No sooner had President Bush announced his intention to reform Social Security than partisan Democrats rushed to proclaim that, Bill Clinton’s plan to save Social Security notwithstanding, there isn’t much of a crisis.
Well, there isn’t — at least not if you think a massive increase in Social Security taxes, or a corresponding cut in benefits, would be a great legacy to bequeath future generations. But the evidence of crisis in the nation’s social compact isn’t just some far-off, theoretical bookkeeping matter. In the corporate world, mammoth pension liabilities, representing an excessive promises, already are hitting home.
Old-line steelmakers were the first to renege, requiring a federal bailout of steelworkers’ pensions in the 1970s and ‘80s. Then came the airlines: Northwest Airlines last week told workers if they did not accept deep cuts in pay and pension benefit changes, bankruptcy would almost surely follow, as it did for U.S. Air and United. Next may be U.S. automakers, struggling with “legacy costs” that make them uncompetitive with the Japanese, Koreans and now the Chinese.
As a result, the quasi-governmental Pension Benefit Guaranty Corp., formed three decades ago to protect worker pensions, is itself $23 billion in the hole — and facing a corporate world that has a $450 billion gap in its pension funds.
The premise behind many claims that Social Security problems have been overstated is that the famously misnamed Social Security Trust Fund has real assets usable to fund future benefits. A mere increase of 1 or 2 percentage points in the Social Security tax would tide us over.
But this ignores the reality that the trust fund exists only on paper. It has nothing but $1.7 trillion in IOUs. The surpluses have been used to fund other government spending. And the IOUs are expected to grow to $10 trillion to $11 trillion fairly soon. The nonpartisan Concord Coalition recently issued a white paper declaring Social Security taxes need to be raised nearly 50 percent to cover expected obligations — even assuming benefits don’t continue rising.
But shouldn’t we be happy to move to European levels of taxation? After all, wouldn’t this produce a kinder, gentler nation? Again, the answer is clearly no — unless you think double-digit unemployment would be kinder and gentler.
Europhiles try to explain the high unemployment as simply a result of Europeans’ preference for leisure. But nearly every major government there, including those of France and Germany, is frantically trying to cut spending and taxes in hopes of putting people back to work (while shoring up their political bases with anti-American rhetoric). They know a well-trained work force for which there is no work is sooner or later a prescription for demoralization and serious social trouble.
Now, even Mr. Bush’s plan allowing workers to set up personal retirement accounts may require some tax increases and benefit cuts. Mr. Bush’s failure to deal more forthrightly with this issue has cost him credibility with the public.
But give him credit for beginning the politically painful process of educating Americans about the potential disaster. Time is likely to prove him far more right than wrong — while the denialists will be viewed by future generations much as we now view the isolationists of the 1930s.
It’s interesting to note that much of the private sector already has reformed its pension system along the lines of the Bush proposal, substituting defined contribution plans which workers control for defined benefit plans never adequately funded. Most of the problem comes from older industries whose naysaying unions prefer to dump the problem on taxpayers.
A good argument can also be made that the only real solution to underfunded pensions is faster, more sustained economic growth. Alas, even in the U.S., faster growth would require deep, sustained cuts in taxation, spending and regulations for which not even many Republicans seem to have the stomach.
Tom Bray is a Detroit News columnist.