A New Social Contract for America

We probably all know that costs of entitlements are the main source of federal budget deficits, and the problem is destined to get dangerously worse as the Baby Boom generation ages. We all know, too, that ordinary families–especially the young–are having a hard time saving independently for their old age. And, we all know that elderly voters, as a group, are easily convinced that any perceived reductions in these programs are unfair. Less widely recognized is that younger voters are waking up to this issue; witness recent university student council resolutions protesting the grim future of Social Security.
The solutions we hear from government usually involve little more than reduced benefits and raised taxes. But the futility of this approach, especially for Social Security, is evident from just one statistic. In 1945 there were 20 American workers to support each Social Security recipient. Today the figure is 3.1 workers per recipient. By 2030, as today’s children reach middle age, there will be fewer than two workers for each beneficiary.

Sharp benefit cutbacks of roughly 40 percent and payroll tax hikes from 15.3 percent to 25.7 percent will be needed in a few years to maintain the solvency of Social Security, but they will devastate workers and retirees alike. The entitlement programs themselves are thus becoming a source of poverty and social insecurity in this country.

Fortunately, there is an exciting, win/win strategy for solving the Social Security problem, at least, and it is beginning to attract broad, bi-partisan support. The most responsible thing the two presidential candidates can do about it this political campaign year is to agree to consider it seriously next January, when there will be less temptation to demagogue.

But the public needs to start discussing the idea right away, because this solution–using the private sector to rescue Social Security–no longer will be possible in a few years, once the Baby Boomers themselves have retired. Action is needed in the next couple of years.

There are now several plans out to use capitalism and the “miracle of compound interest” to provide a brighter future for American workers. The libertarian Cato Institute has one, and so does Martin Feldstein, Harvard professor and former chairman of President Reagan’s Council of Economic Advisers. Republicans, naturally, tend to like the idea. Steve Forbes elicited cheers when he embraced the idea at the University of Arizona debate during the presidential primary season. A similar program, many point out, already works spectacularly in Chile.

But one of the first and most carefully researched American plans is that of a former Democratic candidate for Senate from Delaware, Sam Beard, founder of the National Development Council that has helped create inner-city jobs under four presidents of both parties, organizer of the Jefferson Awards for community service, a fellow of the Discovery Institute in Seattle–and, most importantly, author of a new book, “Restoring Hope in America: The Social Security Solution” (ICS Press, San Francisco). Beard’s first post-publication address will be in Seattle next Tuesday, May 14, at 7 p.m. in the University of Washington’s Kane Hall Room 220, co-sponsored by Discovery Institute, The Seattle P.I. and the UW Graduate School of Public Affairs.

I was introduced to Sam Beard about a year and a half ago by the P.I’s publisher, J.D. Alexander, and immediately saw in him the classic example of the enterprising generalist seized with a life-changing big idea.

Under Beard’s plan, present Social Security recipients would receive exactly what they have been promised, and those approaching retirement also would stay part of the plan we have now–guaranteed. But young people just starting out in the workforce would be given the opportunity to put their Social Security taxes to work in investment funds in the private market, much as regular mutual funds and annuity programs operate. The government’s role would be to allocate each taxpayer’s money to the fund he or she selected and to make certain that the funds are organized in a sound manner. Workers in the middle-age brackets (such as Baby Boomers) could mix their forms of participation, partially paying into the present system and partially investing in the new Social Security investment funds.

The plan works because the private sector is so much more productive than the public sector, which, in any case, does not invest its Social Security funds, but spends them as they come in on other government priorities. (What we have today is a great chain letter scheme that would be illegal in the private sector.) The Beard plan also will work because the huge Baby Boom generation presently–and for the next few years–is pumping into the government far more than the older generation of recipients is taking out. Under the “Restoring Hope” plan, that surplus will be invested rather than squandered on other programs. A one-time, long term and, of course, voluntary, bond program for better-off taxpayers will cover the budgetary shortfall caused by the government’s shift of Social Security money that it is “borrowing” now back into the Social Security program for which it was intended.

What this plan offers the elderly is just what they have, without danger of later cutbacks. What it offers the young is hope for a secure old age: roughly 50 percent more money annually than from the present system, or twice as much if they choose to treat the program as an annuity. For a $30,000 a year wage-earner, after 45 years, this would come to $18, 424 a year, versus $13,710 under Social Security (all of this is in constant dollars). Capital of roughly $368,486 could be passed along to heirs. Alternatively, the recipient could use his accumulation as an annuity, raising his annual receipt to $29,256.

Knowing that they are accumulating real savings and that these funds are working away in the private sector will give all wage earners an investment in the future of the overall economy, a stake most presently lack. What it offers the country as a whole is a huge increase in the savings rate and a brake on inflation and interest rates. No wonder it has won praise from sources as varied as William F. Buckley and Robert F. Kennedy, Jr., and from both Democratic Sen. Robert Kerry of Nebraska and Republican Sen. Alan K. Simpson of Wyoming, co-chairmen of the Social Security Commission.

“Restoring Hope in America” is nothing less than a new social contract, a chance to unite rather than divide us, to heal generational and class differences rather than increase them. It is the program of shared economic growth and security that we badly need.

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.