Social Security isn’t broken; don’t ‘fix’ it
They say that even the worst tragedies harbor the seed of something good. So here’s something positive in the stock market’s gruesome behavior over the last year: It may finally have driven a stake through the heart of the campaign to “fix” Social Security.
Let’s be plain about one thing: This campaign, cooked up mostly by Wall Street investment houses and conservative Republicans, was always about “fixing” Social Security the way one “fixes” a cat.
The perpetrators employed what might charitably be labeled flapdoodle to scare soft-headed politicians, inattentive journalists and innocent citizens into thinking there’s something fiscally out of whack with Social Security.
They proposed that the program be “privatized” instead. Rather than pay payroll taxes into a government fund in return for an inflation-indexed monthly retirement stipend guaranteed to the end of your days, they said, you should hold on to your own money and put it in the stock market.
One would have expected the bear market of 2000-02, which shaved roughly 50% from the value of stock portfolios, to have buried the idea of replacing Social Security with personal retirement accounts forever.
Yet it rose to walk among us again, the way Rasputin clambered out of the frozen River Neva with a dozen bullet holes in his body. In 2005, President Bush tried to make it a centerpiece of White House policy.
With any luck, the 2008 stock market crash will permanently restore Social Security’s luster. Indeed, the program looks so solid and reliable compared with every other source of retirement income -- your pension, your portfolio, your house -- that people ought to respond well to the idea of expanding it, in part by permitting them to put more money into their Social Security accounts to obtain better benefits.
Before we get to that, let’s lay some of the slanders about Social Security to rest.
The privateers claimed that the program was doomed to bankruptcy. They talked about how its surplus, currently $2.4 trillion, is invested in nothing but U.S. government IOUs. They didn’t mention that those IOUs are U.S. Treasury bonds, which are the safest securities in the world.
They said that the program was going to run out of money in or around 2042. They didn’t say that they were relying on a single estimate (among many flawed and contradictory projections produced by the program’s trustees) forecasting that the Social Security trust fund would be spent down to zero by that date, or that even according to that projection the program would still have plenty of funds to pay benefits thereafter.
Their point was that if we’re going to “fix” Social Security, we need to start now, because we only have (at this writing) 33 years to get it right.
Of course that only exposes the folly of basing important decisions on long-term projections. If we were to project conditions today from the vantage point of 33 years ago -- 1976 -- we would be doing so in ignorance of personal computers, the Internet, cellphones, cholesterol drugs, the collapse of the Soviet Union, 9/11, the tech boom, the dot-com crash and the financial meltdown of 2008, all of which have had a profound effect on the U.S. economy.
You still want to tamper with a crucial program because of something you think might be true 33 years from now?
Social Security has never been touched by scandal. It pays benefits promptly and dependably. Its administrative costs are rock-bottom. When I move, the Social Security people always seem to learn my forwarding address without being told, sometimes before my mother does.
Contrast that with the history of personal retirement accounts. Traditional pension plans that make guaranteed monthly payments are going extinct in the private sector, supplanted almost everywhere by self-managed 401(k) accounts, which offer the opportunity to risk your retirement nest egg in the stock market.
But if you do the math, you can see that the difference between the balance in a lifelong retirement account of someone who cashed out in, say, 2004 and someone trying to retire today, post-crash, might be hundreds of thousands of dollars.
So perhaps the time has come to put Social Security to even greater use.
One intriguing idea comes from David Langer, an 81-year-old professional actuary who has been a thorn in the side of the program’s critics for years. (He exposed the flaws in the long-term financial projections in a series of actuarial journal articles in the 1990s.)
Langer observes that with termites eating away at two of the three traditional pillars of retirement security -- employer pensions and personal investments -- Social Security deserves a bigger role in most people’s retirement.
He proposes a standard by which the program would supply up to 70% of a worker’s average pre-retirement income, up from today’s maximum of about 57%, which applies to the lowest-earning workers. He would finance the expansion partially from the program’s existing surplus and partially by raising the ceiling on the payroll tax, which this year applies to earnings up to $106,800. He hasn’t worked out how high the ceiling would have to be raised.
Langer also proposes allowing individuals to fatten their Social Security fund by paying in additional resources, such as their 401(k) balances. The program would set a conversion rate -- for every $10,000 transferred, say, you get a certain additional monthly benefit upon retirement or a discount on your future payroll tax. Employers could transfer their pension fund balances on similar terms.
“The virtues of expanding Social Security are legion,” Langer told me recently. “It’s a national plan. It is not dependent on the survival of a worker’s employer. It is not dependent on anyone’s investment acumen. Protection against inflation is built in. The effect of investment market and corporate financial chicanery is greatly limited.”
Implementing Langer’s proposal would involve manifold legal questions, not to mention actuarial issues to make your head spin. But he has his finger on a key point, which is that by establishing Social Security in 1935 the U.S. government created something greater than it knew. Since then this grand old program has been battered around by enemies and profiteers. Yet it’s still standing, and today all the fancy alternatives that have been proposed over the years look pathetic by comparison.
Michael Hiltzik’s column appears Mondays and Thursdays.
You can reach him at michael.hiltzik@latimes .com and read his previous columns at www.latimes.com /hiltzik.