SOCIAL SECURITY

February 2005
		President Bush's call for reforms to Social Security is part of a broader philosophical effort to promote an "ownership society" in the United States. Dinesh D'Souza of the Hoover Institution at Stanford University and professor Jacob Hacker of Yale University answer your questions about the philosophical differences in the Social Security debate. Special Report: Social Security Reform

Forum Introduction After we baby boomers die off will the imbalance of workers to retirees correct itself? Why not just pay out less to those who have high assets? Why not just have the SSA invest a percentage of the current contributions in index funds? What happened to the "lockbox" idea? Has the Social Security trust fund been used for other purposes?	Judy Brook of Great Neck, N.Y. asks: After we baby boomers die off in about 40 years will the imbalance of workers to retirees correct itself? My kids are in their late 20s and early 30s. When they were born, they were referred to as the "baby bust" generation. What do the (future) demographics show? Dinesh D'Souza responds: The future depends entirely on how many children are born to young people who are in their teens, 20s and 30s today. There has been a trend toward lower birth rates-one child rather than two or more. But there is no law that says this trend has to continue. So no one really knows what the future holds. This is one of the problems with Social Security: it is a slave to demographic trends. A sound system would build up accounts for each citizen, and allow these to grow so that citizens can benefit from the compounding value of their money. Jacob Hacker responds: Quite honestly, no one knows exactly. Most rich countries, including the United States, have seen a sharp decline in birth rates over the past 30 years. But birth rates in the United States have actually remained higher than in many other affluent nations-and in fact, as your question suggests, they actually rose between the "baby bust" of the mid-1970s and today. What I can tell you is that the Social Security Trustees who oversee the financing of the program assume that birth rates will drop only slightly in the next century. The Trustees also estimate that Social Security will be able to pay promised benefits throughout the period when the baby boomers are in retirement (roughly 2010 to 2030), and that it will be able to pay roughly three-quarters of benefits even after the Social Security trust fund is spent down, around 40 years from now. The Congressional Budget Office estimates that the program will able to pay full benefits even longer. I take your question, however, to be larger than "What do actuaries think?" What is the basis for a program in which one generation funds the retirement of the next? The idea is that we take care of our elders and our children take care of us. That idea made tremendous sense when Social Security was created. The elderly were among the most disadvantaged members of society, and it was only fair to pay them benefits that exceeded how much they paid into the program. The important thing to recognize is that this money (that is, money devoted to early benefits) has been spent. Plans to put private accounts into Social Security won't bring it back. In fact, under the president's (still sketchy) proposal, private accounts will be funded through huge benefit cuts and massive borrowing, the burdens of which will fall mostly on today's young. Incidentally, the birth rate is not the only factor that affects how many workers there are relative to retirees. The other important factor is how long people live after retirement. But life expectancy has a different effect on Social Security than birth rates. If each generation lives longer than the next, then each generation simply pays a bit more for to support their elders than the next. Workers who paid more when they were working simply collect benefits longer in retirement when they retire.