January 3, 2005
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January 3, 2005
EDITORIAL
The Social Security Fear Factor
f you've lent even one ear to the administration's recent comments on Social Security, you have no doubt heard President Bush and his aides asserting that a $10 trillion shortfall threatens the retirement system - and the economy itself. That $10 trillion hole is the basis of the president's claim last month that "the [Social Security] crisis is now." It's also the basis of the administration's claim that the cost of doing nothing to reform the system would be far greater than the cost of acting now.
Well, the $10 trillion figure is the closest you can get to pulling a number out of the air. Make that the ether. Starting last year, as the groundwork was being set for the emerging debate, the Social Security trustees took the liberty of projecting the system's solvency over infinity, rather than sticking to the traditional 75-year time horizon. That world-without-end assumption generates the scary $10 trillion estimate, and with it, Mr. Bush's putative rationale for dismantling Social Security in favor of a system centered on private savings accounts. The American Academy of Actuaries, the profession's premier trade association, objected to the change. In a letter to the trustees, the actuaries wrote that infinite projections provide "little if any useful information about the program's long-range finances and indeed are likely to mislead any [nonexpert] into believing that the program is in far worse financial condition than is actually indicated."
As it often does with dissenting professional opinion, the administration is ignoring the actuaries. But that doesn't alter the facts or common sense. If the $10 trillion figure is essentially bogus, so is the claim that Social Security is in crisis. The assertion that doing nothing would be costlier than enacting a privatization plan also turns out to be wrong, by the estimates of Congress's own budget agency.
Over a 75-year time frame, Social Security's shortfall is estimated by the Congressional Budget Office at $2 trillion and by the Social Security trustees at $3.7 trillion, a manageable sliver of the economy in each case. If the shortfall is on the low side, Social Security will be in the black until 2052, when it will be able to pay out 80 percent of the promised benefits. If it is on the high side, the system will pay full benefits until 2042, when it will cover 70 percent.
Contrary to Mr. Bush's frequent assertion that Social Security is constantly imperiled by political meddling, it has in fact been preserved and improved by political intervention throughout its 70-year history, most significantly in 1983. The system could - and should - be strengthened again by a modest package of benefit cuts and tax increases phased in over decades.
Instead, the administration wants workers to divert some of the payroll taxes that currently pay for Social Security into private investment accounts, in exchange for a much-reduced government benefit. To replace the taxes it would otherwise have collected - money it needs to pay benefits to current and near retirees - the government would borrow an estimated $2 trillion over the next 10 years or so and even more thereafter.
In effect, the administration's plan would get rid of the financial burden of Social Security by getting rid of Social Security. The plan shifts the financial risk of growing old onto each individual and off of the government - where it is dispersed among a very large population, as with any sensible insurance policy. In a privatized system, you may do fine, but your fellow retirees may not, or vice versa.
In any event, doing well under privatization is relative. Congress's budget agency analyzed the privatized plan that is widely regarded as the template for future legislation and found that total retirement benefits - including payouts from the private account plus the government subsidy - would be less than under the present system. The amount available from the privatized system was less even after midcentury, when the current system is projected to come up short.
It should come as no shock that individual investors might not do as well as hoped. The stock market's historical returns - some 7 percent a year - are predicated on a hypothetical investor who bought an array of stocks in the past, reinvested all dividends, never cashed in and never paid commissions or fees. That's not how investing works in the real world. An especially grave danger is that investors would withdraw their funds before retirement, a pattern that is pronounced in 401(k) plans. It would be politically very difficult to refuse people access to accounts that were sold to them on the premise that they - not the government - would own them.
The Congressional Budget Office analysis also likely understates the costs to individuals of privatizing Social Security. The borrowing that would be needed to establish private accounts could lead to higher interest rates, a weaker dollar and slower economic growth. It is also likely that future tax hikes would be required to cover the interest payments on the additional national debt.
The only hands-down winner would be Wall Street, as fees to manage millions of accounts poured in. (Those fees, not incidentally, would come out of your return.) Current stockholders would also stand to benefit, as increased demand pushed up stock prices, giving existing owners a gain at the expense of newcomers who would be forced to buy high. The affluent, who could afford professional investing advice, would also be advantaged, even though everyone would be taking the same risks.
The zeal over privatization is fueled by the belief of Mr. Bush and his supporters that free-market fixes are appropriate for virtually every problem. That faith is misguided. For a society to be functional and humane, it's not enough that some people have a chance to be rich in old age. Rather, all old people must have the dignity of financial security, and that requires universal coverage.
Social Security is the core tier of old-age support, replacing about a third of preretirement income for a typical retiree and providing inflation-proof income for life - a feature not available in private accounts. Its purpose is not to supplant other retirement investing, but to provide a crucial safety net. Anyone who wants to maintain his or her standard of living into old age must also amass substantial personal savings and investments. To introduce the same risk into the core tier of benefits that already exists for the bulk of one's retirement savings would be as unfair as it is unwise.
If Mr. Bush were not so serious about privatizing Social Security, his urgency would be silly. Compared with other challenges looming for the government, it's a non-problem. The shortfall in the Medicare hospital insurance fund is two to three times the size of the Social Security shortfall, and that fund is projected to be insolvent some two to three decades before Social Security. Taken together, the costs of the Medicare prescription benefit and of making the tax cuts permanent - Mr. Bush's two main domestic initiatives - are 5 to 8.5 times larger. And his hair is on fire over Social Security?
One of the most distressing aspects of the debate over Social Security privatization is that it distracts from more pressing issues and obscures better solutions to the problem of secure retirement. A future editorial will discuss new strategies to increase private savings outside of Social Security that draw on market theory and behavioral economics and are more promising than rehashing the same tired formula of tax-sheltered savings accounts. In the meantime, however, Mr. Bush and his supporters will be pursuing their idée fixe of privatization. It's bad policy. And it's bad politics, too, driven by reflex, ideology and special interests, and sustained by conformism that masquerades as party discipline. Lawmakers who still value their right and obligation to think for themselves - and to act in the best interest of their constituents - must champion solutions that will build on Social Security, not undermine it.
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EDITORIAL DESK
How to Save Social Security
(NYT) 1288 words Published: October 2, 2004
Rumors of the death of Social Security have been widely exaggerated. This year, the system's trustees reported that the fund is solvent until 2042, when it would still be able to pay about 70 percent of the promised benefits. That is not a crisis. To put the shortfall into perspective, consider that in the next 75 years -- the span of time over which the trustees plan for solvency -- President Bush's plan to lock in his tax cuts would cost about three times what it would take to fix Social Security. Now that's alarming.
Politicians have nearly four decades to phase in Social Security reforms. With so much time, the cost of updating Social Security can be shared by everyone, and mitigated for all.
The answer is not creating private investment accounts within Social Security -- President Bush's chosen tack. (See our previous editorial, ''How Not to Save Social Security,'' at nytimes.com/issues.) And Senator John Kerry is not helping things any when he pledges never to cut benefits. Social Security has become such a third-rail political issue that few elected officials have the courage to be realistic about it in an election year. It's too bad, but not surprising, that neither Mr. Bush nor Mr. Kerry is choosing to present workable solutions.
Both men are right, however, in promising to protect current retirees and those who are close to retiring. Credible reform -- both fair and adequate -- should focus on workers who are still at least a decade away from retirement. It will require a combination of modest benefit cuts and tax increases.
What ails Social Security is well understood: there are increasingly fewer taxpaying workers to support each retiree, and retirees are living longer. But the onset of these destabilizing trends does not mean that Social Security is outdated. On the contrary, the system's adaptability is one of its great strengths.
Dozens of possible correctives -- many of them eminently doable -- have been proposed and endlessly debated. To us, the best reform packages are the fairest. They contain proposals that do not grasp for all of the needed revenue from high-income taxpayers, and are not overly reliant on benefit cuts for the elderly. Rather, they raise the necessary funds in ways that strive to reflect each group's fair share of Social Security's shortfall. All that is needed now is the political will to change, along the lines of the following:
Link benefits to life expectancy. The last major reform of Social Security, in 1983, increased the retirement age for full benefits to 66 from 65 starting next year, and to 67 starting in 2022.
But as people live longer, it is not feasible to simply keep pushing out the retirement age. The projected costs of increased life expectancy should be updated regularly, and the responsibility for them should be split between retirees and workers -- through small automatic reductions in future benefits and modest increases in the payroll tax.
For an average 35-year-old today, for instance, the benefit cut in 2036 would be the equivalent of about $300 a year. For workers, the tax increase would start 10 years from now and rise each decade, so that by 2036, the rate would be 12.7 percent, up from 12.4 percent today, split equally between employees and employers. Taken together, those changes would close nearly one-third of Social Security's long-term financing gap.
Link life expectancy to income levels. The well-off live longer than the less affluent, and their lead is growing. That's bad news for Social Security. It means that those with high earnings not only draw the biggest retirement checks, but they also do so for a longer time, compared with everyone else. That, in turn, makes the system less progressive than it would be if life expectancy were roughly the same at all income levels. Currently, the highest-earning workers get 15 cents in benefits for every dollar of earnings at the top end of the benefit formula. Reducing that share to 10 cents over the next 25 years or so would affect only about the top 15 percent of retirees, would make the program more progressive and would close about 10 percent of Social Security's deficit.
Increase taxes -- slowly. Since the 1983 reform, the rule specifying the amount of annual wages that is subject to the Social Security payroll tax -- currently $87,900 -- has not kept up with the income gains of the top earners. In 1983, only 10 percent of all wages escaped the payroll tax. Today, it is 15 percent. If the wage base was increased over 40 years so the amount of wages on which no payroll tax was paid was closer to the 1983 level, some 10 percent of the Social Security shortfall would disappear.
Wages above the cap should also be taxed, though not as much as the wages below the cutoff. The argument for not taxing wages above a certain level is that Social Security benefits rise only so high, no matter how much you make. But in a balanced system, the payroll tax wouldn't pay for benefits alone. It would also help pay off ongoing debt from previous generations, when retirees' benefits exceeded contributions to the system. Because high-income workers have a chunk of earnings that escape the payroll tax, they do not bear a proportional share of this burden. An additional tax of 3 to 4 percent on wages above the base (split between employees and employers), imposed over 75 years, would make the system fairer and correct about one-third of Social Security's imbalance.
But if the well-off help pay off Social Security's generational debt, so should other workers. For starters, the four million state and local government employees who are not covered by Social Security should be brought into the system, just as federal employees were in 1983. Doing so would close 10 percent of the financing gap. The remaining 10 percent shortfall could be bridged by a tax increase that was spread among the approximately 150 million workers. The increase would come to 0.2 percentage points, if enacted immediately.
Clearly, it's possible to reform Social Security while preserving its essential character: a contract under which the young support the old via taxes, and the rich help the poor through a benefit formula that favors the neediest. It is also possible for the system to adapt while retaining its key provisions. We do not favor taking away full inflation protection because it is increasingly important over long lives and is unavailable in other retirement plans. We also do not endorse extending the length of time one must work to garner full advantage of the benefit formula, currently 35 years, because that could disproportionately harm women, who generally spend fewer years in the work force than men.
Any of the reforms we've recommended could be tweaked to cover the cost of enhancing benefits for vulnerable groups, like widows, the poor and the disabled. And if a particular proposal proved too contentious, it could be scaled back, slowed down or replaced with other measures. One intriguing idea is to keep the estate tax on the books after 2009, when it is set to expire, and dedicate the revenue to Social Security. That would affect a minuscule number of estates and would generate enough revenue to correct about a third of Social Security's imbalance.
It's time to stop fretting about Social Security. Everyone knows what needs to be done -- and it's not all that drastic. We just need the will to do it.
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