Looking towards a Sounder Social Security System
Perez, Robert C., Hammerbacher, Irene, Review of Business
Most studies show that retirement security ranks as the highest priority in a worker's goals. Much progress has been made with employer-sponsored pensions and other retirement programs. But the Government-sponsored social security system, which was designed to provide a retirement security blanket for all working Americans, has failed to provide workers with adequate supplementary retirement income; the average annual social security payment is $7,600, far below the current poverty level. With the huge surpluses currently being enjoyed by the social security system, we should now be investing a portion of those surpluses into faster growing equities to provide a cushion for the drastic outflows which will occur when the baby boomers begin to retire en masse in the early part of the next century. However, the original Social Security Act mandates that all contributions to the Social Security Trust Funds must be invested in U.S. Treasury securities--no common stocks or corporate bonds.
This paper projects the present assets of the combined social security funds into the future to see how well modern investment management techniques utilizing diversification across the spectrum of investment alternatives might perform compared with the "governments only" investment strategy mandated in the present system. The projections carry the results 78 years into the future through 2070 starting with the actual assets of $280.7 billion in the system at the end of 1991 and using all three of the economic assumptions of the Social Security Trustees from the 1992 annual report.
Senator Daniel Patrick Moynihan recently identified a major immediate problem with Social Security, which is that the system's revenues are being used to fund unrelated Government spending. But that just obscures the more important point that the system costs too much: Social Security and related programs accounted for $345 billion in taxes in fiscal 1990, almost half of all Federal spending aside from the military and interest on the national debt in that year.|1~ In fact, 74 percent of all taxpayers now pay more in social security taxes (including their employer's share) than in personal income taxes. Through the efforts a Senator Moynihan and others, the public is becoming more and more aware that Social Security contributions are not "invested" to finance future retirement benefits. As the General Accounting Office stated in September 1991: "The present situation ... means that the payroll tax is being used, not to make provision for future retirement benefits, but to pay for today's general operations of government."|2~
Even for the highest earning individuals, current benefit schedules call for an annual payment of only $15,326 a year. By comparison, if social security contributions had been invested in private annuities, a retiree would have been able to receive a guaranteed lifetime income of up to $49,509 per year. Even in a savings plan earning only a very conservative 5.5 percent per year, that retirement nest egg would grow to $450,000 over a working lifetime. An average worker with a nonworking spouse could save enough to receive a yearly retirement income of $21,351 and leave $388,000 to their children.|3~ More venturesome savers willing to take on higher risk in pursuit of higher returns would be able to triple this retirement fund according to figures prepared by Ibbotson Associates. Moreover, the risk would be reduced because the accumulations and returns would occur over extremely long time horizons.
If something isn't done--and done soon--our grandchildren may pay as much as 40 percent of their incomes in taxes (including their employer's share and the separate cost of Medicare) beginning in the second decade of the next century to pay for their parents retirement; the social security trustees' own "best" estimate is a 26 percent tax rate. Either tax rate would impede the growth of the economy, and perhaps cause intergenerational hostility. …