Social Security Debate: Heat Without Light

COMMENTARY Social Security

Social Security Debate: Heat Without Light

Aug 16th, 2001 3 min read

Former Senior Research Fellow in Retirement Security and Financial Institutions

David is a former Senior Research Fellow in Retirement Security and Financial Institutions.
The August recess may give federal lawmakers a chance to avoid the heat of Washington's typically unbearable summers. But thanks to the House Democratic Caucus, some  of them have brought Capitol Hill's most overheated rhetoric back home.

The subject is Social Security, and it appears no claim is over-the-top. The Caucus sent its members home with a packet -- complete with a fill-in-the blank press release, op-ed column and constituent flyer -- that roasts the president's Social Security commission. (The fact that too many Republicans fear putting the words "Social" and "Security" together in one sentence only helps the Caucus.)           

The commission has been created to recommend reforms that address the virtually undisputed fact that Social Security, absent reform, will become bankrupt within a generation. Yet, according to the Caucus, the commission's goal is to "undermine" and "dismantle Social Security as we know it."

Which would be serious charge, if it were true.

There's no need to "undermine" a house of cards when one knows a stiff breeze is coming. And all anyone interested in "dismantling" Social Security has to do is sit back and wait.

Even if Caucus members doesn't understand this, the vast majority of young American workers do. Survey after survey shows they don't expect to see all their promised benefits.           

The Caucus-penned op-ed concedes that "we need a plan to reform Social Security" but offers no ideas on how to do this. Instead, it lobs rhetorical bombshells at President Bush for having the gall to form a panel for the purpose of … er, well … of developing a plan to reform Social Security.           

What drives the Caucus crazy is the suspicion that the commission will recommend letting people invest part of their Social Security taxes in personal retirement accounts. This will result in "less money for Social Security and deep cuts in guaranteed benefits," it claims.

This is completely wrong. For one thing, retirees will see more money, not less. The typical annual rate of return on the money "invested" in Social Security is about 1.2 percent. The same amount invested in personal accounts typically yields 5 percent to 7 percent.

And those "deep cuts" can be avoided only by letting workers put some of their Social Security funds into personal accounts. They would receive less from the "traditional" part of the program, but this would be more than offset by (for a typical wage-earner) thousands of dollars in additional income from the personal account.           

But, the Caucus replies, "Individual accounts mean higher administrative fees … An annual fee of 2 percent would eat up 40 percent of a worker's account."

A more accurate estimate comes from a 1996 Labor Department study that found administrative costs for private-sector, multi-employer defined benefit plans average less than 1 percent. And the retirement savings plan for federal employees costs about 0.1 percent. Even after this small amount is subtracted, returns from personal accounts far outstrip those from Social Security.           

Ah, but "investing in the stock market is risky," the Caucus says. "Stock prices have collapsed in the last 12 months."           

But retirement investing isn't day trading. It's done over the long haul. And stock investments held for 20 years or longer always yield positive average annual returns. Indeed, if the Caucus were to show a 15-year chart of the NASDAQ, it would show the index has grown more than 700 percent during that period, despite the recent troubles and downturns in 1987 and 1990. The Dow Jones and Standard & Poor's Composite indices reveal similarly impressive long-term growth.           

What's really risky is the notion that the Social Security program's financial ills can be cured by minor tinkering. Its "trust fund" isn't a savings account. As the U.S. Treasury receives "excess" Social Security tax revenues, it immediately issues the trust fund an IOU and spends the money on retiring the national debt. The much-vaunted "surplus" exists only on paper -- chits that will be called in as the baby boomers retire.           

There are three ways out of this mess: raise taxes, slash benefits, or make the money work harder. The Caucus strives desperately to rule out that last solution -- getting a bigger bang for the retirement investment dollar. It also vows to block any benefit cuts, which leaves them only one possible out: a 50 percent tax hike.           

I'd love to hear how the anti-reform fear-mongers of the House Democratic Caucus plan to sell that one.

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

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