The Surest Social Security

By Marshall Loeb

If three institutions are sacred in America, they are motherhood, baseball and Social Security. Any critic of the geometric rise of Social Security payouts is looked upon as a reactionary who would condemn the aged and disabled, the widows and orphans to a life of impecunity on a diet of Alpo. Yet the most articulate critic of this increasingly straitened pension system hardly looks or sounds like a modern Marie Antoinette.

He is Martin Feldstein, a gentle, cherubic fellow, who left the Bronx sidewalks for undergraduate distinction at Harvard and found a home there (with time off to earn a Ph.D. at Oxford). Philosophically, Professor Feldstein is eclectic: liberal enough to have been a counselor to Candidate Carter in '76, sufficiently conservative to have been invited to join President Ford's Council of Economic Advisers in '74 (he turned down the bid). At 38, Marty Feldstein is one of America's three or four brightest young economists, and already he heads the prestigious National Bureau of Economic Research.

The surest way to raise living standards and create jobs, Feldstein argues, would be to increase investment in factories and machines, in automation and modernization. To do that, America needs more savings and capital formation --and, Feldstein continues, the biggest impediment to that is Social Security.

Americans do not save much--only 5% or so of their incomes--because they figure that those monthly Government checks will nicely take care of their old age. When Johnny Bluecollar retires now, Social Security benefits for himself and his aged wife average nearly 85% of his peak after-tax earnings.

Trouble is, Social Security does not add to the nation's savings, which might be lent out to build factories, expand old plants, allow new businesses to start and create wealth.

Social Security is a mere transfer of capital.

The payments come right out of the pockets of workers and companies and go right into the pockets of the beneficiaries.

The solution is not to reduce Social Security benefits but to slow their great growth, permitting private pensions and personal savings to carry more of the load. That will indeed occur, Feldstein is convinced, "because politicians and union members will recognize that Social Security is becoming a lousy deal for people who pay into the system today." True, it is now a good deal for beneficiaries because they paid in low taxes years ago and are now collecting hefty benefits. But Social Security taxes are scheduled to rise so fast -- from a top of $1,071 this year to $1,404 next year on a salary of $22,900, and much, much more later on -- that workers will rebel, Feldstein feels. He predicts: "Union people will be saying 'Don't raise our taxes. Let us keep our money. Let us invest it in private pensions, in which we can get a higher return.' " And that, says Feldstein, will add tremendously to capital formation.

To encourage savings and capital growth, he believes, the U.S. should also adopt techniques used in other countries. Canadians get generous tax deductions on money that they contribute to their pension funds. France permits anyone to put away some $20,000 in savings, with the interest payments untaxed. The Europeans further build capital by allowing companies to write off quickly the costs of their new plants and equipment against their taxes. Surely the U.S. needs to liberalize these depreciation allowances, says Feldstein, probably by letting the tax write-offs rise along with the rate of inflation.

Because of their savings incentives foreign countries invest much more than the U.S. does. Scarcely 10% of America's gross national product goes into private capital formation, but West Germany invests 15% of its G.N.P. and Japan 21%. In consequence, their productivity gains are higher, and they are beating the stripes off Uncle Sam in world markets.

If the U.S. put just 1% more of its G.N.P. into savings, it would have $20 billion more in seed capital. Says Feldstein: "It really comes down to this: If we save more, we grow faster. Surely we should take this good opportunity to forgo a bit today in order to gain a lot more tomorrow." To which it might be added that the "lot more tomorrow" would be the best social security for everybody.

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