In Washington, the term “bipartisan commission” is a euphemism for “tax increase.” But Bob Dole was right about one thing: Social Security needs to be radically restructured or else a financial time bomb will explode in Americans’ laps on or about the time the baby boomers start to retire.
This is not my opinion. It is the conclusion of the actuaries of the Social Security Administration. They admit in their latest trustees’ report that by about 2011 Social Security will start running deficits.
That may be an overly optimistic assessment. In four of the last six reports of the trustees, the number crunchers have had to fast‐forward the date when Social Security starts losing money. The Greenspan Commission that Bob Dole (and Bill Clinton) trumpet, was supposed to save the system for more than 50 years. Oops.
Social Security now has an unfunded long‐term liability of roughly $5.5 trillion—which is larger than the entire national debt. It is said that demographics are destiny, and nowhere is that more true than in this retirement program. In 1950 there were 17 workers for every retired person. Today there are three. By 2030 there will be just two.
To keep the system solvent at current benefit levels (along with Medicare) would require the tax rate to rise from 15% to as much as 30%. That may be fine with Dick Gephardt, but it’s liable to unleash generational warfare when the MTV generation learns the unhappy truth.
William Shipman of State Street Global Advisors recently calculated the rate of return on Social Security taxes for today’s young workers. A young woman just now entering the workforce with an average starting salary of $22,500, and with a normal lifetime earnings path, is expected upon retirement to receive a Social Security benefit of about $12,500 per year (1994 dollars). (This optimistically assumes that the program is even still around in 2040.)
If she were permitted to simply place her payroll taxes in an annuity with a 6% real rate of return, she would have a nest egg worth $800,000 at retirement age. This would allow the worker to draw a $60,000 benefit per year until death (assumed at age 80). “This is five‐times higher than what Social Security offers for the same level of investment!” concludes Shipman. For today’s young workers Social Security isn’t generational inequity. It’s thievery.
Conventional reforms, unfortunately, will only make the system a worse deal for young workers. The Social Security Advisory Council recently offered the usual grab bag of failed nonreforms: raising payroll taxes (by another 20% over the next 30 years); further taxes on benefits (to punish those who save for retirement on their own); reduced promised benefits. In other words: Pay more, get less.
The Cato Institute has developed one potential reform that would fully insure continued benefits to senior citizens but allow young workers a better return on their tax dollars. We call it the “Super IRA” approach. Workers would be permitted to put their payroll tax money into a personal retirement account (PRA) and earn a market return, as opposed to sending the dollars to Washington for Congress to spend. Even for a worker earning the minimum wage his entire lifetime, the PRA option leaves him with a higher retirement benefit than Social Security will offer.
Clearly, a commission crammed with the usual suspects—“go along to get along” lifetime Washington politicians and policy wonks—must be rejected by reformers. The collective creative thinking of this bunch could fill a thimble.
Instead, every young person in America needs to be educated with both the sobering facts of Social Security and the advantages of a market‐based solution. The legacy we should leave our children should be a financially secure privatized system, not a ticking time bomb.