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. Setting aside the fact that one recession would undo all the optimistic projections, the program’s problems go far beyond the question of the date on which it will go broke. For example, even if the program were completely solvent, it would still be a bad deal for most young people. Under the best of circumstances, if Social Security was somehow able to pay all promised benefits without any increase in taxes, most young workers could expect a return on their taxes of 1 percent or less. Many will actually receive a negative rate of return, getting back less in benefits than they pay in taxes. 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 a poor rate of return, they could have been investing in real assets, such as stocks and bonds, that earn far higher returns. Indeed, the average annual pre-tax return to corporate capital over the past 70 years has been more than 9 percent. Compare that to Social Security’s returns and you can see what young workers are losing today and every day that they are forced to pay 12.4 percent of their incomes into Social Security. That is a crisis today — not in 2014, or 2032 or whenever.
The low rate of return from Social Security may not be important to the wealthy who have alternative ways to save for their retirement. But for the millions of elderly who depend nearly exclusively on Social Security for their retirement income, it is a disaster. Despite Social Security benefits, nearly 13 percent of all elderly people still live in poverty; nearly 40 percent of elderly widows and nearly 30 percent of elderly African-American women live in poverty.
Indeed, African-Americans fare particularly badly under Social Security. Because the total amount of Social Security benefits people receive depends in large part on how long they live, those groups in our Society such as low-income workers and African-Americans, who have lower life expectancies, receive a disproportionately poor rate of return. For that reason, the RAND Corporation, among others, has concluded that Social Security transfers money from blacks to whites and from the poor to the rich. That is not in the Trustees’ Report, but it is a very real problem that demands congressional attention.
And perhaps most important, the Trustees’ Report says nothing about the fact that Americans still have no legal right to their benefits. The Supreme Court has ruled that Social Security payroll taxes are not contributions to a retirement fund but a simple tax, and therefore we have no right to Social Security benefits. That means that people who work hard all their lives, pay Social Security taxes (three out of four Americans pay more in Social Security taxes than in federal income taxes) and play by the rules must go hat in hand to the government when they retire and hope they’ll get some money to live on. They don’t own their contributions to Social Security. Their benefits are dependent on the whims of 535 politicians in Washington.
Ultimately the case for Social Security reform is not based on the date two lines will hypothetically cross on a graph. It is based on the fundamental unfairness of a system that forces Americans to pay huge amounts of their incomes into a system that guarantees them a poor rate of return, leaves millions of seniors in poverty, discriminates against minorities and recognizes no legal ownership rights.
Congress would be well advised to put the Trustees Report away and get down to the serious work of transforming Social Security to a new program of individually owned, privately invested accounts. The American people can’t afford a delay.