Commentary

Social Security: A Permanent Fix

By George Pearson
May 1, 1997

In 1983, Allan Greenspan, now chairman of the Federal Reserve Board, and former Kansas Sen. Bob Dole, among other prominent and influential people, served on a commission that recommended repairs that were supposed to fix the Social Security system. Their recommendations were passed, Social Security taxes were raised and Congress declared that the problem was fixed until the year 2058.

Today’s forecast is less optimistic. The forecast now is that Social Security will go broke by the year 2029 and payments will exceed income by 2012.

The 1983 fix was the big fix, not the only fix. Social Security tax rates have increased 17 times since 1951. Counting both tax rate increases and adjustments of the wage base, payroll taxes have grown from 3 percent of $3000 in 1951 to 12.4 percent (not including Medicare) of $65,400 today.

The big fix was necessary because the original Social Security concept had changed. During the first 37 years of the program the maximum starting benefits paralleled the average hourly wage of the production worker at roughly one-third of that wage.

In 1972, Congress began increasing maximum Social Security benefits faster than increases in the hourly wage. As a result the maximum starting benefits today are nearly two-thirds of the average monthly wages. The old concept of providing a minimal retirement benefit has been replaced by the present, more generous approach of providing retirement income.

The Social Security program is under stress today not only because the ratio of workers to beneficiaries has changed (an issue that many talk about) but because the benefit payments have increased to provide a comfortable pension (an issue that few talk about).

When the Social Security committee looked at different options for fixing the program in 1983, the Chilean model was not considered an option. In 1924, Chile became the first country to adopt a Social Security program. In 1981, when it ran into the same demographic problems that we are facing today, it privatized its program. So in 1983, there was not enough evidence to draw conclusions about the Chilean experiment.

Today there is considerable evidence that Chile made the right move. The country’s gross domestic product has been growing at the annual rate of 7 percent for the last 10 years. Its rate of savings is 28 percent compared to 3 percent in the U.S. Its pension fund has registered a 12.6 percent annual return since being established 15 years ago. Most telling is that 95 percent of all Chilean workers have chosen the private system that exists side-by-side with the state system.

By 2012, the federal government no longer will have the Social Security surpluses to apply to its annual deficit. At that time, if not sooner, the federal government will have to get along without the subsidy that the surplus funds have been providing. Instead the federal government will have to find money to fund both its own budget and the annual deficit that will begin occurring in the Social Security program.

If the past is any indication, the politically motivated fix can not be expected to outlast the political life of the elected officials who vote for it. What is needed is fundamental reform, a permanent fix, that will provide a sound retirement program for our children and grandchildren.

George Pearson is a senior consultant to the Cato Institute.