Democrats and Republicans calling for an overhaul of our national retirement system are overlooking the obvious: If it ain’t broke, don’t fix it.
By Merrill Goozner
Bid goodbye to the Social Security crisis — prosperity killed it. Too bad the presidential candidates didn’t get the news.
The trustees of the nation’s publicly funded retirement program reported last week that the booming economy has pushed back the system’s date with insolvency by three more years, this time to 2037. And the Medicare program will remain solvent for an additional eight years, until 2025, the healthiest projection for the senior health care program since it began operating in the mid-1960s.
It was the third straight year of increasingly bullish projections, and you’d think the legacy-hungry Clinton administration would spin the optimistic report as the latest evidence of the wisdom of its economic stewardship. Hardly. One by one, the Clinton-appointed trustees stepped up to the podium of the steamy Treasury Department conference room Thursday to warn that when it comes to “saving Social Security,” this is no time for complacency
Enter politics. Too much good Social Security news is useless to congressional Democrats and their presumptive presidential nominee, Vice President Al Gore. Without a crisis, what scare tactics do the Democrats have to convince senior citizens that if they vote for George W. Bush this November, their monthly checks will disappear?
And it goes without saying that a more solvent Social Security system isn’t favored by Bush, who would love nothing better than a little chaos in the New Deal-era program that each month sends a cash reminder to 44 million Americans that Big Government is capable of getting some things right.
It was easy to imagine leading Bush economic advisor and Harvard professor Martin Feldstein gnashing his teeth over the report. Feldstein has devoted no small portion of his intellectual life to the increasingly dubious proposition that the system is going broke and its only salvation lies in privatization.
Social Security has long been America’s most popular social program. It’s universal, and it’s progressive: Low-income workers get a larger percentage of their final, pre-retirement income than do high-wage workers. But high-wage workers still draw a decent enough benefit from the system.
The program has transformed the country’s seniors, once the most impoverished group in society, into its most prosperous. It provides special benefits for the disabled and for widows — those gray-haired grannies who probably spent many years outside the workforce raising children or as homemakers and would, therefore, qualify for much lower benefits if they had to depend on their own contributions.
It’s no wonder, then, that threats to Social Security, both imagined and real, stir up a tempest of emotions. In recent years, there has been no shortage of demagogues eager to conjure up images that the system is on its last legs.
As recently as two years ago, the professional prophets of doom were predicting Social Security would go broke the minute the oversize baby-boom generation entered its golden years. The White House even took its Social Security doomsday show on the road with town-hall-style meetings across the country to discuss the “crisis.”
Investment banker turned gray-wave expert Peter Peterson secured a regular gig on the talk-show circuit with his book “Will America Grow Up Before It Grows Old?” which issued a less-than-stirring call for boomers to stay in the workforce as long as possible and accept cuts in retirement benefits in order to save the supposedly beleaguered institution. With so much gloom in the air, it wasn’t surprising that polls of Gen X-ers showed the majority of that undersize cohort believes it will never see a dime from the system.
The hype drowned out how minor the problems of the Social Security system really are. Even under the previous conservative estimates of the trustees — who as actuaries are compelled to make conservative assumptions — it would take only a 1 percent payroll tax hike (which would be matched by employers) to fully cover every current worker and future worker now alive, with no reduction in benefits, for the next 75 years. And according to the latest report, it would take a hike of only nine-tenths of 1 percent to sufficiently bolster Social Security.
Militant defenders of the current system — notably Dean Baker and Mark Weisbrot, authors of “Social Security: The Phony Crisis” — argue that increasing the payroll tax is a sensible idea. The real income of the average worker will rise at least 20 percent over the next 75 years. And workers’ incomes will rise even more if, as many analysts believe, the economy has entered a new era of high productivity growth fostered by the Internet.
Moreover, people will be living substantially longer in the 21st century. The average life expectancy will increase to 81 years for men and 85 for women by 2075, compared with 73.7 and 79.5 now. While that’s indeed good news, it stands to reason that if people are going to have higher incomes and live longer, they probably ought to set aside a larger share of their future earnings for retirement, both in the public system and in their individual savings.
But a willingness to enact a small tax increase doesn’t mean one will be necessary, according to Baker and Weisbrot. Solvency of the Social Security system will depend on how well the economy performs over the coming decades, and the most conservative Social Security trustees say the prognosis for an extended boom is not all that good.
The trustees project that the economy will grow at a rate of 2.3 percent over the next 10 years and then fall to a 1.75 percent average growth rate over the full 75-year period covered in the report — overly conservative estimates by any measure, but absurdly low when you consider the 7.3 percent growth rate for the past quarter.
Indeed, the trustees are essentially predicting that the U.S. economy will grow more slowly in the 21st century than at any time in American history. What ever happened to the Internet-driven, high-performance New Economy that all those people with dot-com stocks in their portfolios are expecting?
So given the conservative indications that Social Security is even healthier than expected, why the rhetoric of despair? Because a thinly veiled agenda fuels most of the Social Security crisis-mongers: privatization.
Virtually every think tank on the right, from the libertarian Cato Institute to the free-enterprise American Enterprise Institute to the conservative Hoover Institution, has made privatization of Social Security a centerpiece of its political strategy for over a decade.
These advocates of reform argue — correctly — that Social Security’s return on investment is lousy for many workers. They note that individuals would fare better if they could invest their payroll taxes in the stock market. The latest screed on this subject, “The Real Deal: The History and Future of Social Security,” was written by consultant Sylvester Schieber and John B. Shoven, Stanford University’s Charles R. Schwab professor of economics. Discount broker Schwab himself, who stands to make a killing if Social Security is privatized, wrote a blurb for the book jacket, calling privatization “good news for everyone.”
Schieber and Shoven also call for a 2.5 percentage point increase in the payroll tax, to be entirely borne by workers, which would go into individual accounts and be matched by funds from the regular payroll tax. These individual Social Security accounts, the argument goes, would be better for everyone, especially if they were kept at aggressive discount brokerages like Charles R. Schwab.
But a privatized Social Security program would disproportionately benefit high-wage workers. Low-wage workers, the disabled and any individuals who moved in and out of the workforce during their working years — societal segments dominated by women — could do worse, and in some cases, much worse.
Why wouldn’t full-time low-wage workers improve their lot under privatization? Here’s a simple explanation: Assume Worker A earns an average annual salary of $60,000 and Worker B earns $20,000 during the course of their working lives. Each year, they put a portion of their payroll taxes into individual accounts. Over the years, those accounts make similar investments and earn similar returns (a generous assumption, since poorer people tend to be more risk averse in their investment strategies and many avoid stocks altogether). At retirement, Worker A will draw three times the benefits of Worker B because his or her contributions were three times as large. Under the current system, the spread in benefits payments between high-wage workers and low-wage workers is only 2 to 1.
But won’t Worker B still draw more than he or she would have under the old system because of the relatively higher returns of funds invested the stock market? Not if the system continues to provide “unearned” benefits to widows, the disabled and people with spotty work histories as it does now.
And therein lies the dirty little secret of Social Security: At its core, it’s also a social insurance program, an income redistribution scheme that provides special benefits to the least well off.
Democrats who talk about saving Social Security avoid talking about the social welfare aspects of the system. There’s good reason for that: Many Americans, especially those whose operating philosophy is “me, myself and I,” would probably turn against the program if they actually understood how it worked. Meanwhile, Republicans talk of saving Social Security through privatization, but avoid mentioning that such proposals would overwhelmingly favor the rich.
So take heart from the fact that the booming economy has made the Social Security “crisis” fade. Do not lament its minor role in this year’s presidential debates. Who needs two politicians arguing over who is best suited to save a system that doesn’t need saving?
Merrill Goozner is chief economics correspondent in the Chicago Tribune’s Washington bureau.From Salon.com