Taking Social Security Private

By Mitchell, Daniel J. | The World and I, October 1998 | Go to article overview

Taking Social Security Private


Mitchell, Daniel J., The World and I


Less than five years ago, Social Security was not part of the policy debate in Washington. Yes, there was a small handful of privatization advocates in think tanks and academia, but skittish policymakers viewed the program as the "third rail" of politics.

But in the last few years, there has been a remarkable turnaround. Republicans and Democrats today are proposing sweeping reforms, and the president has been leading a nationwide series of town hall meetings with the American people.

This noteworthy shire in the public debate is largely due to the growing recognition that the program is suffering from two crippling crises.

The first is financial. The baby boom generation will begin to retire in about 10 years, and Social Security will not have nearly enough payroll tax revenue to pay promised benefits. The program's total inflation-adjusted shortfall between 2010 and 2075 is more than $20 trillion, more than four times the size of the national debt. This is a lot of money, even by Washington standards.

This $20 trillion figure also represents the transition cost that would have to be made up by the government through higher payroll taxes or other devices if it wants to maintain today's 60-year-old pay-as-you-go Social Security system.

The system also suffers from a second crisis, one that some view as equally grave. Simply stated, the program is no longer a good investment for workers. Regardless of workers' age, income, ethnicity, or marital status, Social Security offers them very low old-age benefits compared with the amount of payroll taxes they are forced to contribute.

Because of complicated redistribution formulas, some groups lose more than others. Blacks and working women, for instance, are most likely to suffer negative returns. Younger workers of all backgrounds, needless to say, also fare poorly.

SOCIAL SECURITY'S PRECARIOUS FINANCES

Social Security will begin paying out more than it collects in just 12 years. The cash deficit in 2010 will be less than $1 billion, but the numbers will quickly climb to dramatic levels. More specifically:

* Social Security's annual cash shortfall will reach $90 billion in 2015.

* By 2025, the trust fund has promised to pay nearly $500 billion more than it will collect in taxes.

* Just 10 years after that, the yearly deficit will be more than $1 trillion.

* In 2075, the last year for which the Social Security Administration provides numbers, the total shortfall will be a staggering $7.5 trillion.

* Even after adjusting for inflation, the deficits will be immense, reaching $200 billion in 2025, $300 billion in 2035, $400 billion in 2056, and $500 billion in 2068.

These huge deficits, added together, measure the total unfunded liability of the current Social Security system.

Unfortunately, the interaction of these two crises creates an even bigger problem. In short, Social Security is burdened with a giant catch-22. Almost anything lawmakers do to delay the trust fund's bankruptcy will make the program an even worse deal for workers. Proposals to make Social Security a better investment, by contrast, will simply cause the program to run out of money even sooner.

Consider, for example, the various ideas to fix the trust fund's shaky finances. Some argue that a 2.2-percentage-point increase in the payroll tax rate would solve the problem (the current tax is 12.4 percent on the first $68,400 of wages). That increase, which many argue will still leave the program deeply in the red, will make Social Security a much worse deal for workers.

Take the case of an average-income, two-earner couple born in 1970. Under current law, these workers are getting an inflation-adjusted return on their payroll taxes of only 1.2 percent. Requiring them to pay more without any increase in their benefits would mean that a wretchedly low return would become a negative return. …

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