Thomas Sowell

MANY PEOPLE were amazed when Governor George W. Bush proposed reforming Social Security because Social Security was considered to be "the third rail" of American politics. But Social Security has now reached the point where it is going to give us all a big jolt if we fail to touch it. The money just isn't there to pay all the pensions when the huge baby boomer generation starts retiring.

You might think that this would reflect badly on those who set up this system in a way that allowed generations of Democrats in control of Congress to keep adding to the goodies provided by Social Security, without putting enough money into the system to pay for those goodies. That was a real "risky scheme," to use Al Gore's favorite pat phrase.

But, so long as Republicans stood around twiddling their thumbs, afraid of touching the political third rail, Democrats were able to ignore the risks of a system that is literally trillions of dollars short of covering all the promises they have made. Now Al Gore and his fellow Democrats have the nerve to claim that it is "risky" to change a system that is doomed to default if nobody changes it.

Privatizing Social Security is not some untested new idea. Among the countries that have already done it are Australia, Chile, Poland, Sweden, Hungary and Argentina. But will the Democrats or the liberal media tell us that? And are the Republicans capable of articulating the issue?

The crucial distinction between Social Security as it stands now and a reformed system that would allow younger people to put some of their retirement money into the private sector is that the private sector uses that money to add to the total real wealth of the country, by building things and manufacturing products. As it stands today, Social Security does not add one dime to the country's real wealth.

The Social Security money that comes into Washington from our paychecks gets spent, not invested, despite creative accounting to the contrary. When the politicians spend the money, they give the Social Security "trust fund" I.O.U.'s in the form of government bonds. But this paper transaction changes nothing, except for creating the illusion that something is being saved when it isn't. You can't spend money and save it at the same time -- no matter how creative your accounting may be.

Future taxpayers are going to have to pay off the government bonds that have been issued to the Social Security system in exchange for the money that was spent. If no such bonds had ever been issued when that money was spent, we would still have to depend on future taxpayers to come up with the money for the baby boomers' retirement. The bonds in the "trust fund" change nothing economically.

What this accounting sleight-of-hand does politically is to confuse the public and maintain the illusion that your Social Security "contributions" are being put aside for your pension when you retire. That would be true if you were investing in the private sector, but not in the government.

The law requires private insurance or annuities to be backed up by enough assets to cover their liabilities. Private insurance companies can't just promise people anything and leave it to someone else in the future to figure out how to pay them off -- or how to evade the responsibility for paying them off. Only the government can do that.

There is a reason why you don't hear the same hysteria from private financial institutions that you hear from the government about how hard it will be to pay the baby boomers' pensions when they retire. Private pensions are financed by investing the money that comes in, so that the assets will be there when retirement time comes.

Forget about money for a moment. The real wealth of the country consists of goods and services. When you add to those goods and services, the country has more real things available for its people's use, including use by people on pensions. That is what happens when private pension funds are invested in tangible assets like buildings and factories -- and what does not happen when the government runs Social Security and spends the money as fast as it reaches Washington.

Private pensions belong to you. Government pensions are controlled by politicians who can change the rules any time they want to. That is what makes Social Security a risky scheme.


Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

Creators Syndicate