March 02, 1997

On February 24, SWANS published "Entitlement Reform, If Not Now, When?", by Mr. Lawrence Grello, an aspiring congressman for 1998. While not agreeing with some of the opinions expressed in his column we decided to publish it nonetheless. SWANS is an Open Forum and, except for extreme views (see our guidelines), we want our site to have a positive contribution to the debate of ideas. But, by the same token, we also decided to write a follow-up to Mr. Grello's views in the hope of generating a healthy discussion on the matter at hand.

For whatever reason the task fell on my shoulders; perhaps to push me to write again (I have not published anything in almost one month). Or, more likely, because I am an immigrant, uninterested in becoming a citizen, who came to this country late in age and consequently is the least likely of the core group at SWANS to benefit from the Social Security system, thus making me a sort of passer-by (not that I do not contribute to the system -- indeed, as an independent consultant, I pay the full 15.3% of my gross income to support it).

A note of caution: I am certainly not an expert on these matters. Neither is Mr. Grello. That makes us equal in our ignorance! Finally, while my opinions are quite different from Mr. Grello's, I happen to think that he means quite well, at least as well as I do (and maybe even more since I tend to look at all this ratatatat with a grain of salt...). So, there is no personal vendetta involved here. I am sincerely grateful to Mr. Grello for having submitted his essay to SWANS and I wish he will continue to do so.

Anyway, let me have a go at it, from the trivial to the sober.

The first thing that struck me when reading Mr. Grello's positions was the way he framed the issue; his premise, if you will. There is a "problem", he thrusts forward. Medicare and Social Security are going broke! And he uses statistical data -- the data that serve his premise -- to make his point. He extrapolates and projects from these data, as many pundits do, dire consequences for the future if we, as a society, do nothing.

It seems to me that we should have learned by now that statistical projections are nothing more than the extrapolation of conditions within a cross-section of time -- a static picture -- into an ever changing environment. Remember the 1973-1975 projections, in the middle of the oil crisis, that stated we would run out of oil resources by the turn of the twenty-first century? All well and good they were, but for the fact that modelling used to predict the fate of this resource simply ignored what was then unknown; that is, undiscovered oil reserves all around the world and the implementation of conservation measures (long since abandonned). More recently the projections of death due to the deadly HIV virus were largely overstated as they could not factor in the medical discoveries of the past couple of years and the possible behavioral changes. Statisitics can crystalize the attention on a specific issue but I have yet to see a projection that got realized (except for the good old death and tax allegory, of course). Then, there is the use of what I would call the statistical sophism of the first degree. It works like this: When projecting present Social Security and Medicare expenditures into the future, the total amount spent will be equalled to all Federal taxes collected at that time (2020 or 2030). So the bankruptcy of the system becomes a logical conclusion. There will not be any money left "for education, the environment, national defense, etc." In other words, a sheep is a mammal and people are mammals, therefore people are sheep (which sometimes, I wonder, whether it is not true... especially with the cloning business of late!).

So we are being confronted with a very dark scenario. You can imagine the consequences "if," as Mr. Grello asserts, "we do nothing". According to Mr. Grello, 80% of people's wages will be dedicated to paying government spending and jobs will be lost due to their export overseas (he somehow fails to explain how he gets from A to B except to say that it "obviously will probably be much cheaper to produce goods and services elsewhere". Is it obvious or probable? We'll never know...). As an acquaintance of mine, attempting to make my debilitated mind grasp the truth, disserting about over-population and pollution, once told me: "If we do nothing, we're all going to die". We surely are going to die, I thought. Then I also thought, this individual with his spouse and no children own two motorcycles, two cars, a diesel van, another big diesel truck used for his windsurfing expeditions, and an old Ford Model T; and, weather permitting, he flies his wealthy friend's helipcopter for week-end entertainment. No doubt he was concerned by over-population. Just imagine what will happen when people start thinking they can have the same life-style! You won't be excessively surprised if I tell you that this individual is advocating less consumption... But I am digressing; or am I?

Mr. Grello, for his part, is a strong advocate of less governement spending. And to that effect he proposes to have the government out of the Social Security & Medicare business, and to privatize it over a "50-60 year period". Fifty years from now you will be in 2047 (I say "you" as I fervently hope not to be here then; I'd be 97, still working hard and with no one to pay for a long-deserved retirement. Better be put to pasture...). By that time the country will already have been -- for 17 to 27 years, according to Mr. Grello's favorite studies -- in a situation where "80% of the work-force wages will go to pay some form of taxes". Plenty of time to be in a state of bankruptcy. It is not his statistics I have a hard time to follow, it is his logic.

I have confessed to not being an expert in these matters but I can legitimately question the type of econometric models that seemingly naturally infer that if we want the economy to remain competitive we need to privatize the system. After all, Social Security spending is presently about 4.68% of our Gross Domestic Product and should grow over the next 35 years or so to about 6.5% , an increase of about 1.8% for the period. It is substantial but it is not the end of the world by far! As a comparison, our defense spending in 1951 was 7.5% of GDP and our spending for education between 1950 and 1970 grew by 2.1% of GDP. You see, I too got a few statistics, courtesy of Joe White's instructing and recommended-reading article in the January 25 issue of Slate, but I do not want to throw numbers at other numbers. They have little meaning but to obfuscate the heart of the matter.

Actually, once you clear the dust of the statistical hogwash and the scare-tactics you are left, not surprisingly, with the all too familiar rehashed debate between the [bad] government financing and the [good] private-sector financing. It is a matter of political philosophy and of historical pragmatism. If -- and it is a big if, as a society, we choose not to let our elders hang cold in the wind of our instant gratifications we must come to grips with the fact that it will take a bigger share of our economy to support our choice, whether or not the costs are born by the private sector or by the government. The question then is which of the two will finance these costs in the most efficient manner. In the present state of affairs one would instinctively view this question as a no-brainer: Obviously it must be the private sector and the free-market.

Proponents of a free-market answer, such as former Governor Pete du Pont, former Senator and Presidential candidate Bob Dole and former Wall-Street financier Pete Peterson, are the same people who have always opposed Social Security as a governement program and a one-payer medical system in the first place. With their unflinching beliefs in the superiority of the market and the rationality of the homo-economicus they argue that the private sector will have the best response to and the best tools for footing the bills. They advance that retirement, like health care, can be privately insured and their inherent risks re-insured. They even go a step further and look at retirement as an investment that will create wealth and grow the economy. They provide ample and seemingly compelling examples of private retirement funds providing three times as much retirement income as Social Security for the same deposits. They show that when depositing into private funds you end up with a cozy nest egg that you can pass on to your decendency while with Social Security you end up with nothing.

Proponents of the governmental answer, that is, our present system, reply that the system has worked for the past 60 years without breaking (thanks to some fixing and tweaking here and there). They argue that it is neither an investment nor an insurance in the usual financial sense. It is a "social" insurance to which everybody contributes and from which everybody benefits without the inherent risks associated with private investments and regular insurances. It assures you that for however long you and/or your spouse live, you and he/she will receive benefits. It also redistributes the benefits from higher-earning to lower-earning people. Both its history and its goals are societal. And, as its name indicates, it is a security for the latter part of one's life and it is a social security because it is provided by the society as a whole, whatever one's race, gender, level of income, etc.

As I said it's a matter of political philosophy. A societal cost or a private cost. Your choice.

But when choosing, a zest of pragmatism may help. You may want to ask yourself what would happen when, in the case of the private sector, the insurance company you faithfully entrusted your hard-earned money with goes belly-up. Does the Savings & Loans debacle ring a bell? You may also want to figure out what you will do when, at the time of your retirement, the market takes a big plunge South and then toward whom you will turn for help. Your favorite private charity, or the Government? And, if you are still not sure, then try to recall why the system was created in 1935, in the first place.