Social Security: The Crisis is Real

COMMENTARY Social Security

Social Security: The Crisis is Real

Apr 26, 2002 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.
You may not be hearing much about Social Security reform right now. But if critics of the president's plan have their way, that'll change by Election Day.

That's because they're convinced the latest financial report from the program's trustees can be used to club their opponents. It shows Social Security won't dip into the red ink quite as soon as the trustees once estimated: Absent reform, it will begin paying out more in benefits than it raises in taxes in 2017, not 2016. And the program won't go broke until 2041, not 2038.

So, some newspaper columnists ask, why the fuss about fixing Social Security now? According to them, President Bush and a bipartisan group of congressional reformers ought to trash their plans to let workers invest part of their Social Security money in super-safe portfolios of blue-chip stocks and bonds -- because if there's no crisis, there's no need for reform. Some minor tinkering will do the trick.

But a sensible look at the numbers reveals two rock-solid reasons to pursue reform: It must be done, and it will make retirement better for workers.

Reforms must be made because, although the hammer may fall slightly later than previously estimated, it will fall significantly harder. The trustees' report states that the "long-term unfunded liability" of Social Security -- 50-cent words for "what we'll owe, but won't have" -- has climbed 15 percent since last year's estimate, to $25 trillion over the next 75 years.

The coming deficits mean that if we delay reform indefinitely, we'll eventually have to decide whether to cut benefits over 30 percent or raise payroll taxes about 50 percent. The first choice puts millions of seniors in financial jeopardy; the second cripples the economy.

In some ways, we're victims of our own health. In 1935, a 65-year-old American could expect to live, on average, about 12.6 more years. Today, that figure is 17 years. In 2040, it'll be 19. But thanks to these leaps in life expectancy, we've gone from having 16 workers supporting every Social Security recipient in 1950 to just three today. And it will drop to two by 2030.

"A bit of extra resources" -- the remedy blithely prescribed by New York Times' columnist Paul Krugman -- won't come close to solving this problem. In just the first year after Social Security begins paying out more than it takes in -- 2017, you'll recall -- we'd accrue $21 billion in deficits. By 2030, that would climb to $252 billion, or about 20 percent of today's federal budget. By 2070, it would be a staggering $516 billion.

Climbing deficits aren't the only problem. Using 2002 numbers, a 33-year-old worker today who pays into the Social Security system until retirement can expect a return on his Social Security "investment" of 1.2 percent. That's less than a third what a basic savings account would pay and about one-sixth what he could earn investing the same amount today in a portfolio of blue-chip stocks and bonds. Some groups, such as men born after 1959, will actually lose money. Because of lower life-expectancy, African-American men will lose more than any other group.

Most Americans realize a day of reckoning awaits Social Security. And so, not surprisingly, a recent poll conducted for National Public Radio by former Clinton/Gore pollster Stanley Greenberg and Republican pollster Bill McInturff, shows wide support for building retirement nest eggs through personal accounts.

The poll asked voters whether they support allowing workers to invest some of their Social Security contributions in the "stock market" (not a "balanced portfolio of stocks and bonds," as President Bush has proposed). This wording, which made the proposal sound more risky, didn't exactly favor the president's plan. Yet the pollsters found voters support voluntary personal retirement accounts by a margin of 55 percent to 40 percent. Among voters younger than 65, 63 percent support the proposal.

Clearly, most Americans are comfortable with what President Bush proposes because they know it works. Pension researchers recently announced that, for the first time, employees contribute more to their workplace pension or retirement plans than their employers. They've embraced 401(k) plans -- which, unlike President Bush's plan, provide no guarantee of return at all -- because they believe that a conservative mix of investments will yield ample retirement income.

Perhaps this issue isn't quite the winner the president's foes envision. The crisis is real -- and so is the need for reform.

David John is a research fellow at The Heritage Foundation, a Washington-based public policy research institute.

Distributed nationally on the Knight-Ridder Tribune Wire