Alarms are sounding from all directions, urging Americans to be
anxious about their Social Security pensions. We, too, believe that
Social Security pension reform belongs on the national agenda. But
is there a financial crisis that demands a major revamping of the
system - "privatizing" it - as so many eager analysts and
politicians insist? The answer, in a word, is no.
In fact, relatively minor adjustments in finance are all it
would take to resolve Social Security's latest technical problems.
The case for "privatizing" substantial portions of the pension
package has much more to do with the ideological preferences and
economic interests of the privatizers than with the solvency of
The situation is this: The Social Security system today is
accruing substantial surpluses, and total income will continue to
exceed outlays until about the year 2020. After that, however,
Social Security's accumulated reserves will have to be retired to
pay for benefits, which will begin to exceed what taxes at current
levels will bring in. By 2070, if no adjustments are made in the
interim, Social Security will be in deficit - short by an estimated
2.2 percent of payroll.
Peter Peterson, the country's reigning guru of economic gloom,
is thus technically correct. The current system is "unsustainable."
But Peterson's assertion that the country cannot finance anything
much like the current system is nonsense.
According to Robert M. Ball, former commissioner of Social
Security, the total 75-year deficit can be eliminated, and then
some, by taking only a few steps that are neither radical nor
Ball and five other members of the Social Security Advisory
Council have proposed, first, to make moderate adjustments in how
Social Security pensions are calculated and taxed and, second, to
get a better return on the money that will be accumulating in the
Social Security trust fund until the year 2020. The trust funds are
now invested entirely in Treasury securities. Ball group proposes
to invest 40 percent in higher-yielding equity securities instead.
Five other member of the 13-person Advisory Council have
proposed a more radical option: a substantial privatization of the
Social Security system. Under their plan, every worker would get a
personal security account (PSA) financed by diverting nearly 40
percent of the payroll taxes that currently finance Social
Security. The money in this account could be invested as the worker
Upon retirement, workers would receive whatever had accumulated
in their PSAs plus a small "base pension" financed the old way.
This base pension - set at $410 a month - would be lower than
today's average benefit under SSI (the means-tested Supplemental
Security Income program) and far lower than the poverty threshhold.
But the PSA proposal diverts so much money from the Social Security
trust fund that the privatizers, to provide even this minimal
guaranteed benefit, had to propose additional payroll taxes (a
raise of 1.52 percentage points in the FICA tax), benefit
reductions and public borrowing.
According to the Office of the Actuary at the Social Security
Administration, both of these advisory council proposals satisfy
the statutory requirement that the scheme be in long-term (75-year)
actuarial balance. But, if so, why go beyond the Ball solution? The
real debate plainly is about something else.
These plans are similar in one other way. Both tie Social
Security's fortunes more closely to the performance of the private
capital markets. Historically, that has been a good investment
Nevertheless it is a strategy with risks. The stock market is
subject to quite precipitous "corrections." And though, over long
periods of time, the average investor can expect to do better by
investing in the market, some people will do substantially worse.
In effect, the Ball approach puts the market risk on government
and on all of us collectively. …