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Press Release

The Enron Debacle Bolsters the Case for Social Security Privatization


As the word “Enron” becomes more and more radioactive in the consciousness of the American electorate, many Democrats have appropriated the infinitive verb “to Enron,” or added the suffix -ize to describe what Bush administration policies, including the tax cut passed last June, will do to an unsuspecting public. Perhaps the most famous example of such innovative usage was Senate Majority Leader Tom Daschle’s (D-S.D.) assertion that Bush wanted to do to Social Security and Medicare what Enron executives did to their company’s finances.

Since the 1964 election, when Republican Barry Goldwater called for an end to Social Security, the Democrats have used the issue to hit Republicans with one hyperbolic bomb after another. In the 1982 campaign, with scissors cutting a Social Security card in the foreground, the Democrats’ commercials accused Republicans of “try(ing) to cut the cost-of-living increases by sixty billion dollars over ten years” and threatening to “increase Social Security taxes.”

Yet two months after the election, a committee composed equally of Democrats and Republicans voted for almost exactly these changes. The Democrats made similar charges about Medicare to secure votes in the 1996 election, but promptly teamed with Republicans the following year to amend the program.

Old-age entitlement politics is soup without seasoning: Democrats demagogue the issue, Republicans run for cover, and both parties team to cut benefits and raise taxes whenever the program approaches insolvency. Sen. Daschle’s Enron jibe is a likely preview of the Democrats’ 2002 installment of this election strategy. Expect Democrats to make fallacious comparisons between the Bush tax cut and other administration policies to the Enron debacle and then use the perceived coziness of Bush and Enron executives to smooth over any glaring inconsistencies.

All in all, it is a strategy that might work, particularly given Republican reticence on the issue. But this outcome would be tragic given the many similarities between Enron’s collapse and the current Social Security system. What appears at first glance to be a liability for Republicans could actually be an asset if only they were willing to make the partial privatization of Social Security, which would allow workers to diversify their retirement savings in ways Enron employees could not, the main focus of the November elections.

For example, just as accounting gimmickry and hidden debt doomed Enron, the future of Social Security is jeopardized by the same double whammy. Under current law, the portion of payroll taxes that exceed outlays for Medicare and Social Security – estimated to be $161 billion in FY 2001 – are turned over to the Treasury in exchange for interest-bearing I.O.U.s to be stored in a “Trust Fund” and redeemed by future beneficiaries. The Treasury then spends whatever payroll tax revenue it receives, making the I.O.U.s worthless and the “Trust Fund” in which they purportedly reside entirely fictional.

Just as Enron’s mark-to-market accounting and off-balance sheet partnerships allowed the company to hide its dire financial condition from shareholders, the anticipated payroll tax surplus for the next ten years may hide Social Security’s calamitous financials from future retirees until it is too late.

By 2016 – just six years into the retirement of the baby boomer generation – Social Security taxes will be insufficient to cover Social Security outlays. At this time, the Social Security “Trust Fund” will attempt to redeem its I.O.U.s from the Treasury. With no actual assets to pay retirement benefits, the Treasury will be forced to issue new bonds to cover the costs unless Congress acts to increase taxes, reduce benefits, or both.

When this day comes, it may set off a chain of events eerily similar to October 16, 2001, when Enron disclosed that the failure of a hidden partnership caused the company to lose $1.2 billion in shareholder equity. While it would be reckless to suppose that Social Security, or the federal government for that matter, could collapse as swiftly as Enron, when Social Security’s $4 trillion in I.O.U.s comes due, the pressures on the federal budget and the government’s ability to service its debt will be like nothing the nation has seen.

With viable foreign alternatives to dollar-denominated debt, like the Euro, already here, and future rivals, such as the Chinese yuan RMB on the horizon, investors may become less enthusiastic about U.S. Treasury bonds, making the actual cost of financing future benefits far greater than we currently presume.

Thankfully, a viable alternative exists in the form of partial Social Security privatization, which would allow workers to invest a portion of their payroll taxes in a wide array of financial instruments or interest-bearing accounts. These investments would be the property of the beneficiary and stored in regulated private accounts that would be required to be broadly diversified.

Conversely, Social Security locks today’s workers into a system of illusory assets and deprives retirees of the diversification that would help to offset their reliance on federal borrowing and soften the blow to future taxpayers. By making Social Security reform an election issue, Republicans could challenge the Democrats’ historical advantage on the issue and protect future retirees from the same fate that befell Enron employees.