Bad News for Social Security: There May Be a Cure for Cancer

June 11, 1998 • Commentary
By Carrie Lips

Recently, investors were in a frenzy over headlines about EntreMed, a biotechnology company that has succeeded in eradicating cancer among lab rats. The prospect of curing a disease that has haunted countless families the world over is truly a cause for celebration. But any cure for cancer will be a serious threat to the life of Social Security.

The Social Security Board of Trustees recently reported that, thanks to the robust economy, the program is expected to be solvent for three more years than previously expected. However, the trustees did not take into account increases in life expectancy that have been driven by the innovations of companies like EntreMed. In fact, the Board of Trustees’ report did not even use the most recent estimates of the Bureau of the Census, which projects average life expectancy as almost two years longer than do the data used by the trustees. Remember, an extra two years of life for a single retiree means an additional two dozen payments from the SSA.

It is already less than 15 years until the SSA expects to begin paying out more in benefits than it collects in taxes. In theory, the SSA will then begin to meet its obligations by using the assets saved in the trust fund. One problem: the “trust fund” is an accounting gimmick. It contains only government bonds, which will have to be redeemed with tax revenues. To pay the promised benefits, the federal government will have to raise taxes, cut spending or sink deeper into debt.

Social Security’s fiscal difficulties are the result of its “pay‐​as‐​you‐​go” financing scheme, which is predicated on the belief that there will be more people working than collecting benefits. Payroll taxes extracted from workers’ paychecks are immediately distributed to current retirees; nothing is saved to cover the future benefits of current workers.

Social Security’s fiscal difficulties are the result of its “pay‐​as‐​you‐​go” financing scheme, which is predicated on the belief that there will be more people working than collecting benefits.

Back in 1940, when the Social Security program was just getting under way, average life expectancy was less than 64 years. The program’s designers expected that many people would contribute to the program most of their lives and die before collecting a dime in retirement benefits. Fortunately for individual workers (but unfortunately for the SSA’s balance sheet), things have changed dramatically. Today, average life expectancy in the United States is more than 75 years. More important, the population that reaches age 65 is also living longer. An average person that lives to 65 will live for approximately another 17 years. That’s about four more years — or 48 more checks — than the average recipient expected in 1940.

As life expectancy has soared, birthrates have declined, leaving fewer and fewer workers to support the ballooning number of retirees. In 1950, this pyramid scheme was solidly supported with 16 workers paying for each retiree; today, there are just over three workers per beneficiary. The SSA’s own estimates indicate that the ratio of workers to beneficiaries will continue to decrease, reaching just two workers per beneficiary by 2030. Moreover, those projections ignore one of the most promising facts of our time: Not only does life expectancy continue to grow; the rate of growth is accelerating. From 1940 to 1965, life expectancy for men over age 65 increased by 1 year; during the next quarter century it grew by 2.1 years. The public has every reason to hope that our nation’s vibrant biotechnology industry will further this trend indefinitely.

It is telling that this wonderful news creates serious concerns for our dinosaur retirement program. Social Security needs fundamental reform if it is to cope with our increasing longevity. Instead of being forced to contribute to the present failing system, all workers should be given the option of redirecting their payroll taxes to personal retirement accounts. Those accounts, which will be invested in productive enterprises, will grow and all workers will accrue a substantial asset of far greater value than the benefits promised — but not yet paid for — by the current Social Security system. Adopting a fully funded system will have benefits that reach beyond the monthly income of tomorrow’s Social Security beneficiaries. As the savings rate increases, young innovative companies — the Microsofts, the Worldcoms and, perhaps, the Entremeds of tomorrow — will have easier access to investment capital and will flourish.

The Trustees’ Report shows that the time for reform is now. The projected unified budget surplus gives us a unique window of opportunity to begin paying for the transition to a system of private accounts while maintaining benefits to current retirees. Every day the system goes unchanged, the unfunded liability grows and individuals lose out on the opportunity to create real wealth that would help pay for what might be — thanks to companies like Entremed — a very long retirement.

About the Author
Carrie Lips is project assistant for the Cato Institute’s Project on Social Security Privatization.