becomes totally unemployable. People in high-pressure jobs like police and firefighting sometime require early retirement. Under Social Security, retirement benefits are not available until age 62. It doesn't take a rocket scientist to figure out why municipal employees don't want to be in Social Security.

But what are we to make of Democrats who criticize Republicans for proposals that would begin the process of allowing American workers to find a deal better than Social Security while at the same time fighting to keep their 5 million constituents from being dragged into the Social Security rat hole? At best, they're a little more than forked-tongue scoundrels.

When politicians boast to you about the wonders of Social Security, you should ask them: "If Social Security is so wonderful, how come people have to be pulled kicking and screaming into it? If it's so wonderful how come you're petitioning Clinton to spare your municipal employee constituents from being pulled into it?" I bet they will fork you gibberish for answers.