Time to Take Stock of Social Security

Social Security soon will be playing the stock market.

A presidential advisory panel will report in early June its recommendations for long-term funding of the nation’s main retirement program. And all of its proposals will include investment of some Social Security payroll taxes in stocks and mutual funds.

The idea is to have Social Security funds earn higher returns and so be able to continue paying benefits to the enormous flood of baby-boom retirees in the next century.

Nothing will be done immediately. The advisory panel’s three alternative proposals--including one that would reduce guaranteed benefits to $400 a month but allow individuals to earn their own retirement by investing in stock and bond funds--will be debated over several years in Congress and the nation.

But the advisory panel’s recommendations mark a major departure. “This will change not only the program’s funding but its function. Its purpose now will be to protect the poor old, the vulnerable old,” says James P. Smith, senior economist at Rand Corp., the Santa Monica research firm.

Thanks in part to Social Security, the 33 million Americans older than 65 are a relatively prosperous group. But if succeeding generations are to enjoy similar retirement, the system will have to change.

Plans are to pay lower benefits to better-off future retirees and to earn the 10% annual returns promised by stock investing, as opposed to 6% or so on Treasury securities, which Social Security taxes are now invested in.

Changing the system won’t be easy, but young and old agree we must try. Richard Thau of Third Millennium, an advocacy organization for people in their 20s--who fear that Social Security will be defunct when they retire--hails the panel’s recommendations that “private markets be allowed to earn returns for Social Security.”

And the 33-million-strong American Assn. of Retired Persons, which takes members as young as 50, is for reform. It favors the advisory panel’s proposal to reduce benefits and invest 40% of annual tax payments in stock mutual funds.

This year that would put an extra $30 billion into stocks--possibly pushing prices up, although predictions about markets are perilous.

Social Security’s problem is one of demographics. When the program began in 1936, there were 15 working Americans paying taxes to support each retiree, who lived, on average, four or five years after stopping work. But today there are 3.3 workers to each retiree--the ratio falls to two early in the next century--and retired people are living longer.

The system still piles up an annual surplus of tax collections over benefits paid, but it will shift into deficit in the year 2013 when the 76 million baby boomers begin to retire.

To prevent mounting deficits and rising tax burdens, new approaches are being considered--although recommending stocks when prices are at record highs recalls humorist Will Rogers’ great line: “Buy good stocks. When they go up, sell them. If they don’t go up, don’t buy them.”

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In fact, changing Social Security may hurt the economy in the short term. Under the system that has operated since 1936, one generation’s taxes pay for the previous generation’s retirement. But under the advisory panel’s recommendations, workers will have to invest and save for their own retirement.

At the point when the systems change over, there will be a transition cost on the generation that has to pay for its parents and save for its own retirement too, explains John Mueller of Lehrman Bell Mueller Cannon, a Washington-area economic consulting firm. “Whether the government pays for that transition with taxation or borrowing, there can be no additional saving to be invested in the economy,” Mueller say. Government deficits will very likely rise and a bear market or a full-blown recession could result.

That’s why one of the panel’s recommendations envisions a 1.5% additional Social Security tax to pay the cost of transition.

Other factors are sure to spark long debates. If a governmental agency, the Social Security Administration, is to invest vast sums in the stock market, will political considerations overrule economic ones? Would the government support the small companies that have become the economy’s engine?

If U.S. workers are asked to invest for their own retirement, will there be a safety net for those who make unwise gambles in stock and bond markets?

But such debates and questions are healthy, just as the advisory panel’s bold recommendations are a positive development. Long before problems in Social Security become acute, 17 years from now, solutions are being considered.

Current alarms about the “collapse” of Social Security and the poverty of an aging America are way off the mark. As Japan and the countries of Western Europe are already doing, U.S. society will cope with an aging population and reform of its retirement system.

There will be no going back to days when the song “Over the Hills to the Poorhouse” described the fate of elderly poor people.

Instead, a couple of current trends will be magnified in the future. One is the increased participation in investment markets of middle-age and young Americans. The need to earn what Social Security would have delivered will only increase their eagerness to invest and the need for classes and counseling on investing, in schools and on the Internet.

The other intensifying trend will be the growth of senior markets as the number of older Americans grows dramatically.

Smart companies are already preparing. Marriott International, the hotel company, is expanding its senior living accommodations, in which people in their 70s and 80s can live independently in rental apartments and get as much assistance--from maid service to nursing care--as they want or need.

Other growth fields are either obvious or will become so, says Edwin Gilroy, 72, a Los Angeles gerontologist--the profession of counseling elderly people that’s a growth field in itself. “Transportation is a service crying out for innovation and all sorts of organizations are needed so old people can socialize,” he says.

As to an aging America, Gilroy, a retired USC professor, advises young and old to “to think about the third stage of life.”

The earlier stages he calls “preparation and vocation.” But the third? Says Gilmore: “Let’s call it realization.”