The Dirty Little Secret about Social Security; the Problem Can Be Solved

Article excerpt


I am frustrated by the refusal of Sens. John McCain and Barack Obama to adequately confront Social Security's looming fiscal crunch. The United States faces a demography-driven crisis of entitlement spending.

Medicare is in the worst shape, but Social Security alone has $15.8 trillion in unfunded liabilities. The natural temptation is to do nothing, but the longer we wait, the bigger will be the shortfall and the more difficult it will be to reform the system.

Unfortunately, we can't get by hoping to save a little money elsewhere. The national debt is $9.5 trillion and next year's deficit will run a half trillion dollars.

Social Security was sold as social insurance, but benefits are neither legally guaranteed nor set aside in income-earning accounts. The trust fund is pure fiction, a public relations cover for a pay-as-you-go system.

The nation's roughly 80 million Baby-Boomers have begun to retire and Social Security will be out of money in 2017. The trust fund is empty. Earlier this year, Moody's Investors Services announced that it was considering downgrading federal bonds because of the coming entitlements tsunami.

Even if there is money to pay Social Security's promised benefits, recipients would receive far less than they could earn in a private system. Nor would they own the principal, like any normal investment.

The rate of return (ROR), counting Social Security taxes as an investment, has been steadily falling. According to the Social Security Administration, five years ago, most low-to medium-income beneficiaries, other than one-earner couples, were receiving less than 2 percent, while most higher earners were below 1 percent or even negative. Other estimates for a steady-state return from Social Security in the future tend towards 1 to 1.5 percent.

In contrast, average annual returns have been stable over time - roughly 7 percent for stocks, 4 percent for bonds, and 5.5 percent for a mixed portfolio. Private investments yield a better return than Social Security even when including notorious downturns, such as in 1987 and 1929.

Mr. Obama proposes raising taxes, which may or may not find favor with Mr. McCain, who can't make up his mind. But huge tax increases would be necessary to close the funding gap, and would discourage business investment, job creation and economic growth.

Moreover, tax hikes would target the wrong people. Current beneficiaries are receiving benefits based on paying lower taxes in the past. Future beneficiaries would be forced to pay more even though they already are slated to receive a lower ROR. …