It's Time To Privatize Social Security

The balanced budget amendment, which has passed the House, will turn out to be an exercise in futility--or a ramp to major tax increases--unless Congress takes a hard line against the growth of entitlements. The Clinton-appointed Bipartisan Commission on Entitlement & Tax Reform concluded before closing its doors on Jan. 31 that by 2028, federal spending on entitlement programs--principally Social Security, Medicare, and Medicaid--will exceed tax revenues, leaving nary a cent for interest on the debt, defense, or anything else.

To put the growing cost of entitlements in perspective, the budget President Clinton submitted to Congress on Feb. 6 projects that by 1997, Social Security, Medicare, Medicaid, and Health & Income Security (mainly but not entirely entitlement outlays) will comprise 56% of all federal spending and 64% of total federal revenues.

If those four budget categories are combined with defense expenditures and net interest paid on the federal debt, they will exceed total federal tax revenues in 1997 by $1.6 billion. The deficit funds the rest of the government. Obviously, Senate Democrats are asking a legitimate question when they inquire of Republicans what they propose to cut in order to balance the budget.

NO FAITH. But there is more at stake than the budget. The growth of entitlements is a direct threat to the quality of our health care. The continued growth of Medicare and Medicaid--at twice the rate of 1994-97 federal tax revenues--will eventually force government to renege on its promises. One way of reneging would be to socialize health care in order to ration the delivery of services.

The government is already reneging on its Social Security promises by taxing the benefits. In the 1980s, the law was changed in order to make 50% of Social Security benefits subject to income tax, a figure that Clinton raised to 85%. Currently there are proposals to further curtail the benefits by raising the retirement age to 70 and by holding cost-of-living adjustments below the inflation rate. Ultimately, Social Security is doomed, since the ratio of workers to retirees is shrinking, and the implied hike in the employment tax would price U.S. labor out of world markets.

Judging from a recent poll, confidence among the young in the Social Security system is practically nonexistent. Only 9% of those surveyed, who are between the ages of 18 and 34, believe Social Security will have the money to pay their retirement benefits--a smaller percentage than believes in ufos. A piecemeal approach to the budget simply passes a sinking ship on to the next watch. Tax increases have been tried and have failed. Despite the higher income tax rates enacted by both Bush and Clinton in their respective "budget deals," Clinton's latest budget projects $200 billion deficits indefinitely.

FACE SAVER. Entitlement promises have been undermined by the aging population and by the perverse incentives of government handouts. It's time for politicians to face facts and to downsize government rationally. One way out of the entitlement mess would be to privatize Social Security. Since the young are disenchanted and would abandon the system if given a chance, general revenues would have to be used to fund retiree benefits during the transition. But with $200 billion deficits, no general revenues are available.

At the current rate of revenue growth, it would require a three-year budget freeze to balance the budget. Alternatively, the budget could be balanced over a longer period by holding spending growth below revenue growth. Clinton's budget projects average annual revenue growth of $73 billion over the 1995-2000 period. If new-spending growth were held to $40 billion annually instead of matching revenue growth, the budget would be balanced in six years.

Once the budget was balanced, holding spending growth below revenue growth would free revenues for phasing out Social Security. This is not an undertaking beyond our ability. Office of Management & Budget Director James C. Miller III essentially froze the budget in 1987. Chile has achieved a successful transition to a private retirement system, and Argentina has begun the privatization of its Social Security system. These nations don't have skills that we lack, and they were beset by worse crises.

If politicians bite the bullet now, the transition can be made without the government having to repudiate its promises and without worsening the competitive position of American labor and capital in international markets. The alternative is to lurch from crisis to crisis, abandoning commitments on an ad hoc basis and destroying the credibility of the U.S. government.