Social Security Part 1
Thursday, June 23, 2005
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President Bush is to be commended for touching the third rail of American politics. You can still smell the seared flesh. The President’s proposals for addressing the insolvency of the Social Security system are radical. They call for reductions in the size of benefits relative to wages for middle and upper income workers. They also propose to allow us to divert some of our payroll taxes into investment accounts, which will be controlled by us rather than by the government. If these proposals are enacted they will force most of us to lower our expectations as to the size of the Social Security benefits we will receive in our retirement. They will also force us to acknowledge that those expectations were based on promises, made by generations of political leaders, which cannot now be met.
The proposal to divert a portion of a person’s Social Security taxes into an individual account has become the flash point for the debate on Social Security reform. With the exception of the first letter, Republicans and Democrats can’t even agree on what to call the accounts. Republicans use the word “personal,” believing it connotes individual ownership. Democrats use the word “private”, believing it connotes “privatization” and a loss of government guaranteed protection. With the exception of a few brave souls like Representative Robert Wexler (D-Fl.), the Democrats won’t discuss the issues or offer alternative unless the President withdraws his proposal to create these “p-accounts.” Republicans, some of whom believe the government should get out of the pension business altogether, refuse to discuss any compromise which takes p-accounts off the table.
The debate over the future of Social Security has become so heated and so emotional that it is difficult to figure out just what the facts are. I suggest you take a look at a recent report, Social Security Reform: Answers to Key Questions, from the Government Accountability Office. It is a straight forward and clearly written discussion of where the system currently stands and what the future holds.
Social Security was created in 1935, during the Depression. At the time fully half of all Americans over the age of 65 were dependant on others. Social Security was designed to make sure retired Americans would not be destitute. That was a good idea then. It is a good idea now. And it has worked. The poverty rate for elderly Americans has fallen dramatically over the years.
But Social Security has found its long-term solvency threatened several times. One reason is that the system was designed to be “pay as you go” with active workers supporting beneficiaries. Lawmakers have expanded the list of eligible beneficiaries to include a non-working spouse, the disabled, survivors and dependant children, people who did not pay into the system. Benefits have also been increased so retirees get payments in excess of that their payroll taxes earned.
The other reason is actuarial. Because we are living longer and because the “baby boom” generation is nearing retirement, the ratio of workers to retirees is rapidly falling. According to the Social Security Board of Trustees Annual Report to Congress, if nothing is changed, Social Security’s costs will exceed its cash revenues beginning in 2017. At that point it will have to begin drawing down the surplus it has built up over the years in the Social Security Trust Fund, which is invested in special US Treasury securities. In 2041, the report says the fund will be exhausted and Social Security will not be able to meet its obligations.
When we find our costs exceeding our revenue, we have few options. It is the same for government. We can increase revenue (taxes); we can cut costs (benefits); we can use our savings (what savings?); we can borrow (increase the deficit). The government can also do something we can’t; it can print money. That, however, has the same economic cost as borrowing, passing the “cost” on to successive generations by depreciating the value of the wages they are, and will be, earning.
In an effort to break the deadlock over Social Security reform Senator Jim DeMint (R-SC.) and Representative Jim McCrery (R-La.) have proposed a variation of the President’s plan allowing for individual investment accounts financed with the surplus the Social Security system is currently generating. Democrats have reacted negatively, arguing that the proposal would only hasten the arrival of the day, now projected to come in 2041, when the Social Security Trust Fund is exhausted. Observers see little chance reform legislation will be enacted this year.
Way back in February, after Federal Reserve Chairman Alan Greenspan discussed Social Security during testimony before the Senate Banking Committee, The New York Times predicted in an editorial that “everybody is going to point to the problems, and nobody is going to embrace a solution.” It doesn’t have to be this way.
The President’s plan is not as radical as some other proposals. In their provocative book, The Coming Generational Storm, Laurence J. Kotlikoff and Scott Burns advocate the immediate end of the Social Security system, replacing it with a Personal Security System account invested by the government in an extremely broad-based and international stock and bond fund. There are numerous provisions designed to reduce the shock of converting to this new system.
If we are smart, we are at the start of what will be a serious debate leading to a well-reasoned and comprehensive plan for changing the Social Security system. It must also consider Medicare and Medicaid which, believe it or not, are in worse shape in terms of cost and revenue projections for the years ahead. I image we’ll visit this topic many more times before we are through. Why do you think this column is titled, “Part 1”?
