COUNTERCOLUMN: All Your Bias Are Belong to Us

I've been kicking around the idea of trying to make the case for Kerry, here. Like Andrew Sullivan, I'm a little troubled by the soaring deficits under George Bush. So I was very much open to the "Kerry's the real fiscal conservative argument."

But the more I think about it, the more Kerry flops as a fiscal conservative.

Yes, I do think that with a Republican congress, and the willingness to roll back the Bush tax cuts, a Kerry Administration would likely run lower deficits than Bush.

In the short run.

But in the long run, the conservative case for Kerry collapses.

Here's why:

Social Security benefits are funded entirely by contributions in the CURRENT YEAR.

At the moment, the Social Security system is running a healthy surplus. We have more workers paying into the system than we actually require in order to maintain current benefit levels.

The law requires the surplus, perversely, to be invested in nonmarketable US Treasury debt. There is nothing else to do with the money. The law prohibits investing it in corporate global or equity markets, which provide higher expected returns (albeit at commensurately higher levels of market risk).

Once the surplus is invested in Treasuries, it goes into the general fund, where Congress MUST spend it. They have no choice. There is nothing else for Congress to do with the money. Congress cannot safely SAVE money, because there is simply no vehicle to save that much money in. Any deposits in private banks would have to be reinvested, indirectly, in mortgages and car loans and everything else banks do, which is effective privatization, which is against the law. (This is why Al Gore's 'lockbox' was, quite simply, a contemptible lie. There was nowhere to lock the box. Everything had to go either to the general fund to be spent, or to pay off the bondholders (i.e., spent.))

This surplus is temporary. As the baby boomers retire over the next 20 years, the ratio of workers to retirees begins to shrink drastically.

There's no getting around it. There's no uncertainty, no fuzzy math. Barring a massive plague that wipes out millions of fifty-somethings, the fact that Social Security will soon collapse on itself is an actuarial certainty. Social Security is a demographic time bomb.

There are only three ways to save Social Security:

1.) Cut benefits (i.e., means test it, raise the retirement age)

2.) Increase Social Security taxes.

3.) Get a greater return on surplus dollars, sufficient to keep up with the expansion of the 65+ demographic, plus hedge against inflation risk. Bill Clinton at one point thought this was a good idea.

Failure to use these three measures in SOME combination will force the US to either dismantle the program altogether (meaning we maximize option 1), and free current contribution dollars for private investment (meaning we maximize option 3), or commit a MASSIVE amount of general funds to bailing out the system every year for decades. How big is the bailout?

The net PRESENT value of the rescue package will amount to nearly 4 trillion dollars, according to the presidential commission, which was bipartisan (Daniel Patrick Moynihan was its co chair).

(Note: NPV requires a calculation back from a specific future value at a given point in time. But since we know that the Demographic numbers are more or less permanently damning, the real situation is much worse than the number suggests. And the fact that interest rates have actually declined sharply since the commission means that the NPV figure, even as calculated, will be much higher).

The Social Security bailout would be a monumental undertaking, and the burden would fall squarely on the shoulders of the young. The fact that they would recieve no real benefit from Social Security would eventuall introduce a new level of political risk to the system - the risk of an intergenerational revolt against the tax system, with younger voters sweeping in politicians vowing to dismantle Social Security.

A REAL fiscal conservative would be working to get his brain around this through pounding the table for some combination of 1, 2, and 3 above.

But Social Security reform doesn't recieve a mention on the Kerry Edwards website.

Instead, Kerry reveals himself to be downright obstructionist on every idea except raising taxes. The problem is that this would undermine private individual savings in defined contribution plans like 401(k)s by drawing resources away from them even as defined benefit pensions slowly vanish from the face of the earth.

(Bill Clinton actually vetoed a bill that would have increased allowable contributions to IRAs on this very logic - that diverting resources to IRAs would undermine defined benefit pension plans).

John Kerry, in short, has no plan to address the shortfall. His claim to fiscal conservatism rests entirely on the improving the national present cash flow statement. He will do nothing to address the looming future obligations.

This is exactly like lowering payments on your credit card debt so they can't keep up with the interest rate, and bragging about having some extra cash around.

Ignoring the Social Security crisis is the acme of fiscal irresponsibility.

And Kerry's Chicken Little act embraces it.



Splash, out

Jason