Counterpoint: States Would Be More Responsible with Social Security than the Federal Government
Letting states lead could fix what Congress won’t
My colleague Thomas Savidge makes several excellent points in his recent Debt Dispatch piece, reacting to my proposal to let states opt out of Social Security for their private citizens. He points out that many states currently underfund pensions for their own retirees, and that there is no statistical correlation over states between public pension funding ratio and percentage of state employees exempt from Social Security under safe-harbor standards.
These are fair points, but in response, I would say that even underfunded state pension systems are more actuarially sound than Social Security because public pension systems have higher rates of pre-funding than the Social Security trust funds, and are invested in higher-returning assets. None of them are at risk of insolvency over the next decade, as Social Security is.
Moreover, because states have to offer pension benefits that meet the Safe Harbor criteria in order to qualify for the Social Security exemption, exempt pension plans are probably adversely selected for excessive benefits and underfunding. For example, defined-contribution pension plans cannot qualify for Safe Harbor. We therefore can’t infer from this experience how states would treat retirement programs for their general populations.
To be sure, the political incentives at any level favor promising bigger benefits now without specifying how they are going to be paid for in the future. States are little different from the federal government there, though as noted in the original piece, states have much lower debt burdens than the federal government. In contrast to the federal government, states enjoy no direct financing from the central bank. Still, some guardrails on state-level substitutes for Social Security are advisable, focused narrowly on ensuring solvency. (As mentioned in the original piece, especially young states could be required to pay into the trust funds a lump sum at opt-out equal to the net present value of future contributions net of benefits, in order to leave the existing system just as solvent as it was before opt-out.)
But we don’t want to discourage the flexibility and innovation that could come from handing Social Security over to the states. States are likely to seek control over retirement benefits for their citizens for the purpose of improving on the federal program and rescuing their economies from the burden of future liabilities and anticipated tax increases. The political advantage of this approach is that Congress clearly doesn’t want to grasp the nettle itself. Devolving Social Security to the states is a way for Congress to set the conditions for fixing the problems with the program without having to make the hard decisions itself. Facing competition for workers and investment, state governments are likely to make more prudent decisions than Congress has.
Jason Sorens is Senior Research Fellow at the American Institute for Economic Research.
Follow on Twitter/X: @JasonSorens
Illinois