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Daily Journal

The Status Quo Should Be the Real Third Rail

Aug. 14th, 2012
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RALEIGH — The term “third rail,” in the context of politics, refers to a policy one cannot touch for fear that he will suffer career electrocution. The analogy stems from the hazardous third rail that powers some train systems.

In the American context, many issues could fall under this banner, but Social Security is the perennial example. In a 2011 debate between presidential candidates, Texas Gov. Rick Perry identified Social Security as a lie and a Ponzi scheme, which it is, but the other candidates fled. Former Massachusetts Gov. Mitt Romney even attacked Perry over the matter, because speaking frankly made the candidate “unelectable.”

The consequences of decades without reform, though — aside from increased generosity to buy votes — are painfully obvious. A recent article in Forbes, by Laurence Kotlikoff, noted 41 Social Security secrets that recipients and Baby Boomers ought to know to maximize payments. But these secrets are just the start. Some 2,728 rules govern benefits, and there are thousands upon thousands of explanations for those rules. To make matters worse, “a large share of the rules in Social Security’s Handbook rules are indecipherable to mortal men. …"

If you had the energy to wade into the 41 secrets — I could not bring myself to finish — you would see what happens when a bureaucracy has a monopoly on retirement pensions. A lack of accountability means the formulas have grown so complex that even specialists, including staff at Social Security offices, do not understand them.

This convoluted system benefits the bloated bureaucracy and professionals required to offer guidance on the matter, not those receiving the payments. The centrally planned formula also fleeces individuals with shorter life spans, and migrants working in the United States for less than 10 years receive no benefits at all, regardless of how much they pay in taxes.

If one considers the fiscal impact of the Social Security program, it has unfunded liabilities in excess of $21 trillion, and even that is based on optimistic actuarial techniques. Just as informed government employees ought to see the writing on the wall with their pension plans, a majority of new Social Security entrants now know they are not going to get their mandatory “contributions” back when they retire.

“[Do you have] any idea how many people you think, what percentage, would opt-out?” an audience member once asked Rep. Ron Paul, R-Texas, on his support for the idea.

“Well, I listed as 25 [and] under to get started, but I’ve announced that in audiences where there were a lot of people over 25, and all they do is [nod] ‘how about including me,’” Paul responded. “But on the campuses, I can’t remember anybody coming up and saying, ‘Hey, I don’t want you to do that. Save me. I want to pay Social Security because I know it’s a good deal. I want to retire on Social Security. Never.”

Awareness has grown to such a degree that the third rail, the untouchable nature of Social Security, should be a thing of the past. Candidates take notice: An opt-out option for prospective new entrants, which respects an individual’s right to choose and is economically prudent, already has majority support (see question 16 on page 4 in this PDF).

Granted, those opting out would make the Ponzi nature of the program more transparent and generate fiscal challenges in the near term. But keep in mind that each new entrant actually worsens the long-term fiscal status of the program, since he generates an even greater future liability. Additionally, those opting out who have already been paying in would reduce the federal government’s unfunded liabilities.

Most importantly, an opt-out option would offer better and safer returns without the bureaucracy. The status quo alternative, with growing deficits as far as the eye can see, should be the real third rail.

Fergus Hodgson (@FergHodgson) is director of fiscal policy studies with the John Locke Foundation.