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URBAN INSTITUTE
No. 28 August 15, 2000
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IN ITS GLORY DAYS, THE BRITISH EMPIRE WAS SO
far-reaching that imperialists claimed the sun never
set on it. After having invested manpower in acquiring territories, some British citizens thought the
motherland could live comfortably off the wealth generated by its acquisitions. The wheels had been set in
motion, the time had arrived to coast on the momentum. Alas, events such as political revolts reduced the
empire’s economic returns and doomed their plan.
But history repeats itself. Some reformers involved in
the current Social Security debate have been stricken
with British Empire Syndrome (BES): They believe
riches can be made to flow into the program endlessly and almost effortlessly, and that, once again, the
wheels simply need to be set in motion.
BES sufferers believe that Social Security can be
made sustainable without addressing the source of its
unsustainability: benefit growth without the taxes
increases to fund the growth. They feel that the future
shortfall can be met by saving a tiny bit of money—
perhaps 1 percentage point of gross domestic product—
today. The economy’s momentum will yield multiple
dividends, allowing the program to lock in current
promises of benefit growth for decades—perhaps
centuries—to come.
The key, according to the BES-afflicted, is compounding rates of return. Because saved money
grows faster than the income of the average worker,
putting it away generates ever-increasing rates of
return relative to average wage levels. The money
needed to finance Social Security in the future, if
acquired today and saved, can generate additional
funds at a lower cost to workers. For example, a typical worker making $10,000 can be taxed 1 percent, or
$100; this $100, if socked away for 60 years, will grow
into $3,300 at a 6 percent rate of return. If instead of
being taxed today, a typical worker is taxed in the
future, a much larger percentage of his or her salary
will be needed to acquire the same $3,300. At a wage
growth of only 2 percent, the typical worker’s salary
grows to $33,000 over 60 years, at which point a 10
percent tax would have to be imposed.
BES sufferers are just as prevalent among those
who want to preserve the current benefit structure as
they are among those who are intent upon introducing individual accounts. In fairness, the goals of both
camps (providing maximum benefits or encouraging
individual saving) are worthy. BES sufferers are united by their unsubstantiated belief that their own saving plans can guarantee large amounts of future
wealth.
Such forecasts are impossible to make. Economists
are unable to predict, with certainty, rates of return
over long periods. Too many unforeseeable factors
are at work. For example, actions beyond the U.S.
borders can affect the economic environment at
H
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BRITISH EMPIRE
SYNDROME STRIKES
SOME SOCIAL
SECURITY REFORMERS
Eugene Steuerle and Christopher Spiro
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Members of Congress who have ventured to speak
this truth have been labeled part of the “pain caucus.”
Surprisingly, these policymakers are not opposed to
taking the steps suggested by the BES proponents.
Even members of this so-called caucus recognize the
benefits of acquiring additional money and placing it
today in private or public savings: Such saving may
help to meet future benefit demands. However,
these policymakers see the danger of guaranteeing
benefits when so little certainty exists about the
future of the program’s financial well-being.
Ultimately, promising only that which can be delivered with a fair degree of certainty may be the least
painful alternative of all.
home; worldwide rates of return can easily fall if
other countries begin to save for their own Social
Security systems, making capital less scarce. Other
events further complicate this scenario. The current
aging of the world population and the retirement of
vast proportions of adults is a phenomenon without
precedent, making precise financial forecasting,
including accurate predictions of returns from saving, unfeasible.
This unpredictability also exists on a more personal scale. No one knows how people will ultimately
react to more deposits being made either in individual accounts or in the Social Security trust funds. For
example, individuals may be inspired to cut back on
the amount they contribute to their private pensions;
similarly, the increased supply of gross saving in one
part of the economy may simply induce individuals
to borrow more money for consumption. Either
reaction is counterproductive, making it harder to
reach the desired result of increasing societal saving
so that promised benefit growth can be guaranteed
for decades or centuries to come.
BES is a convenient affliction. It allows policymakers to promise benefit growth without having to present difficult choices. Addressing Social Security’s
financial imbalance will require at least one of the following: a slower rate of promised benefit growth,
higher taxes, reduced spending on education and
other programs, or more work. Money to meet the
shortfall must come from somewhere. This is the
truth, as politically unpopular as it may be.
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Eugene Steuerle is a senior fellow at the Urban
Institute, where his research includes work on Social
Security reform. Christopher Spiro is a research
assistant at the Urban Institute.
This series is made possible by an Andrew
W. Mellon Foundation grant.
For more information, call Public Affairs:
202-261-5709. For additional copies of this
publication, call 202-261-5687 or visit the
Retirement Project’s Web site:
http://www.urban.org/retirement.
Copyright ©2000. The views expressed are
those of the authors and do not necessarily
reflect those of the Urban Institute, its sponsors,
or its trustees. Permission is granted for reproduction of this document, with attribution to the
Urban Institute.
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