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Those concerned about Social Security are wrong

the problem is actually worse

August 29, 2004|by Tom Firey

This fall's political campaigns will include a lot of discussion about "saving" Social Security. That talk won't come just from candidates, but also from concerned citizens; for instance, The Herald-Mail recently published letters about the program by local residents S.V. Yumlu and Anna Lee Burker.

Yumlu and Burker are right to worry about Social Security. Unfortunately, the program's woes are far graver than either of them describes.

It's often believed that Social Security works like a retirement plan: We pay in while we work, and when we grow old, we'll receive a guaranteed, commensurate benefit. As Burker wrote, "We paid for our benefits and we earned them and they are owed to us."

In fact, the system has never worked that way. Legally and historically, there are no guaranteed benefits that "we earned." The Supreme Court ruled in the 1960 case Fleming v. Nestor that no one has a "right" to Social Security benefits. Congress can change the program's taxes and benefits at any time, and has done so several times in the past.

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From the day Social Security began issuing monthly benefit checks in 1940 to now, the program has been a "pay-as-you-go" system in which the revenue from current workers is used to pay current retirees' benefits. The system has not been managed to ensure that long-term contributions will cover benefits: No generation's benefits are truly "paid for."

It's commonly believed that, as Yumlu wrote, "the reason why the trust fund will get into trouble soon is because of the government's raid on the fund to pay for other obligations." But all borrowing from the trust fund must be repaid with interest. To be sure, the borrowing is harmful to the nation's overall fiscal health and is not helpful to Social Security, but it is not the major reason why the program is in trouble.

The program's true financial crisis comes from a combination of factors: previous expansions in benefits that are unsustainable at current payroll tax rates over the long term; the relative decline in birth rates during the 1960s that will lead to a deficit of young workers to fund the system in the coming decades; and longer life spans.

Beginning about 2019, the money collected for Social Security in payroll taxes will fall short of what will be paid in benefits. To compensate, the Treasury will begin paying off its borrowing, and Social Security will be able to maintain its benefits level - for awhile. But by 2042, the trust fund - including the repaid money - will be gone, and Social Security will no longer be able to fund its current benefit level.

How can we avoid that outcome? One way would be for the U.S. to set aside $10.4 trillion today in an account bearing 3 percent interest so that, along with ongoing payroll taxes, Social Security could maintain its current benefit levels for the long term. (We would have to invest an additional $62 trillion to cover Medicare).

To put that in perspective, the size of the 2004 federal budget is only $2.2 trillion. The accrued federal debt is $7.3 trillion. U.S. gross domestic product in 2004 will be about $11.6 trillion. It would take all the money the federal government spent on every foreign and domestic program for the last six years to equal what we need today to back up Social Security's promise of benefits as scheduled under current laws.

Or it would take a 100 percent tax on every penny generated by the U.S economy for 11 months. And we would still have to invest the resulting $10.4 trillion at 3 percent interest.

What if we didn't try to harness that interest - if we kept Social Security money away from investment as Yumlu and Burker want? Then Social Security would have to come up with several hundred billion additional dollars every year from 2042 onward, along with the payroll tax, to maintain the current level of benefits.

We could do this by immediately raising the payroll tax from 12.4 percent of a worker's current wage to about 14.25 percent. If we delay action until 2019, we would have to increase the tax to about 17.33 percent to come up with the necessary money. And if we wait until 2042, we would have to increase the tax to about 18 percent.

Given those numbers, we see that Social Security's woes are even more severe than Yumlu and Burker describe. Their concerns about federal borrowing and the extension of partial benefits to some migrant workers are understandable, but are just background noise compared to the program's $10.4 trillion current-value structural deficit. Saving Social Security will require far more radical reform than what Yumlu or Burker suggest.




Thomas A. Firey, a Washington County native, is managing editor of Regulation magazine, a publication of the Cato Institute, and is a senior fellow of the Maryland Public Policy Institute. He may be contacted by e-mail at tfirey@cato.org.

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