Social Security "Reform": A Solution in Search of a Problem
Washington Post, January 23, 2005
Bergen Record (NJ), January 30, 2005
Six years ago the New York Times' Fred Brock wrote that "so-called Social Security reform is looking more and more like a solution in search of a problem." How true it was then, and even truer today. The latest (June 2004) estimate from the non-partisan Congressional Budget Office projects that Social Security can pay all promised benefits, with no changes at all, until 2052. That's nearly half a century.
And we are supposed to be worried about this? It brings to mind the image of Woody Allen as a nerdy young child in "Annie Hall," suddenly depressed because he has discovered that "the universe is expanding!" and life on Earth is ultimately doomed.
Granted, half a century is not an eternity, and the Social Security Trustees' Report puts the date of insolvency at 2042. But even after 2042, Social Security will be able to pay an average benefit that is actually higher than what workers receive today -- indefinitely. That's in 2004 dollars -- adjusted for inflation.
Social Security benefits are programmed to rise not only with inflation, but also with wages. So to pay all promised benefits after 2042, the country will at some point have to increase taxes if future generations choose to enjoy more of their longer life spans in retirement. But of course the same thing has been true for the last six decades.
This so-called problem is not large -- in fact the projected shortfall for the whole 75-year planning period is less than what was fixed in each of the following decades: the 1950s, 1960s, 1970s, and 1980s. It is also about one-third the size of the tax cuts enacted during the Bush Administration.
In other words, it's a non-issue. Or should be. Yet most of the media seems terribly confused about the basic facts. During the Presidential debates last fall, moderator Bob Schieffer of CBS told the candidates that Social Security was "running out of money." Neither candidate corrected him, and the press did not seem to notice the mistake.
Not surprisingly, the public is similarly confused. How can this happen, when everyone -- from President Bush to the Gray Panthers -- is using the same numbers?
Here are some of the verbal and accounting tricks -- or misunderstandings in some cases -- that have helped to create a false impression of Social Security's finances:
-- The Disappearing Trust Fund: You may have heard that Social Security will run out of money in 2018. But this is like saying that Bill Gates will be in financial trouble if he decides to work only half-time. He will still have $40 billion in assets, enough to keep him and his descendants living well for a very long time. Similarly, the Social Security Trust Fund will have $3.7 trillion (in today's dollars) in 2018. Together with payroll tax revenues, that is enough to pay promised benefits until 2042 -- or 2052, if we use the CBO estimates.
-- "That Money's All Been Spent": This is also nonsense. When you loan money to the Federal government by buying a bond, the government spends it. The government also pays you interest and repays what they borrowed from you. The same is true for the Social Security Trust Fund. Social Security has been running an annual surplus (now at more than $150 billion) since 1983. By law it is required to invest that surplus in U.S. Treasury obligations, for which it receives interest, and will be repaid the principal.
-- "But the Trust Fund is only holding I.O.U.s -- just pieces of paper!" Another trick: all bonds are by definition I.O.U.'s. Those "pieces of paper" held by the Social Security Trust Fund have the full faith and credit of the U.S. government, which hasn't defaulted on its bonds in our entire history as a nation.
-- "The baby boomers' retirement will bankrupt Social Security." Far from it. The first boomers actually begin retiring in 2008. Most of them will be long dead before Social Security faces any financial difficulties.
-- "There are currently 3.3 workers for every beneficiary; by 2035 there will be only 2.1." True enough, but about as useful as one half of a baseball score. The other half of the score is that productivity (output per hour) will grow by more than 70 percent during the same time, so we won't need nearly as many people working to support a larger retired population.
-- "If nothing is done, Social Security and Medicare will eat up 90 percent of our federal budget by 2050." The trick here is mixing in Medicare, a separate program from Social Security with its own payroll tax and federal funding. The projected costs of Medicare are indeed out of control -- but not because of our aging population or the program itself. Medicare's problems are a direct result of spiraling private health care costs. The United States spends nearly twice as much as other high-income countries on health care, yet has worse health care outcomes and still leaves 45 million of our citizens uninsured. This makes a strong case for health care reform. But it has nothing to do with the cost-effectiveness of Medicare (which has much lower administrative costs than the private sector). And certainly nothing to do with Social Security.
There are more tricks but they are all based on the same slight-of-hand: take a small projected shortfall over a 75-year planning period -- less than what has been easily managed in the past -- and find a way to make it look big.
The bottom line is that Social Security is -- by unanimous agreement among the experts, since they are all using the same numbers -- more financially sound today that it has been through most of its 69-year history. If workers in 2050, who will be earning on average 68 percent more in real, inflation-adjusted dollars than they are today, have to pay one or two percent more of their income in taxes -- as they have in the past -- it is unlikely that they will complain. They will still enjoy a much higher living standard than we do today. And Social Security will provide a much larger real annual benefit for a longer retirement when it is their turn to retire.
The myth of Social Security's impending crisis, like the myth of Saddam Hussein's involvement in the September 11 attacks or his non-existent nuclear weapons program, has real consequences. Just as it would have been difficult, if not impossible, to get public support for an invasion of Iraq without these myths, the Bush administration's proposal to slash benefits and partially privatize Social Security wouldn't have a prayer if people were aware of the actual state of Social Security's finances.
Which is a shame, because the "President's Commission to Strengthen Social Security" (nice name!) has proposed serious benefit cuts. For a 20 year-old just entering the labor force, the plan would reduce benefits by 37 percent, or close to $172,000 over a lifetime of retirement. Only about $5,000 of this would on average be recovered by those choosing to divert some of their Social Security taxes into an individual account -- provided they don't get into the stock market at the wrong time.
Social Security used to be the "third rail" of American politics -- politicians were afraid to touch it. But some time in the last decade Democratic pollsters ran focus groups and found that people believed the program was financially unsound. They concluded that it wasn't politically wise to challenge that misunderstanding.
So now the program is politically threatened as never before. There is a lesson in this, not easily digested in Washington: sometimes even in politics, honesty is the best policy.
Mark Weisbrotand Dean Baker are Co-Directors of the Center for Economic and Policy Research and co-authors of Social Security: The Phony Crisis.