Social Security 101

In a poll earlier this year, more than half the respondents rated their understanding of Social Security as poor or only fair, evidence of a disturbing lack of information about a key federal program now more than 60 years old. Given this gap in understanding, it’s not surprising that misconceptions have arisen, the most prevalent being that the program is headed for collapse well before today’s younger workers will be old enough to share in its benefits.

The nation’s most valued social program is not going to collapse, because no Congress and no president will let it. But the system does need shoring up, as President Clinton last week reminded everyone in the first of a series of forums aimed at shaping a national consensus on how to keep Social Security solvent.

For the next dozen years or so, payroll taxes will be sufficient to cover what has been promised the system’s 44 million retirees, the disabled and families of working-age people who die. The cloud on the horizon is the 76 million people of the post-World War II baby-boom generation who will begin retiring in large numbers around 2010. This rising flood of retirees will consume Social Security’s income from payroll taxes and begin eating up the surpluses in its trust fund, which has lent hundreds of billions of dollars to the Treasury to keep budget deficits down. In time, unless changes are made, Social Security benefits will have to be sharply reduced.

There’s no shortage of proposals to prevent that. The simplest would be to raise payroll taxes, which now total 12.4%. Employees and employers each pay half on the first $68,400 earned (a limit scheduled to rise incrementally to $82,800 by 2003). But many families already pay more payroll taxes than income taxes, and it would be wrong to increase the payroll tax percentage and add to their burden. There is not a lot of merit either in the notion of slashing benefits to retired people with high incomes or large assets. People should not be punished because they have been successful earners or prudent savers, especially when doing so would be certain to invite a political backlash against the system.

A number of more feasible ideas are gaining support. To cut expenditures, Congress has already extended beyond 65 the age when future retirees can qualify for full benefits, beginning with people born in 1938. Those born in 1960 and later, for example, will have to wait until their 67th birthday. That timetable could be accelerated. It’s also likely that annual cost-of-living increases to retirees will be reduced, given the clear evidence that the consumer price index, on which the increases are based, overstates the real rate of inflation. Sens. Daniel Patrick Moynihan (D-N.Y.) and Bob Kerrey (D-Neb.) have proposed in their plan to save Social Security that annual cost-of-living adjustments be kept 1% below the consumer price index.

The boldest idea is to require some portion of Social Security taxes to be “privatized,” that is, invested in personal security accounts, as they are called, managed either by individuals or the government. Investment in selected and relatively low-risk market instruments should, over the long term, assure markedly higher monthly benefits for retired workers. The natural concern is that market fluctuations could lead to some losses for payroll tax investors, particularly during the early years of privatization. For that reason most of the privatization plans being discussed would maintain underlying Social Security guarantees during a transition period.

No single approach can satisfy all fiscal and political concerns. Fixing the looming solvency problem of too many claimants chasing too few dollars will take a combination of adjustments. The bedrock need is for a national consensus on how to proceed. That requires first of all improving public understanding of how Social Security works and where it is headed. The bipartisan forums launched this month make an informative starting point.