July 25, 2001

July 25, 2001 | Commentary on Social Security

Social Security's No Accounts

Denial ain't just a river in Egypt, the saying goes. It's exactly what we're getting from opponents of Social Security reform, who have staged sign-wielding protests in more than 40 cities to convince Americans that the premier New Deal program is healthier than they've been told.  

The program's looming financial problems are easily fixed, critics contend. To suggest otherwise, as the president's commission did in its recent report, amounts to "sowing the seeds of panic," in the words of Alan Blinder, former campaign adviser to Vice President Al Gore. "It is irresponsible to frighten people," he added.

With all due respect, Mr. Blinder, what's irresponsible is forecasting light rain when a monsoon is on the horizon. The commission merely highlighted an uncomfortable fact: Absent reform, the program will start running out of money in 2016. That may seem hard to believe now, when Social Security is piling up large surpluses, but it's true.

To understand why, consider for a moment how the program's "trust fund" works. The money you pay into the system through your payroll taxes isn't sitting in an account somewhere with your name on it, the way trust funds work in the real world. No, it's paid out immediately in the form of benefits to current retirees -- just as their payroll taxes were passed along to an earlier generation of retirees.

It all works beautifully -- provided there are enough workers for every retiree. And years ago, that's what you had. In 1950, for example, there were 16 workers paying into the system for every one retiree drawing benefits. But today, it's 3 to 1. By 2030, it's expected to be 2 to 1. So, short of fundamental reform, how will tomorrow's workers support the baby boom retirees (who are now at the peak of their earning years and showering the program with surpluses)?

Use today's surpluses then, you may say. That might be a good suggestion if we were dealing with a real-world trust fund, but we're not. The extra money Social Security brings in is also immediately spent, but on retiring the national debt. In exchange, the U.S. Treasury gives Social Security a special type of government bond -- in essence, an IOU.

And that's what is in the "trust fund" today: IOUs that eventually must be repaid. So how do Blinder and his colleagues suggest we fix things? The same way Congress has in the past -- by raising taxes, cutting benefits or some combination of the two.

But this hardly qualifies as a long-term solution, especially when you consider the scandalously low "rate of return" many young workers can expect. A 30-year-old, two-income couple with average incomes will receive the equivalent of only a 1.2 percent return a year -- a fraction of what they could earn from a simple savings account. If they were allowed to invest their Social Security taxes instead, they could have $525,000 more for retirement.

The situation is even worse for younger workers and minorities. A typical 25-year-old African-American male will receive $13,400 less in benefits than he will pay in taxes. He could have $145,000 more if he were allowed to invest a portion of his taxes.

If sharing this information qualifies as "sowing the seeds of panic," then maybe it's time we had a little panic.

Americans can have a secure retirement. But lawmakers must be willing to shake up the system and start letting people put a portion of their Social Security taxes into personal accounts that they own.

Such accounts, made up of a mixed portfolio of half stocks and half super-safe government bonds, earn an average of 5 percent a year. Even Series I U.S. Savings Bonds earn 3.4 percent after inflation. Wealthy Americans earn at least this much every day, and it's time we let workers of all income levels share in this growth.

Don't be fooled by claims that having personal accounts as part of a government-run pension program is risky and untried. Some two dozen other countries already have some form of them, including Australia, Great Britain, Mexico, Peru, Poland and Sweden. Even China, of all places, recently began letting some of its citizens invest their retirement funds.

So, apologies to Alan Blinder and company. But somebody's got to be the one to let the emperor know he has no clothes.

David John is a senior policy analyst for Social Security at The Heritage Foundation (www.heritage.org ), a Washington-based public policy research institute.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Social Security

Distributed nationally by Knight-Ridder/Tribune News Wire (07/25/01)