Sunday, January 30, 2005

Social Security `fix'--the next disaster

By R.C. Longworth, former Tribune senior correspondent and business editor
Published January 23, 2005

President Bush has promised to make Social Security reform the domestic centerpiece of his second term in office. But this reform, to be unveiled next month, shows all the unreality, fiscal irresponsibility and overhyped salesmanship of the keystones of his first term, the war in Iraq and tax cuts for the rich.

Like these two adventures, Social Security reform is a disaster in the making. For that reason, it is necessary to sort the facts from the fiction in this flawed proposal.

No matter what the administration says, there is no Social Security crisis. Social Security isn't broke and doesn't need fixing. It is a system that will run just fine for 40 years, probably more, even if nothing at all is done.

A problem will appear at midcentury, but it's a relatively small problem that is easily fixed. Full-scale reform, on the other hand, would end up killing the system it is meant to save.

In his inaugural address Thursday, Bush said he wants to "build an ownership society" in America, and he has made clear that a key to that would be partial privatization of Social Security.

But he had launched his campaign for partial privatization of Social Security earlier this month with a fear-mongering speech that told young workers, "If you're 20 years old, in your mid-20s, and you're beginning to work, I want you to think about a Social Security system that will be flat bust, bankrupt, unless the United States Congress has got the willingness to act now."

Vice President Dick Cheney followed this up by predicting "fiscal collapse" by 2042, leaving the government no option "other than to suddenly and dramatically reduce benefit payments by over 25 percent, or to impose a massive, economically ruinous tax increase on all American workers."

These two statements, by the two highest officers in the land, are not even remotely true. Here are the facts:

Social Security began in 1935 and has gone a long way toward eliminating poverty among America's elderly. That rate is about 8 percent today, down from 35 percent in 1960.

The payback is not lavish: The typical annual pension for a retired couple amounts to less than $17,000. Better-off retirees supplement it with private investments, but two-thirds of older Americans rely on it for the majority of their income. For most of the elderly, it's insurance, and it works. In an era when most private pensions are tied to the value of an employer's stock, this guarantee is more important than ever.

How it works now

Social Security is basically a pay-as-you-go system, with the taxes paid by today's workers financing pensions for today's retired persons. You pay for your parents' retirement now, and your kids will pay for your retirement later.

Here's where the problem comes in. If you're a typical American, especially if you're a Baby Boomer, you don't have as many kids as your parents did. This means that, when all those Boomers retire in the next two or three decades, there won't be enough younger workers to keep their Social Security pensions fully funded.

This is no surprise. Demographers saw this coming years ago. So did the government. In 1983, the Reagan administration, acting on a recommendation by Federal Reserve Board Chairman Alan Greenspan, raised Social Security taxes higher than necessary, by about 2.2 percent, to build a surplus--a trust fund--to help pay the Boomer pensions.

It worked. There's $1.5 trillion in that trust fund now, all invested in government bonds. It will keep growing until about 2019, when the full flood of Boomer retirements hits, and it begins to shrink.

In about 40 years, this surplus will be gone. Social Security trustees predict it will run out in 2042; the Congressional Budget Office says 2052. It all depends on how fast the economy and wages grow in the meantime, how many immigrants join the workforce and how much longer we live.

This spending of the surplus is what supporters of the Bush privatization plan mean when they talk about a "crisis." It's what Bush means when he says the "Social Security system will be flat bust, bankrupt."

No such thing. Even then, workers will still be paying enough into Social Security each month to finance some 70 to 80 percent of its pensions and other benefits.

But 70 or 80 percent isn't good enough, and that's the problem. Bush and Cheney are right, at least, when they foresee a problem "unless Congress has got the willingness to act now."

Rough look at plan

While the White House so far has spoken in general terms about its plans, most observers expect Bush and Cheney to push Congress to change the pay-as-you-go system by enabling workers to divert up to half their Social Security taxes into private accounts.

The money would no longer go to today's retirees, but would be held in personal accounts that would be invested in the stock market, much like 401(k) accounts are now. No one doubts that Bush eventually wants to privatize all of Social Security.

This is radical reform that might or might not work; Bush's radical approaches to Iraq or taxes haven't worked very well. At the least, it would end Social Security's basic role as a national insurance system, turning it into a semiprivate investment fund.

If there were no other choice, this might be palatable. But ever since Social Security began in 1935, Congress has tinkered with it to keep it solvent; the 1983 Greenspan-inspired trust fund is a good example. There's plenty of tinkering that can be done now to keep it solvent pretty much through the 21st Century.

The easiest is to raise the Social Security tax. Right now that tax is 12.4 percent of paychecks, half paid by workers, half by employers. Raising that tax by about 1.9 percent--split between workers and employers--would solve the problem. (That raise, remember, is less than the 2.2 percent Reagan-Greenspan increase of 1983.)

Another idea is to end the cap on contributions. Workers now pay Social Security taxes only on the first $90,000 of their annual income. That means that anyone earning $90,000 or less--which means most people--pays a 6.2 percent Social Security tax. But a boss earning $900,000 pays only one-tenth as much of his total salary--six-tenths of one percent. This is about as regressive as taxes get. Raising this cap to $140,000 would erase about one-third of the shortfall.

There are lots of other ways to make the system solvent, some mildly painful, none calamitous. Retirees now pay only about 50 to 80 percent of full taxes on Social Security benefits--this tax could be raised. Or the 7 million state and local employees who now have their own pension funds could be included in Social Security, helping fund the system. The annual cost-of-living increase to benefits, which some economists think is unrealistically high, could be lowered.

The official retirement age, which already is being raised from 65 to 67, could be raised further to 70--an idea that probably sounds better to those of us who work at a desk than it does to, say, waitresses or construction workers.

Some economists argue that even these fixes aren't necessary. They say that economic growth and high immigration will keep Social Security solvent forever. But most feel some mix of higher taxes and lower benefits is inevitable--the sooner the better, to minimize the long-term pain.

Well, why inflict any pain at all? Because the reforms are worse.

First, even Bush says that Social Security pensions due to older workers--those above 40, say--must be paid in full: No politician wants to stiff gray-haired voters. But if half the Social Security donations go into private accounts, there won't be enough money going into the system to pay these pensions.

Some privatization advocates favor a sharp tax to make up the difference. But Bush rejects any new taxes and wants to borrow the money--no less than $2 trillion--instead. This would add trillions more to the other trillions in national debt, much of it due to Bush's tax cuts, all of which must eventually be paid by--guess who?--the younger workers who are supposed to benefit from privatization.

But will they benefit? In the long run, stock markets have indeed paid a higher return than government bonds. But retirees don't need their money in the long run. They need it right now, when they retire. If their retirement coincides with a boom market, fine. If not, not so fine.

Stock markets can and do decline, for a decade or more. A lot of people who retired in 2000 to live on the returns of the 1990s boom are back to work now. Presumably, the market will grow again one day, and they can go back to the golf course.

But is this guaranteed? And when will it happen?

At least those Americans who rely on boring old Social Security for their retirement have got all the money they expected.

No one knows how the private accounts will work in practice. Bush says we will "own" them, which means we'll have control. Can we cash them in, to meet a medical emergency or college tuition? Then what happens when we retire? Can we invest them as we wish? If we invest in Singapore derivatives or Florida swampland and get wiped out, will the government let us starve?

Actually, there probably will be rules against cashing in, and Cheney says there will be government "guidelines" on where we can invest. Some "ownership."

Presumably, those "guidelines" will approve normal, solid, profitable companies. Like cigarette companies or (listen up, conservatives!) condom manufacturers. No? Then which companies will get the government seal of approval? And how many conservatives want the government to have this much clout on the stock market?

None of these questions is close to being answered, and they needn't be asked if Social Security is seen as what it is: an insurance plan, not a get-rich-quick scheme. It pays less than the stock market because, unlike the stock market, it's not risky. Its name is Social Security, not Social Maximum Return.

Of all the things wrong with the Bush plan, the worst is the outright lying that has been used to justify it.

White House distortion

The administration claims that Social Security faces a $10 trillion shortfall and only privatization can stave off this calamity. This just isn't true.

The Social Security trustees say that Social Security will find itself $10 trillion short only if the shortfall is allowed to run forever and ever, literally. Actually, the projected shortfall over the next 75 years is $2 trillion, or about three-tenths of 1 percent of the U.S. gross domestic product, assuming that the economy doesn't grow at all in the next 75 years.

This also assumes that Congress does nothing at all to close that shortfall. As we saw above, there's plenty that can be done in the next 40 years to keep that from happening.

At any rate, that $2 trillion shortfall, which probably won't happen, is only one-fifth as big as the cost over the same period if Bush gets his wish to make his tax cuts permanent.

Privatization advocates also warn that Social Security's future rests on trillions of dollars of "unfunded obligations." What they mean is that, when it comes time to pay the pensions, the money won't be there.

Wrong again. As seen above, at least 70 percent will come from normal payroll taxes. The rest comes from that trust fund, which is invested in government bonds: In essence, the government borrows from the fund to pay its bills now, promising to repay when the bonds come due.

To say that these obligations are "unfunded" is to say that the U.S. government will renege on this debt. In fact, the government, unlike a lot of companies that would sell stock to those privatized accounts, has never defaulted on a debt in the nation's history.

There's one more reason to keep Social Security as it is now. It has nothing to do with economics and everything to do with America's soul.

This is a divided nation. So many of the obligations that once held America together have vanished. But Social Security remains, a promise from one generation to another, perhaps the only program that unites the nation in mutual responsibility.

Privatization of Social Security would sever that last remaining tie and make this generational promise just one more item to be bought and sold in the marketplace, which may be exactly what its proponents have in mind.

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