Spinach and Steak

by Patrick Korten

Patrick Korten is vice president for communications at the Cato Institute. In the 1980s, he was director of policy and communications at the U.S. Office of Personnel Management, which administers the retirement system for federal employees.

Spinach fans and vegetarians: cut me a little slack as you read this, please; contrasting spinach (yuk!) with steak (yum!) is merely a literary device.

The President's Kansas City forum on Social Security left no doubt about the fact that some sort of privatization will be part of the package when Congress and the White House zero in on legislation after the fall elections. We've finally gotten to the point where the advantages of privately owned investment accounts are so obvious that they're no longer in dispute. Unfortunately, there remains an irrational but powerful desire on the part of many Americans to try to hang on to our most revered Ponzi scheme at the same time.

Put simply, this comes down to a choice between spinach and steak.

Holding onto the current pay-as-you-go Social Security system is spinach. There's no other way to describe it. We've already moved from the New Deal to the Raw Deal: most young people entering the work force today will actually get back less from Social Security than they put in and things are getting worse with each passing day. To keep Social Security afloat, taxes will have to be raised or benefits will have to be cut, and there's a very high probability that we'll have to do both. In other words, we're all going to have to pay more to get less.

Privatization, on the other hand, is steak. Instead of dropping 12.4 percent of your salary down the black hole of Social Security each payday, you'll be able to invest it in real assets, stocks and bonds that belong to you. You'll have the pleasure of watching that investment grow, because of both the appreciation in the value of the stocks and the dividends or interest that compound year after year. Thanks to the miracle of compound interest, even low-paid workers will have nest eggs worth hundreds of thousands of dollars when they retire. In fact, lower-income workers will be the biggest winners in a privatized system, because for the first time in their lives they'll be able to do what middle- and upper-income people have been doing for years: build personal wealth through investments that pay market rates of return. Right now, low-income workers don't have that opportunity, because they have virtually no extra disposable income. Privatization would give them that chance, and in the process provide them with retirement income that will be two to three times higher than Social Security.

Offered such a choice between spinach and steak, many of the speakers at the Kansas City forum argued in favor of a retirement meal that would include a very big plateful of spinach, along with one little bite of steak. Take a percent or two of that payroll tax and put it in a private account, they say, but give the rest to the government.

A variation on the theme comes from New York Sen. Pat Moynihan, who wants to lower the payroll tax a little bit for a few years and allow people to put the money into a private investment account instead. That's a classic political bait and switch: he also wants to raise the payroll tax again later on, and cut benefits by nearly 30 percent, and raise the retirement age and raise the cap on earnings subject to the payroll tax by 50 percent! In other words, Moynihan wants to give you a big plate of spinach, and a little bite of steak, and then he wants the steak bite back after you've chewed on it a little.

Well, the great American Social Security debate is just beginning, and most people haven't yet focused on the spinach-versus-steak choice that's in the offing. But they will, sooner or later. And when they do, politicians who're sitting on the spinach side of the fence will find that 'preserving Social Security' isn't the political plus that they thought it was.

I vote for steak. How about you?

This article originally appeared in The Journal of Commerce, May 21, 1998.