Social Security vs. Stocks: Another Look

Article excerpt

In the escalating debate for the future of Social Security, forecasts are popping up faster than prairie dogs at dawn. But forecasts without context can be misleading.

Here are answers to some key questions on the issue - and a correction. First, the questions:

Will today's young people receive healthy Social Security pensions when they retire?

Yes, for political reasons, if none other. The share of seniors in the voting-age population is projected to reach 27.2 percent by 2040. If Congress falls over itself to issue subsidies to farmers, who make up less than 2 percent of the population, it's inconceivable that politicians would offend such a huge bloc of voters by not providing adequate financial care for their retirement. Even if lawmakers approve a system of private accounts and the financial returns are poor - as they have been in Britain - Congress would step in to look after those hardest hit by the losses.

Will the Social Security system run out of money?

Yes, in 2042, if the current system is untouched. That's the estimate by the Social Security Administration. The Congressional Budget Office puts off that date 10 years. But even if the trust fund runs dry, the system would still be collecting payroll taxes. So after 2042, Social Security would be able to pay at least 70 percent of promised benefits. That 70 percent will have more purchasing power than today's Social Security pensions because pensions are based on average incomes at retirement. Presumably, American real incomes will rise over the next nearly four decades.

But taxpayers will feel the pinch starting in 2018. That's when Social Security is expected to begin paying out more than it takes in. As the system dips into its trust fund, Congress will have to act. For decades, it has disguised the size of US budget deficits by counting the trust fund as income. In effect, it has spent money promised to future retirees. The solution is to raise taxes, cut spending, add to government debt, or reduce Social Security benefits. Given retirees' voting clout, don't expect benefit cuts.

Are these projections accurate?

It depends. Demographic projections are reasonably good, since most of those born today will be around in 75 years. But other long- term assumptions, such as growth rates for the economy and for productivity, are really unknowns, yet crucial to calculations. If longevity rises faster than in the past, the Social Security system will have a bigger problem supporting more old people. If families decide to have more children than they do today, the extra workers in 20 years would ease the strain. Future immigration levels will also play a role.

Now, the correction, with an apology. On Dec. 27, this column cited a calculation by Stanley Logue, a retired defense-industry analyst, that suggested that investing in the stock market didn't necessarily produce a superior return, even over long periods. …