December 27, 1999

December 27, 1999 | Commentary on Social Security

Deaf to Social Security's Problems

"A Social Security Bombshell" read the headline on a recent Washington Post editorial highlighting a report showing Social Security's finances in even worse shape than suspected. But despite the shells falling all around them, some of the program's staunchest defenders seem to have developed a unique form of deafness.

For example, Dean Baker and Mark Weisbrot, co-directors of the liberal Center for Economic and Policy Research, informed Post readers in a Dec. 13 essay that the public should ignore "the symphony of misinformation and disinformation" being composed by critics of Social Security. After all, "the system is sound without any change for the next 35 years," and relatively minor changes will keep it solvent past 2034, so why worry?

Truth is an acceptable casualty in the battle of ideas for such analysts. In reality, Social Security is careening toward financial collapse, and the fictitious Social Security "trust fund" -- long ago spent on other government programs -- provides no comfort. The retirement of the baby boom generation will drive Social Security into the red in 2014, and deficits quickly mount to $500 billion before 2030 and $1 trillion before 2040. The cumulative shortfall between 2014 and 2075 will total nearly $20 trillion, or five times the current national debt.

Perhaps that's why a number of presidential candidates are supporting some form of private investment option for Social Security. The alternatives -- reducing benefits, raising payroll taxes, or some combination of the two -- don't "poll very well," as they say in political circles.

But there's a more compelling reason to embrace private investment: Because the current system represents a lousy deal for the average American worker. A new book by Heritage Foundation researchers Gareth Davis and Philippe Lacoude, What Social Security Will Pay, goes through every congressional district in the United States and finds that the highest "rate of return" workers can expect for their Social Security dollar is a dismal 2.4 percent. The average is about half that amount, and some workers will actually be hit with a negative rate, getting back less money than they paid into the system.

Consider the plight of young workers in Michigan's 15th District. An average-income, two-earner couple born in 1965 will pay $318,706 in Social Security taxes and get back only $317,914. They would be better off stuffing their money in a mattress. If they were permitted to invest their Social Security taxes in a private account -- a simple, conservative portfolio of stocks and bonds with a modest annual return of 4.2 percent (many accounts yield returns twice that high) -- they would retire with $916,487, or almost three times the amount they paid in.

A dangerous and risky experiment, critics retort. But they're overlooking the fact that many nations, including Britain, Australia, Sweden, Mexico, Chile, Argentina and even formerly communist Poland and Hungary, have allowed private investment and given their workers a much more secure retirement income. More than two-thirds of British workers have placed their funds in private accounts, where they earn an average return of 10 percent.

Let's hope it won't take more "bombshells" before lawmakers reform Social Security. In the meantime, those seeking a more secure retirement might try their luck with Regis Philbin on "Who Wants to be a Millionaire?"

Edwin Feulner is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

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