Social Insecurity

President Bush tells us that the Social Security System is in crisis. He says the way to “fix” the problem is to allow younger workers to create “personal” accounts (do not call them private accounts) where they get to invest their money in stocks and bonds and not in the social security system itself.

On the surface it doesn’t sounds like a bad idea. Social Security was designed to provide a floor that would keep the elderly out of abject poverty. Not all employers provide 401-K plans. Workers who want to put their own money into an IRA are generally limited to $4000 in contributions per year. While the limit will increase to $5000 in 2008, surviving on a social security check and an IRA hardly sounds like the way to finance a successful retirement.

But of course what Bush really wants to do is to allow younger workers to channel part of the money that would go into the social security trust fund and place it in “personal” accounts instead. The major problem: social security is a pay as you go system. With less money going into the social security trust fund, the fund would go dry much sooner than 2042, the date predicted by the trustees of the social security system itself.

So to make up the gap Bush would borrow the money: hundreds of billions of dollars. Of course our creditors won’t give it to use for free. We’ll have to pay interest on that money. This of course means the real cost will be some multiple of the amount actually borrowed. But what’s a few hundred billion dollars to an administration that has no problem with $430 billion annual deficits? Apparently it’s monopoly money, not real money.

The fact is the system is in no crisis whatsoever. Currently more money is going into the social security system than is coming out of it. The demographics suggest that this will change in coming years when the baby boomers retire. But the fund will be no means go broke. It is flush with U.S. Treasury Bills, which it will cash in to pay expenses. It’s not until 2042 when, if current trends continue, all those treasury bills will be cashed in.

Will the fund then be broke? No! There will still be money coming into the system. Payroll taxes will still be withheld and it will go to provide social security checks to people like me. (I anticipate being alive in 2042. I’ll only be 85.) It is estimated that the money coming in would still pay 70% of the benefits due. My check would either be 30% less or Congress would have to place general tax revenue in the fund. And while it sounds a very burdensome thing to throw money from general expenditures into the social security fund (we prefer to borrow from the social security fund to mask the true size of our deficits) even this scenario is not all that dire. For example, it would cost less to pay this burden every year than it currently costs us to finance the war in Iraq.

So all this hand wringing is over something about forty years in the future and assumes we spend forty years doing nothing to solve the problem. Fortunately the problem is easily solved without raising taxes, something Bush conveniently doesn’t want to talk about. It is solved without raising taxes or reducing benefits by adding two more years before workers, who are living longer anyhow, can retire. They would have to retire at age 70. Or if we want to keep the current retirement age at 68 we could increase the payroll tax by no more than 2%.

Trial balloons coming out of the White House suggest that Bush wants to cut benefits as part of the solution to the problem. The idea is to hold future benefits to an inflation index instead of the average increase in wages. Make no mistake: this would be a reduction in benefits for a worker compared to what they can expect today. The same money would go in but less money would come back. It’s like thinking you are going to get that 16 ounce box of corn flakes for $2 and you find that $2 only buys 13 ounces.

And let’s be clear about the risks involved with these “personal” accounts. It means that younger workers, rather than the government, are assuming risk for their retirement. There is no guarantee that stocks and bonds purchased today can be traded in at the appropriate time to finance a nice retirement.

Those of us who bought stocks when they were high at the end of the 1990s are sanguine about the risks in the stock market. We are still taking losses when we sell our stocks. My modest portfolio has lost money during the years Bush has been in office and looks like it will again this year. You can gauge the problem by looking at the S&P 500 Index. At its peak in 2000 it was around 1500. When Bush took office it was at 1343. Today it is at 1171. It’s unlikely I will make a dime in my investments until Bush is out of office. Unfortunately I expect my daughter to start college before then so I will probably sell some of my funds at a loss.

Over the course of the next 30 years hopefully stocks will return modest gains, but there is no guarantee of future performance at all. In short instead of a defined benefit, younger workers benefits would fluctuate and may be markedly higher or lower than your social security benefit. There is no way to tell. Rest assured though that it would be your problem, and not the government’s. And it’s possible the American economy could undergo another depression. In this case those “personal” accounts may be next to worthless when you need to cash them in. And like their great-grandparents younger workers may look forward to spending their final years in the 21st century version of the poor house.

I am in favor of personal accounts to supplement the social security system. But I see no reason to radically change a system that is not in crisis. Arguably the system was in much worse shape in the 1980s. But back then the Congress did the sensible thing and increased withholding rates. Even President Reagan saw the wisdom in it. It never occurred to him to undo this critical program that kept older Americans out of poverty.

So what is really going on is not an attempt to save social security but to slowly strange it. To the neoconservatives it’s a philosophical issue, not a fiscal issue. But rather than change things in a revolutionary manner the neoconservatives are trying to do it in a sly, evolutionary manner. Some day they hope social security will be gone for good. See, neoconservatives believe we should all be engaged in a Darwinian struggle for survival. They see it as healthy and something that keeps America lean, mean and efficient.

But don’t you be fooled. The social security system has served this country very well. It has meant for the first time that most Americans can avoid poverty in their final years. It is there for a reason: because Darwinism was tried for millennium and didn’t work. We need a defined benefit in social security because we believe that those who spend their lives working deserve to stay out of poverty when they are older or are incapable of working. Stocks are no guarantee. And the government is the only institution large enough to be able to guarantee defined benefits. Consequently we need a social security system with a defined benefit. Anything else is social insecurity.

One thought on “Social Insecurity

  1. Hi Mark. Great post! You raise a lot of interesting points. I was hoping to make some random commentary.

    1) Ahhh. The question of affordability. I think with the aging population, it will be unaffordable to keep the existing social security systems for countries like Australia, UK, most of Europe and the Americas. Full stop.

    It’s interesting to see the debate on whether countries will be able to support that minimal safety net. More interesting to see all the ways people come up with the numbers.

    2) But I think there is another larger problem; up to 90% of retirees will experience severe drops in lifestyle if they do not change their money management tactics NOW…I think the weight of evidence is overwhelming and you can start with So it’s not only a question of “can the government provide near poverty line income for retirees

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