That rush of hot air you just felt was the collective sigh of relief from Washington after the release of the latest report by Social Security's trustees. According to the report, a surge in revenue from the strong economy has pushed back the date at which Social Security begins to run a deficit from 2013 to 2014 and extended the theoretical life of the Social Security Trust Fund by two years, from 2032 to 2034. That is considered important news in Washington, not because it actually means that the nation's retirement program is safe -- with just a few more years of booming economic growth, the projections for Social Security will almost be back where they were in 1997 -- but because it provides Congress with another excuse to postpone making any changes to the failing program.
But the Trustees' Report does not tell the whole story. Settingaside thefact that one recession would undo all the optimistic projections, theprogram's problems go far beyond the question of the date on which it willgo broke. For example, even if the program were completely solvent, itwould still be a bad deal for most young people. Under the best ofcircumstances, if Social Security was somehow able to pay all promisedbenefits without any increase in taxes, most young workers could expect areturn on their taxes of 1 percent or less. Many will actually receive anegative rate of return, getting back less in benefits than they pay intaxes. Those young workers will actually lose money in the system.
Even worse is the opportunity cost for those young workers, because,instead of putting money into a Social Security system that provides such apoor rate of return, they could have been investing in real assets, such asstocks and bonds, that earn far higher returns. Indeed, the average annualpre-tax return to corporate capital over the past 70 years has been morethan 9 percent. Compare that to Social Security's returns and you can seewhat young workers are losing today and every day that they are forced topay 12.4 percent of their incomes into Social Security. That is a crisistoday -- not in 2014, or 2032 or whenever.
The low rate of return from Social Security may not be important tothewealthy who have alternative ways to save for their retirement. But for themillions of elderly who depend nearly exclusively on Social Security fortheir retirement income, it is a disaster. Despite Social Securitybenefits, nearly 13 percent of all elderly people still live in poverty;nearly 40 percent of elderly widows and nearly 30 percent of elderlyAfrican-American women live in poverty.
Indeed, African-Americans fare particularly badly under SocialSecurity.Because the total amount of Social Security benefits people receive dependsin large part on how long they live, those groups in our Society such aslow-income workers and African-Americans, who have lower life expectancies,receive a disproportionately poor rate of return. For that reason, the RANDCorporation, among others, has concluded that Social Security transfersmoney from blacks to whites and from the poor to the rich. That is not inthe Trustees' Report, but it is a very real problem that demandscongressional attention.
And perhaps most important, the Trustees' Report says nothing aboutthefact that Americans still have no legal right to their benefits. TheSupreme Court has ruled that Social Security payroll taxes are notcontributions to a retirement fund but a simple tax, and therefore we haveno right to Social Security benefits. That means that people who work hardall their lives, pay Social Security taxes (three out of four Americans paymore in Social Security taxes than in federal income taxes) and play by therules must go hat in hand to the government when they retire and hopethey'll get some money to live on. They don't own their contributions toSocial Security. Their benefits are dependent on the whims of 535politicians in Washington.
Ultimately the case for Social Security reform is not based on thedate twolines will hypothetically cross on a graph. It is based on the fundamentalunfairness of a system that forces Americans to pay huge amounts of theirincomes into a system that guarantees them a poor rate of return, leavesmillions of seniors in poverty, discriminates against minorities andrecognizes no legal ownership rights.
Congress would be well advised to put the Trustees Report away andget downto the serious work of transforming Social Security to a new program ofindividually owned, privately invested accounts. The American people can'tafford a delay.