How we can fix Social Security
Forget wishful thinking and the either-or argument. We'll need a wide-ranging plan that borrows ideas from right, center and left
By George J. Church
May 3, 1999
A quarter-century of writing and editing analyses of Social Security had convinced me that no one would cobble together even a jury-rigged fix for the system until five minutes before the first pension check bounced--if then. But now President Clinton really has put "saving Social Security" at the top of the nation's domestic agenda, sparking a debate unprecedented in its intensity. So maybe...
Then again, maybe not. A good deal of the debate is confused, ideologically envenomed, or both. Left and right squabble furiously over the latest idea--totally replacing Social Security with a system of individual investment accounts. Now, even this market-based approach is being shelved by its Republican proponents, who have become fearful of the political risks.
Some people think wishfully that rapid economic growth will enable the Social Security system to muddle through pretty much as is. Others talk in either-or terms--either funnel most future budget surpluses into Social Security and invest some of that money in the stock market, or increase Social Security taxes and modestly reduce benefits--and the problem will be solved.
Sorry, but it won't wash. The size of the gap between Social Security tax collections and pension payouts over the next 30 or so years, and how far any specific proposal would go toward closing that gap, are still anybody's guess. And those guesses depend on such variables as the speed of economic growth, the future pace of inflation and the course of the stock market--all notoriously difficult to predict even a year ahead. Estimates clash so sharply as to invite suspicion that they are shaped more by political bias than by analysis.
But it is possible to indicate orders of magnitude. Currently there are a bit more than three taxpaying workers supporting one retiree. By the 2030s, when the tidal wave of baby-boomer retirements crests, there will be only two. Somewhere around 2014, the system is expected to be paying out more in benefits than it collects in taxes, forcing Social Security to start cashing in the Treasury bonds in its trust fund, whose assets are now more than $760 billion. By 2034, that too will be gone, and taxes will cover only an estimated 71% of annual pensions.
One estimate is that under present tax and benefit schedules, the Social Security system would plunge $6.9 trillion into debt between 2014 and 2034. If that is accurate, Clinton's 1999 budget proposals, which are supposed to pump $2.7 trillion into Social Security during the next 15 years, would close less than half the initial gap. Further reforms would be needed to keep revenues in balance with payouts after 2034. Also, the present system contains some glaring inequities that ought to be corrected--at the cost of making the fiscal gap even wider. No one proposal will probably come near to filling it. What is needed, in my opinion, is a comprehensive program, summarized by these commands:
Play the stock market
All this assumes, of course, that financial-market investments will continue to provide an attractive return. That seems reasonable, at least in the long run. Martin Feldstein, president of the National Bureau of Economic Research, calculates that a portfolio 60% of which is invested in stocks and 40% in bonds would grow on average 5.5% a year. That represents the actual average from the end of World War II until today, minus an allowance for administrative costs. By contrast, the special Treasury bonds that, by law, Social Security must now buy with any spare cash it has may yield on average less than 3%.
But many pensioners, present and future, would be terrified of having their retirement income depend heavily on the short-term ups and downs of Wall Street. They would have to be guaranteed a fairly high pension still paid out of regular Social Security taxes--currently 12.4% of each employee's wages, split between worker and boss--no matter what.
A Senate bill written by Democrats Daniel Patrick Moynihan of New York and Robert Kerrey of Nebraska would allow workers to divert 2% into investment accounts but would lower guaranteed benefits to what could be financed out of the remaining 10.4%. Feldstein has an even better idea: keep present tax and benefit rates but have the government deposit into individual accounts an additional 2% of each worker's earnings, up to the prescribed annual taxable limit. On retirement the worker would repay Uncle Sam $3 of every $4 he or she had in the account. Taxpayers under this scheme might earn somewhat less, in total, than under Moynihan's plan--though that one-fourth share could add up over decades. On the other hand, they would run little if any risk of losing anything, and the government would eventually gain a new and potentially major source of revenue to help pay the guaranteed pensions.
But suppose sharpies bamboozle Grandpa into buying stock in Fraudulent Uranium Co. or Flim-Flam.com? Not to worry: the law should allow only competent and honest professional managers to bid for Social Security money--and require them to offer a wide choice among funds making highly conservative to more adventurous investments, which is roughly the deal enjoyed today by employees in company 401(k) plans. In any investing, some risk is inevitable, but probably less than the risk that pensions would be slashed to keep a completely tax-financed system sound.
Pay your debt, Uncle Sam!
It won't happen automatically. Rosy current projections could go wrong--the February 1997 projection of 1998 results was off by $191 billion. Clinton has proposed using 62% of surpluses during the next 15 years to pay down the $3.7 trillion national debt. Congress should raise that to a full two-thirds and write the requirement into law. That would go far toward preventing politicians from squandering the surpluses on tax-cutting or spending sprees. It would also ease the immense burden of interest payments--currently $229 billion a year--on federal finances and help pep up the economy. The more debt the government pays off as it comes due, the less new money it must borrow to refinance the remaining debt; the less the government borrows, the more loan money is freed to finance consumer spending and business investment. All that will help assure that the forecast surpluses materialize and become available to help Social Security in its hour of need.
Give the working poor a break
Republican Senator John Ashcroft of Missouri has suggested allowing workers to take an income tax deduction equal to their supposed half share of Social Security taxes. Right idea, wrong numbers. Ashcroft would give this break to anyone earning $70,000 a year or less. It should be targeted much more closely on those struggling to escape or avoid poverty--perhaps those earning no more than $30,000. The many families in this bracket who earn too little to pay income tax yet "contribute" to Social Security should get a proportionate cash refund in the form of an expanded earned-income credit.
Make the rich pay more
Deflate the fattest pillows
Switch to a "diet cola"
Raise the retirement age
Stop shortchanging workingwomen
Individual investment accounts might help remedy this; whatever a woman earned on investments would be hers to keep and would add to the pension she would otherwise get. But much more should be done. The National Organization for Women advocates an income-splitting approach for married women: if a couple makes, say, a combined $60,000 a year, husband and wife would each be credited with $30,000 of earnings for Social Security purposes. This arrangement would be costly and no doubt difficult to sell to male legislators. But it sounds fair--a partial remedy for the discrimination that still keeps the pay of even many highly skilled professional women below that of men doing the same job.
Some colleagues have asked me, "Do we really need to do all that?" Maybe not--if the economy and the stock market continue to boom and inflation stays tame for years to come. But we shouldn't take chances. The system needs to be shored up so it can continue to keep the elderly out of poverty, come what may: recession, a stock-market crash, a flare-up of inflation or even all these things together. In the unlikely event that the economy continues to show its remarkable combination of superfast growth, superlow unemployment and superlow inflation for another decade or so, and the stock market soars even further into the wild blue yonder, then this program could be softened. Some ideas: restore full COLAs; do not increase the "normal" retirement age beyond 67, and set the earliest at 60; grant income tax deductions equal to Social Security levies to people with somewhat more income--maybe as much as $50,000.
This program, which borrows ideas from Ashcroft on the right to NOW on the left, can hardly be called partisan. Nor can it be called self-serving. If it had been in effect years ago, I would have paid Social Security tax on much more of my 1995-97 income. And my proposed means test would bar me from collecting much, if any, future pension benefits.
Tough! It needs to be done.
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