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January 29, 1998

Even AARP Agrees:  Social Security is a Bad Deal

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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 -- privatization.

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 thing.

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 system.

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