August 3, 2000 | Commentary on Retirement Security
You probably don't have it pencilled in on your social calendar yet, but on Aug. 14, Social Security turns 65. That's right - the premier New Deal program, the one that has served the nation through war and peace, through recessions and booms - hits retirement age.
And I can think of no better way to observe the occasion than to retire the Depression-era program with full honors and a prominent place in the Hall of Fame.
No, I'm not saying that Social Security should be abolished. But a partial retirement - one that honors the commitments made to current and near-term retirees and allows it to continue as a smaller, leaner program - is clearly needed. Why? Because demographic changes that will leave too few workers supporting too many retirees is about to give my generation (the baby boomers) and my daughters' generation almost nothing in return for our "investments."
Social Security's defenders say the system should be left intact or undergo only minor changes - usually tax hikes or cuts in benefits. That means Rachel, my 14-year-old, can expect to earn less than 1 percent (.78 percent, to be precise) on the $455,645 she'll pay in Social Security taxes over her lifetime, assuming she earns the average wage. You don't have to be fabled investor Warren Buffett to beat those numbers.
If Rachel stays in the workforce until she's 67 (which will be the retirement age then), Social Security will pay her $567,502 over her expected retirement years. A gain of $110,000 sounds good, until you realize she could have nearly $1.5 million in the bank if the government would allow her to invest the $455,645 she'll pay in taxes.
It's not just young people who are getting shafted. As a 53-year-old resident of the District of Columbia, I'll get a rate of return of 1.11 percent on my payroll taxes. I, too, could have made more than $1 million if I had been permitted to invest these taxes. A simple savings account from my neighborhood bank could earn me 3 percent to 4 percent.
There's no question that Social Security has helped reduce poverty among the elderly, while reassuring families with only one breadwinner that there will still be an income to support them if that earner dies unexpectedly. It's an important safety net.
But that's where the good news stops. Unfortunately, President Roosevelt and the congressional leaders who launched the program couldn't have foreseen that their "pay as you go" system, with today's workers funding yesterday's retirees, would be tripped up by the larger-than-usual post-World War II generation. Simple math shows there won't be enough workers to support 77 million boomers through retirement and leave something for Generation X.
Which is why the payroll tax burden, which has grown steadily over the years, threatens to get worse. When Social Security started in 1935, the government took 2 percent of the first $3,000 of earnings to pay for the program. Today, the government takes 12.4 percent of the first $76,200 in earnings - an amount that will have to increase even more if the government hopes to pay benefits to my daughters when they retire.
But don't take my word for it. According to the most recent Social Security trustees' report, the program faces financial disaster, with Social Security's cumulative deficit amounting to $21.6 trillion between 2015 (when the program first dips into the red) and 2075. To keep paying benefits, payroll taxes would have to be hiked to 18.6 percent, benefits slashed by 32 percent, or some combination of the two.
No wonder reform plans that would allow American workers to put even a small portion of their payroll taxes into personal investment accounts have gained bipartisan support in Congress. And with more than a dozen and a half countries (including Great Britain, Mexico and Sweden) having at least partially privatized their Social Security systems, such accounts are hardly untested. They would let a Social Security system that is showing its age concentrate on providing a true safety net for everyone, while letting all Americans - Rachel included - look forward to a far better return on their retirement dollars.
Liberals once spoke of the national debt as a cost they didn't want to pass on to future generations. Fine, but a $21.6 trillion Social Security shortfall is a debt I don't want to pass on to my children. The next administration, whether Republican or Democrat, should find a way to ease Social Security, carefully but firmly, into a well-deserved partial retirement.
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