Dispel Social Security Fears With Discipline
The fear and confusion over Social Security are extraordinary. In a Gallup poll taken for the Employee Benefit Research Institute, a Washington think tank, 47% of the respondents said they didn’t believe that they’d get any retirement benefits from Social Security.
They saw zero payback, that is, for all the Social Security taxes deducted from their paychecks. And the younger the respondents, the more pessimistic they were, with a plurality of 35- to 54-year-olds doubting benefits, and a clear majority of 18- to 34-year-olds saying there’d be no money for them.
Which is very odd. Because all those people should know that there is no problem with Social Security. “The chance of not receiving the benefits guaranteed by current law is equivalent to the risk of getting hit by an elephant at Hollywood and Vine,” says Henry Aaron, tax expert at the Brookings Institution.
Not only are benefits guaranteed by law, there is more than enough money to pay them. There is a gigantic reserve building up in the Social Security trust fund today, because the number of active workers paying in is greater than the number of retirees collecting benefits, and will be much greater for at least the next two decades.
The reserve, which is to help pay benefits in the next century for retirees of the baby boom generation, has grown to $232 billion at present and will continue to grow--to $1.5 trillion in 2000 and ultimately to $11.5 trillion in 2030.
Then, on present reckoning, it will begin to be drawn down as payments to retirees outrun new taxes from active workers. But even that projection is based on assumptions about future interest rates. “If interest rates are anywhere near today’s levels, the system could run forever on the present rate of taxes,” says Brookings economist Barry Bosworth, author of “Can America Afford To Grow Old?” Finally, even if the reserve does run out in 2050, Social Security benefits won’t stop. The system will simply carry on as it has since 1935, with each working generation paying retirement benefits for the generation that went before.
Then why the worry and why all the talk about Social Security from politicians these days? In the past two months, Sen. Daniel Moynihan (D-N.Y.) has advocated cutting the payroll tax and eliminating the Social Security reserve. And Rep. Dan Rostenkowski (D-Ill.), declaring that “we have to stop cooking the numbers,” has called for balancing the federal budget through tax hikes and a one-year freeze on cost-of-living adjustments for Social Security benefits.
The congressmen are acting out of frustration. They recognize that the Social Security reserve, rather than being set aside for future obligations, is actually helping to fund the federal budget deficit. And that deficit isn’t declining to less than $100 billion, as the White House says, but is rising to $224 billion this year and $236 billion next year. In other words, what should be a savings account is being used as a checking account for current bills.
One reason there is confusion is that today’s Social Security taxes are a departure from historic practice. To understand, it helps to recall that Social Security was set up in 1935 to open up jobs for younger people by giving older workers a little money to retire. Naturally, those early retirees had paid nothing into the system, so the active workers paid for them--and each succeeding generation since has paid for the previous one.
That idea worked fine as long as there were no swings in the birthrate--and as long as each generation lived roughly the same number of years in retirement. But in the decade and a half after World War II, more Americans were born than in any previous or succeeding generation, and people today are living longer than ever.
The result is the certain prospect of big retirement bills to come. So Social Security tax rates were raised in 1983 to assure a reserve buildup. In a sense, the baby boomers are paying more now to finance their own retirement.
Only they’re not, because like all Americans they’re paying lower income and other taxes while still opposing cuts in government programs and tolerating budget deficits. They know instinctively that a tide of federal expenditure makes things easier in the current economy.
But Americans also know that Social Security reserves are funding that tide of expenditure. And so they fear for the future.
Americans today are like someone who has set up a savings account for the kids’ education but dips into it every week to party on Saturday night. When the tuition bills arrive, they might come up with the money somehow--but it will be harder than if they had saved.
What should be done? The federal government should match current expenditure with current tax revenues, and the Social Security reserve should be set aside as envisioned in the reforms of 1983. It could then help to fund or retire the national debt, and free up other resources in the capital markets--and be the national savings lifeline this country needs.
The issue, as in so many other things, is one of discipline and faith in the future, rather than fear.
