The journalist Michael Barone recently summed up the conven-
tional wisdom about reforming Social Security. “The content of the
reform is fairly clear—individual investment accounts to replace
part of the government benefits financed by the payroll tax, later
retirement ages, adjusted cost of living increases,” he wrote in the
American Enterprise. And, he added, “suddenly the money to pay
for the costs of transition is at hand, in the form of a budget surplus.”

I have italicized “part” and “costs of transition” because they
epitomize key defects in conventional wisdom.

Social Security has become less and less attractive as the number
of current recipients has grown relative to the number of workers
paying taxes, an imbalance that will only get bigger. That explains
the widespread support for individual investment accounts.
Younger workers, in particular, are skeptical that they will get any-
thing like their money's worth for the Social Security taxes that they
and their employers pay. They believe they would do much better
if they could invest the money in their own 401(k)s or the equivalent.

But if that is so, why replace only part and not all of government
benefits? The standard explanation is that this is not feasible because
payroll taxes—or part of them—are needed to pay benefits already
committed to present and future retirees. That is how they are now
being used, but there is nothing in the nature of things that requires
a particular tax to be linked to a particular expenditure.

The link between the payroll tax and benefit payments is part of a
confidence game to convince the public that what the Social Security

Originally published in the New York Times, January 11, 1999. Reprinted by permission
as Cato Briefing Paper no. 46, April 12, 1999.

-309-