January 29, 1998
By Gareth Davis
In his State of the Union address, President Clinton proposed
that we use future budget surpluses to help save Social Security
from insolvency. While this sounds like a bold move, it stops short
of what will really save the program -- and has saved similar
programs in Great Britain, Australia and Chile --
Washington presents a strange spectacle with regard to Social
Security privatization: Participants in the debate are managing to
loudly disagree -- while each is actually saying the same
Consider this claim: Social Security offers a raw deal to
workers, and especially younger workers, because the benefits they
can expect to collect pale in comparison to what they could receive
if they had invested their taxes privately.
This claim has long been standard currency for many who favor
privatization. Many public policy organizations have, in the past
year, published research to this effect. Indeed, a recent study
completed at the Heritage Foundation by William Beach and myself
found that the returns from the current Social Security system are
much smaller than those available from private investments for the
vast majority of families.
Strangely enough, however, this finding was first announced by
one of the most passionate opponents of privatization: the American
Association of Retired Persons (AARP). In its July-August 1995
Bulletin, the medium by which it communicates with its
grassroots membership, the AARP stated that the bulk of workers
retiring in 1995 can expect to get back less in Social Security
benefits than they paid into the system.
According to the AARP, once interest is taken into account, an
average-wage worker (someone earning approximately $24,000 per year
who retired in 1995) will have to live beyond 83 years of age in
order to collect benefits equal to what he and his employer paid
into the system. For upper-income workers who earned the maximum
wage on which Social Security taxes are paid ($61,200 in 1995) and
who retired in 1995, the outlook is even worse. The AARP claims
that such a worker must live beyond 90 years of age to break even
under the current system.
The problem is that most people can expect to die before
reaching these ages. The life expectancy for males at age 65 in
1995 was just over 80 years, almost two years younger than the
break-even age for average-wage workers and 10 years younger than
the break-even point for maximum-wage workers. Female life
expectancy at age 65 in 1995 was 84 years. This means that an
average-wage female worker could expect to live only six months
after her Social Security break-even date, while a maximum-wage
female could expect to die almost seven years before the value of
her Social Security benefits would exceed the value of the taxes
she had paid into the system.
That's the scenario for current retirees; the outlook for their
successors is even bleaker. As the July-August 1995 AARP
Bulletin puts it "¼ some average- and high-income
earners will see an erosion in what their money is worth by 2030 to
the point where they may not even break even."
These findings mirror the conclusions of The Heritage Foundation
and even economists such as Dean Leimer from the Social Security
Administration's Office of the Chief Actuary, both of whom have
found that rates of return from Social Security have fallen
dramatically since the program began. For the great majority of
those born after 1950, what retirees will collect is greatly
inferior to what would be available if that same money had gone
into private retirement investments.
However, the real mystery remains as to why, despite being in
possession of such statistics, the AARP (and other defenders of the
status quo) have chosen to react with such hostility to plans that
allow Americans to enlarge their retirement income.
On Jan. 6, 1997, AARP Executive Director Horace Deets responded
as follows to the publication of the Social Security Advisory
Council's proposals: "Clearly, now is not the time to shift to
risky, do-it-yourself investment accounts, that for millions, could
once again equate to growing older in a life of poverty."
Why are opponents agreeing on the facts of an issue, while
adamantly maintaining their opposing positions on that same issue?
Because the battle lines over Social Security have been drawn for
so long and the trenches dug so deeply that to turn back now is,
for some, to look pretty ridiculous.
When those pushing for private options in Social Security reform
find a face-saving way for groups like AARP to join them, America
will be well on its way toward fixing the nation's retirement
Even AARP Agrees: Social Security is a Bad Deal
Read More >>
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